Monday, January 26, 2015

Greece votes for a dream, and it is only that

The news that Greece looks like getting a far-left government let by the soft communist Syriza Party has excited some commentators, but what is perhaps most deceptive is the claim that it is a "rejection of austerity", as if the choices to Greek people were like a menu.

In fact, the choices are far more stark, because what Greek politics is and has been ever since it joined the Euro (indeed one could say ever since it joined the European Economic Community), is an exercise is mass deception and reality evasion.

The troubles of the Greek economy are not due to "the Germans", nor are they due to "the bankers", they are due to the peculiar, though not unique, mismatch between the part of Greek society that wants money from the state (and protection for their businesses or jobs), and the part that doesn't trust the state at all, to the point that it egregiously evades taxation on a grand scale.

This mismatch used to be managed by stealthily stealing from most ordinary Greek people through continual devaluation of the drachma. 

Then it was covered by structural adjustment transfers from the EEC/EU, as Greece gained money to build transport, energy and civic infrastructure, and of course the ongoing subsidies for its agricultural sector.   When it joined the Euro, the Greek government gained access to easy borrowing in a hard currency at low interest rates, so it ran further deficits.  The OECD describes Greece's economy as thus:

In Greece, economic difficulties go deeper than the direct effects of the recent crisis and fiscal consolidation is urgent. Difficulties have been brewing for years, so when the crisis came, Greece was significantly more exposed than others. Besides the severity of its fiscal problems, Greece has, over the past several years, gradually but persistently lost international cost competitiveness, resulting in widening current account deficits, a deteriorating international investment position, and a poor record of inward foreign direct investment. 

Greece has a highly regulated protected economy, with a bloated state sector. 

Syriza wants to protect the economy even further, increase the state sector even further, cut taxes and thinks that banks in other countries, supported by taxpayers in northern European Eurozone states, will help Greece out.

There are, in effect, two paths.

Either a renegotiation of existing loans to be written off or extended is achieved, and Syriza quietly folds its promises on state sector pay, free electricity (indeed any further giveaways), and Greece remains in stasis.  or

Greece defaults on debts and leaves the Euro.

In the former scenario, it looks like at best Greece might get some easing of terms of debt repayment, but the idea that it will get half of its debt written off again, is unlikely, given the previous deal saw private Greek government bondholders accept a 50% write down of debt.  There is little real chance the Greek government could get anything from the private sector, so any further loans will be government to government.  

If Greece gets the sort of deal Syriza hopes for, it will set a precedent that Spanish, Italian, Portuguese and even French and Belgian governments will want to replicate.  At that point, you would have to wonder how much tolerance voters in Germany, the Netherlands, Finland would have for propping up their profligate southern neighbours (let alone the former communist bloc countries that went through much more radical and painful structural reforms than Greece should be facing). 

The real risk is that voters in those countries eject governments that agree to bail out other governments with their money.  After all, who wants to be seen to be bailing out Italy?  German guilt over the war can't be stretched that far.   It threatens unravelling the Euro and even the entire EU project, as parties like Syriza effectively want a fortress Europe that looks closer to the former COMECON than a customs union.

The latter scenario has seemed less likely, but I'm not so sure.  A deal gets offered to Greece that extends the terms for existing loans, in the hope that Greece engages in reforms, but ultimately Greece will run out of money.  At that point, it faces either not paying its pensions or public sector workers, or issuing a new currency, and then the Greek economy finally collapses under the weight of its fundamental contradiction.  A western European standard of living cannot be sustained with an economy that is akin to a wealthy developing country, 

The only solution to this is to reduce the costs of doing business, address the corruption within the regulatory/subsidy/state contract/tax system, remove protection for existing businesses (and jobs) and to cut the role of the state, while enabling the state to be more effective in carrying out its core responsibilities.

However, the outgoing Greek government only made modest progress on this, and Syriza is philosophically opposed to making life easier for the private sector.  Syriza believes in the state owning larger businesses and licensing/protecting smaller businesses.  It believes in a generous welfare state and public sector, and wants lower taxes on everyone except the "rich", who of course have either already left or have at least set up their accounts in a way that they are away from the hands of the taxman.

Even if Syriza does get a deal that avoids a default, it will only delay the next crisis.  An anti-business, anti-free enterprise party will continue to strangle Greece just like similar policies have done for many years.  

What's bizarre is that Greece's northern neighbours have faced much more serious levels of reform and restructuring in the past twenty years than it needs to, but they did it.  Bulgaria and Albania are both much poorer than Greece on a per capita GDP basis, but have economies in much better shape. 

The tragedy is that too many Greeks have voted for a dream that they too can convince taxpayers in other countries to buy them a standard of living they don't earn themselves, and that they can convince banks and other private investors to risk their money with a government that is unwilling to pay them back.  It is a dream, and it is about to become a nightmare. 

What I wrote before about Greece, two years ago, remains true.  

1 comment:

Anonymous said...
Surprised you haven't covered the HongKong protests.