Stealing You Blind: The Fate of Greece

by Iain Murray on June 28, 2011 · 2 comments

in Economy, Employment, Features, International, Stimulus to Nowhere

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Rioters have taken to the streets in the Greek capital of Athens. While not as unusual an occurrence as it is in Athens, Georgia, these latest riots underline one thing — that the Greeks do not understand their complicity in their country’s disastrous economic state.

Former UPI Business Editor Martin Hutchinson has a useful essay up at the Prudent Bear website that describes exactly how Greece got into this mess, which all goes back to when Andreas Papandreou, father of the current Prime Minister, managed to get Greece into the EU when its economy just wasn’t ready:

Instead of steering the Greek economy to reap the enormous potential benefits of its premature EU membership, the internationally sophisticated Papandreou manipulated the EU system of slush funds so as to keep a gigantic stream of resources flowing to the bloated Greek public sector. The result was an economy focused almost entirely on the public sector and tourism (which also benefited from innumerable EU grants) with the populace enjoying living standards far in excess of their ability to pay their way.

Greece joined the euro in 2001 based on false statistics, its debt total manipulated by an extremely expensive deal arranged by the ineffable Goldman Sachs. Once a euro member, it took no notice of the “Maastricht Treaty” strictures against excessive public sector deficits, other than to falsify its figures for a number of years in order to avoid excessive criticism that might have blocked the flow of slush funds.

The result was a massive expansion of the Greek economy, far more than it could afford, and mostly unproductive:

The result of all this was to give Greeks as a whole, and particularly the Greek public sector, living standards hugely in excess of those justified by their productivity. By 2008, Greek GDP per capita, based on purchasing power parity, was a staggering $32,000. That was almost level with the EU average ($33,600), not much below Germany ($34,800), above Italy ($31,000) and South Korea ($26,000) and far above Portugal ($22,000), which in reality had productivity well ahead of Greece. By sucking in borrowing and massive EU grants Greece had distorted its economy as much as the former East Germany, which in 1989 was reckoned by the Economist to be richer than Britain. In productivity Greece’s real comparables were its neighbors Bulgaria (GDP per capita $12,900) and Macedonia (GDP per capita $9,000). While Bulgaria and Macedonia had suffered under a communist dictatorship and a social-ownership dictatorship respectively, by now, 20 years after their liberation, both countries have decent governments and economies more market-oriented, with more productive businesses, than a Greece that willingly succumbed to 30 years of Papandreouism.

The genuine foundation of the Greek economy these days is tourism. Everything else is built on a massive money-go-round of EU subsidies. It is those which have kept the Greek public servant in a pampered lifestyle, with a good salary, excellent benefits, early retirement, and a nice little sideline in corruption (Greeks paid almost $1 billion in bribes to public officials in 2008).

Martin suggests that the current austerity measures being debated with words and thrown rocks aren’t sufficient to solve Greece’s problems. Instead, he suggests a dramatic solution — the temporary expulsion of Greece from the Eurozone:

[T]he EU can achieve the required effect by compulsorily drachmaizing the Greek economy (if necessary, by refusing to lend any more money, to accept euro payments from Greek banks, or to deliver any further euro currency within Greece’s borders). This can be done quite quickly: the new currency can be printed by an international security printer in a few weeks, and the exchange can be mandated over a weekend. The process would be very similar to the “pesoification” of the Argentine economy in December 2001. For a temporary period, Greeks would be placed in the same position as Bulgarians and Romanians, without full rights of movement in the EU. To keep the Greek banks solvent, their euro deposits would be converted compulsorily into new drachmas. The Greek government might also find it needed exchange controls in the short term as no new international funding would be available.

Following the conversion, the drachma would probably drop to about one quarter of its previous value, as did the Argentine peso in 2002. This would not reduce Greek living standards by three quarters, but by about half – Mercedes in Athens would become four times as expensive, but haircuts and moussaka would not. Greece would then need to renegotiate its international debt, involving a substantial write-down of principal. Greek banks would be insolvent, but could be recapitalized with new drachmas by the government, while foreign banks that suffered losses on Greek paper could be bailed out by their own governments if that was mistakenly thought desirable.

With wage costs at one quarter of their previous level, around those of Bulgaria and Macedonia, Greece would now be able to export successfully, and within a year or two its payments deficit would become a surplus. At that point, the future would be in the hands of the Greek people. If they continued to elect Papandreouists, expanded their public sector and presented a surly attitude to foreign tourists and investors, they would stay poor. Their lives would be much less comfortable than those of the post-2003 Argentines, because unlike Argentina Greece has few natural resources.  If on the other hand Greece developed its now bargain-priced tourism on a free market basis, cut back its overgrown government and remained a haven for shipping services, then from their new lower level the Greeks’ living standards would rapidly improve, this time on a sound unsubsidized basis.

Either way, EU subsidies should be cut off altogether, to keep the Greek government honest and assist in repaying EU taxpayers for the costs of the bailouts followed by default. If Greece foolishly wished to leave the EU because of the new austerity, it should be free to do so.

This drastic course of action would be appropriate for Greece. However, given that America is heading the way of Greece without external subsidies, it is clear that we need to take different drastic action of our own. There needs to be a significant and immediate slimming down of government concurrent with significant deregulation of the economy to get people hiring again and a resettlement of the mistakes of the past that are sucking up so much money (health expenses, social security, government sector pensions).

