The Greek tragedy: a drama with many villains and no heroes

JONATHAN MANTHORPE: International Affairs   
July 3, 2015. 

Giorgos, a 77-year-old pensioner from Athens, sits outside a branch of the National Bank of Greece as he waits along with dozens of other pensioners, hoping to get their pensions in Athens, Greece June 29, 2015. REUTERS/Yannis Behrakis

Giorgos, a 77-year-old pensioner from Athens, sits outside a branch of the National Bank of Greece as he waits along with dozens of other pensioners, hoping to get their pensions in Athens, Greece June 29, 2015.  EUTERS/Yannis Behrakis

There is no shortage of villains in this Greek tragedy.

Indeed, what is really challenging is to point to someone in Greece or anyone who has inhabited the upper echelons of the European Union in the last 30 years whose hands are clean.

From the dangerously fanatic, Escher-inspired architects of the euro common currency in the 1980s, to the 11 million Greek people themselves – who may have invented European democracy, but who have shown little aptitude for making it work, everyone is dripping with guilt.

And because the euro was a misbegotten notion to begin with, what we have here is an equivalent of the United States’ “sub-prime” crisis on a continental scale. Except, in Europe it is not just individual householders who risk being chucked out on the streets, but whole countries. It’s Greece today, but it may be Spain, Portugal, Ireland and even Italy tomorrow.

Greeks are due to vote in a referendum on Sunday on the latest bail-out proposals by the European Union (EU), but heavily influenced by the International Monetary Fund (IMF) and its managing director, fiscal dominatrix Christine Legarde. Legarde and the EU chastizers are demanding all manner of austerity programs. These are designed to force Greeks to realise that they are in reality a third world – well, maybe second world – country that since the creation of the euro in 1999 has been living like a first world economy on borrowed money. But the mid-night bell has wrung, the party’s over, and it’s time to pay the piper. Greece owes about 323 billion euros ($US366 billion) and was unable to repay an instalment of 1.54 billion euros ($US1.71 billion) to its creditors this week or about 1.5 billion euros in month-end pensions and government salaries. Unless things change, there will be similar defaults this month.

The Greek Prime Minister Alexis Tsipras is calling for rejection of the EU proposal, in the expectation this will force Greece’s creditors to accept more lenient terms. Tsipras is an Hellenic Cheshire Cat – all gleaming white teeth and no substance. He and his left-wing coalition were elected in January with about 77 per cent of the vote. Greek voters had begun to comprehend the scale of incompetence and amateurism of the previous government in its months of negotiations with creditors. But Tsipras has squandered his mandate both by his own incompetence in negotiations with the EU, and his constant acquiescence to a militantly anti-EU, anti-capitalist communist faction within his coalition.

Polls suggest a majority of Greek voters fear Tsipras’ approach will get them driven out of the euro zone, to which 19 of the EU’s 28 members belong. They are thus likely to vote in favour of the EU/IMF proposals in Sunday’s referendum. Whether such a rejection would prod Tsipras to resign, and whether his departure would improve the situation, can only be matters for speculation. What is evident is that Greece is facing its greatest challenge since the end of military rule in 1974.

There is a growing number of European governments that think Athens should be thrown to the wolves, but the majority still believe it’s in their own interest that Greece is saved. Not only are there worries about the domino effect on the common currency if Greece is forced out of the euro, there’s also the prospect of serious social unrest if Greece is dumped back on an economy of pandering to tourists and flogging olive oil.

But the central imperative for the EU is to ensure the survival of the euro, which was always seen as much more than just a common currency.

The formation of what is now the EU was driven by the passionate belief after the Second World War that somehow a way had to be found to ensure that European nations never went to war against each other again. The central aim was to forge a political and economic union between France and Germany, whose mutual antipathy had spawned countless European wars for hundreds of years.

What started as the creation of a free trade zone – the Common Market – quickly assumed overt political aims, with the devolution of more and more legislative authority from national governments and parliaments to the EU centre in Brussels. But by the 1980s the project to turn Europe into a federation had got stuck. The parliaments and populations of the member states were resisting further loss of control over their own lives to the EU bureaucrats. The introduction of the euro common currency was designed, in large part, to break this logjam and re-launch the federation project.

The problem, of course, was that because creation of the euro was a political manoeuvre, it made little or no economic sense. The disparity between the European economies was – and is – huge. There was – and is – absolutely no basis for comparison between the economies of Germany – the world’s second largest exporter of manufactured goods after China – and the southern European economies slowly emerging from peasant agriculture, such as Spain, Portugal and Greece.

Yet the euro zone would tie these emergent economies to a First World currency over which they have no control. Under normal circumstances, when a country has a debt problem or its exports are overpriced and uncompetitive, the government can use interest rates and monetary policies to impose discipline and bring things back into line. But when fiscal policy has been handed to Brussels, whose preoccupation is Germany and France, the small fish are very vulnerable.

A small attempt was made to compensate for this loss of national control over fiscal policy by imposing some strict rules about borrowing. No country in the euro zone was going to be allowed to have a budget deficit of more than three per cent of gross domestic product (GDP) and remain a member. Also, no country could stay in the euro zone if its rate of debt to GDP exceeded 60 per cent.

Well, those rules went by the board faster than a greased weasel down a drainpipe. Greece’s $US366 billion debt is 175 per cent of its GDP. The cowardice of EU leaders and their shying away from sticking to the rules that might have made the euro work is one of the great sins at the heart of this debacle.

It hasn’t helped matters that the advent of the euro has been a huge boon for the EU’s industrialized economies, especially Germany. Because the euro includes dud or semi-functional economies like Greece, Portugal, Spain, Italy and Ireland, the international market place marks the currency’s value down against other hard currencies like the U.S. dollar. The result is that German exports are 50 per cent cheaper, by some analysis, than they would be if the country still used its former currency, the deutchmark. For example, without the euro a mid-range $50,000 Mercedes Benz car would cost $75,000 in the U.S. For that money, the Mercedes would face challenges from many competitors.

When the euro was introduced in 1999, Germany exported goods worth 469 billion euros. Last year German exports were worth 1.19 trillion euros ($US1.3 trillion), three times their value a decade-and-a-half ago. And as it is small and medium-sized businesses that make up more than half Germany’s economic output, the social and political importance of these numbers is considerable.

And for those numbers, Germany has to thank the fact that it is dragging Greece and the other semi-functional economies on its coattails.

The advent of the euro in 1999 also opened the door to what became the European equivalent of America’s sub-prime mortgage fiasco. Unlike Britain or the U.S., Germany and France have a multitude of small financial institutions making very small profits. Brussels wanted Germany and France to develop banks and such comparable to the big British and American banks and their 30 per cent annual profit margins. To that end, the EU backed loans by German and French banks.

It was an invitation to disaster. The German banks looked to the poor economies of southern Europe, offering cash at interest rates as low as four per cent when local rates were at 14 per cent or higher. The flood of money from the German banks to all kinds of ill-conceived, ridiculous and unaffordable projects in southern Europe was breathtaking. According to the figures of the Bank of International Settlements, in the decade after the introduction of the euro, German banks lent the equivalent of over $US700 billion to Greece, Ireland, Italy, Portugal and Spain.

None of the projects – or very few of them – financed the creation of economic activity which would pay for the loans. A study by an Austrian bank has calculated that 77 per cent of the bail-out money so far provided by the IMF and the European Central Bank has gone to pay off the German and French banks who have forced their loans on Greece in the past 15 years.

At the same time, the Greeks were lulled into believing the good times would roll on forever. The wilful blindness to reality of Greek voters is extraordinary. Lavish pension schemes became the norm, with early retirement provided for people whose working lives are fraught with daily dangers. Hair dressers are among those entitled to early retirement on full pensions because their work is considered “arduous and hazardous.”

Greeks also lost the plot – if they ever understood it – on the compact between government and citizens that is essential to the functioning of a proper democracy. A basic equation of that deal is that citizens give the government the revenue necessary to provide the services and security that the voters require of it.

The Greek aversion to paying taxes goes back to the hundreds of years when the country was occupied by the Turkish Ottoman Empire. At that time, not paying taxes was an act of subversion against the occupying power. The habit has, however, continued since independence in 1830, buoyed by the belief among 90 per cent of the population, according to Transparency International, that most Greek politicians and political parties are corrupt.

The result is that an estimated $30 billion a year in what should be government tax revenue goes uncollected. Tax revenue in Greece accounts for only 29 per cent of GDP, according to the World Bank, when the EU average is 37 per cent. A 2013 study by Austria’s Johannes Kepler University estimated that Greece’s “black economy” is worth about 24 per cent of GDP. This compares with “off the books” business in Britain being worth about 10 per cent of GDP and slightly less in France.

Looking at the Greek tragedy, some conservative European commentators have recalled something Margaret Thatcher said. “The problem with socialism is that you eventually run out of other people’s money.”

That, as I’ve tried to describe, is only part of the story, but it is, sadly, a fitting epitaph for the Greek economy.

Copyright Jonathan Manthorpe 2015

Contact: jonathan.manthorpe@gmail.com 

Further reading on F&O: 

EU makes last ditch effort to save Greek bailout, by Renee Maltezou and Lefteris Papadimas, Reuters
Nine things to know about Greece’s IMF debt default , by  Andre Broome

The Greek crisis in photos, by Reuters:

 

Manthorpe B&WJonathan Manthorpe is a founding columnist with Facts and Opinions and is the author of the journal’s International Affairs column. Manthorpe has been a foreign correspondent and international affairs columnist for nearly 40 years. Manthorpe’s  nomadic career began in the late 1970s as European Bureau Chief for The Toronto Star, the job that took Ernest Hemingway to Europe in the 1920s. In the mid-1980s Manthorpe became European Correspondent for Southam News. In the following years Manthorpe was sent by Southam News, the internal news agency for Canada’s largest group of metropolitan daily newspapers, to be the correspondent in Africa and then Asia. Between postings Manthorpe spent a few years based in Ottawa focusing on intelligence and military affairs, and the United Nations. Since 1998 Manthorpe has been based in Vancouver, but has travelled frequently on assignment to Asia, Europe and Latin America.

 

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