That’s likely to lead to public sector union direct action — it’s happening pre-emptively in Britain, which is inspiring the government there to take stronger action — but this is the fight that has to be had. Greece, Britain, Wisconsin, Ohio, Connecticut, and soon Washington, D.C. — all are having essentially the same fight.

It’s government versus the rest of us. D.C. is full of monuments to the might of government (like the fascist-style art of Man Controlling Trade at the Federal Trade Commission). Ironically, we’d be better off if they had fallen into ruin like those great monuments of Athens.

Bob Frassinetti June 28, 2011 at 8:23 pm

Yes, I lived in Argentina during the crises. And I remember it well, but first some words as an introduction to these troubled times lived here in Buenos Aires. No crises in itself is bad or wrong, crises will allow us to see the mistakes and hopefully not to repeat them, if they are studied,……. As to the actual Greek crises of today, it’s being in the making for some time now. Europe, with its powerful German and French members wanted to grow, and found interested partners for their growth through a new Euro and the European Market, they expanded there frontiers with new members all the way to Greece, with no wars or any real kind of opposition, big money was spent on TV programmes selling the idea, a BIG Europe a Common Market for European’s to be part of a New World Order to stand by themselves against China and the USA…….. The Germans and French for power and control and the Greeks as an opportunity for the hopeful economy that was going nowhere, but, paraphrasing the English actor who plays Dr House in the America TV series, we have to understand that, “everybody lies!” And this goes for the Germans and the French who sold false promise and the Greeks who accepted them as a quick way to get rich,……. Lying about their newly regulated economic market’s, rules and regulations, equalling them to the Germans and the French, so, Banks, all kind of Government Institutes where given money, by the overflowing money cash Banks, passed from one to the other, ….cash bonuses for hugh commissions exchanged hands as fast as new contracts could be signed and it seemed for a time that everyone was happy,………. Especially the politicians. Their live for today motto was working fine for them, …

Eh July 7, 2011 at 3:56 pm

Disclaimer: I’m Greek so perhaps my view is biased. That said, while this article makes some fair criticisms some of the statistical claims it makes are (rather ironically) wildly distorted.

For instance, while Greece did benefit from EU funds there is no way debt (or EU subsidies) came even close accounting for Greece’s GDP/capita and high standard o living. EU transfer payments accounted for less than 10% of the Greek annual economy and debt was accrued over decades.

The author also bizarrely claims “The genuine foundation of the Greek economy these days is tourism. Everything else is built on a massive money-go-round of EU subsidies” This is sheer nonsense. While Greece lacks a significant manufacturing sector and tourism is certainly the biggest industry in Greece… tourism still only makes up roughly 15-17% of the Greek economy. The author obviously mistakes his stereotypes for the economic reality that Greece has a large ecosystem of small businesses (which make up the bulk of Greek economy), as well as a banking sector, and one of the world’s biggest maritime industries (despite its small size)

And while corruption is a problem in Greece , its really not that much different than a micro version of the current lobbiest system in some countries that amounts to legalized bribery (vis-a-vis corporate interests funding campaigns of economically “friendly” public officials). Transparency International ranks over a hundred countries as more corrupt than Greece (so obviously corruption isn’t the only reason why the debt mushroomed as this article seemingly attempts to suggest.

Even the Greek government’s accounting practices (which I would agree were horrible) should be considered in a wider context that Goldman Sachs(et al) played along with this sort of debt accounting trickery for years (including other EU countries like Italy).

As for debt, while Greek debt has ballooned to unmanagable levels…. its not that much more than those that criticize it for overspending. For instance, Americans actually owe more money than Greeks on a per capita basis (especially when private debt is also considered where the figure is actually substantially greater) Compounding debt problems in America have only been offset by greater production, a lower interest rate, and the fact the Fed has the luxury of “paying” its debts by simply printing money, (whereas most EU nations are now pegged on the Euro) Japan is actually in a worse situation in GDP/debt than Greece (saved from default only by the fact most of their debt is held internally at a very low rate of interest)

In short, Greece certainly made some mistakes with its botched fiances. A bloated public sector, accounting trickery by politicians (both on the left and right), and nothing like the IRS (to deal with tax evaders) all added up to a deadly mix of excessive debt. However, resorting to patronizing hyperbole and demonization of the Greek people as the author of this article has done really makes him sound more like a bigot than an legitimate economic analysis.

All the forces that existed in Greece exist in other countries too. Greece was just the proverbial canary in the coal mine. We are growing very tired of listening to smug patronizing pseudo-intellects scapegoating us and dehumanzing us.

As for so-called “Macedonia”…

I would recommend the author also open up a book on US history circa 1944 to see who is not following principles these days. Not sure when some of the self proclaimed “protectors of western civilization” became so rabidly anti-Greek.

“This (US) Government considers talk of Macedonian “nation”, Macedonian “Fatherland”, or Macedonia “national consciousness” to be unjustified demagoguery representing no ethnic nor political reality, and sees in its present revival a possible cloak for aggressive intentions against Greece.” – US State Department (Foreign Relations Vol. VIII Washington D.C. Circular Airgram – 868.014/26 Dec. 1944)

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