Monday, October 17, 2016

What happened to beautiful Greece?

A recent article in a German newspaper suggested Greece should be given a last debt haircut and be left to float outside the Euro.

According to Greek press reports, a prominent IMF executive recently claimed that Greece is "beyond repair".

A member of the EU since 1981 and the Eurozone since 2003, Greece decided not to leave the Euro after the deficit and debt crisis started in 2009 and do an unprecedented "internal devaluation" instead. In effect it was supposed to emulate currency devaluation inside a currency zone, ie bring down salaries, prices of goods, services and assets such as real estate, thus rendering the economy more competitive. Note that Greece had never had a trade surplus at least since it joined GATT (now WTO) in the late 1940s.

So how was Greece surviving all those years before the crisis? Well, there was a large volume of money sent from abroad (diaspora), tourism and shipping. When Greece joined the EEC and its Common Market, imports from the other 9 at that time grew due to the removal of tariffs and quotas. Even more imports came as the EEC expanded and the Single Market made intra-EU trade easier.

Why did Greece's exports to the rest of the EEC/EU not rise significantly due to EEC membership? Because the bulk of its industry was (and still is to this day, largely) inward looking and un-competitive . One of the reasons is Greece's geo location (without land borders with the rest of the EU) and sheer transport distance from the EU's lucrative German market. But we will come back to the factors of Greece's lack of competitiveness.

The internal devaluation programme, coupled with a re-adjustment programme, was decided the Greek government and the IMF, the European Central Bank and the European Commission. It included reform of the public sector, market liberalisation (opening up of activities and professions) and other things. In return it replaced the debt from the bonds by debt to the IMF and the Eurozone states. It also gave Greece money to survive because it was running a budget deficit was more than 10% at that time (3% is the Eurozone limit).

The programme overshot and caused the GNP to drop 26%! And unemployment rose to 18% in 2011 and 27% in 2013! These figures are worse than the US Great Depression.

In 2016, unemployment is 23% (No. 2 Spain's is 19.5%). Salaries, pensions and real estate prices have taken a dive. Product prices have stabilised but did not drop of course. Greece managed to have a trade surplus year in spite of the EU-Russia embargo in 2014, partly due to the decline of imports because of the drop in consumer demand.

Many attribute Greece's problems to political corruption. That is too simplistic an explanation. Greece's competitiveness status, as is the case with all economies, is a net result of many and complex factors. Over-legislated, fully bureaucratic, too dependent on the public sector for employment and sales (via procurement), too SME in composition, the Greek economy is maybe Division 4 in the European league. Firms are too small and too busy operating in red tape Greece to have enough energy left for exporting, intra and extra EU. It has been way easier to be an importer than an exporter in modern Greece.

In 2015 the PM gave people a referendum on Juncker's proposals re the Greek economy and people rejected it 62-38 but most Greeks are pro EU and pro Euro. Many think that if Greece was to leave the Euro, people would not be able to buy basic food and medicine since, they claim, "Greece imports everything" thus "everything" will become too expensive or simply not available when the new currency starts devaluing after a Euro exit. They are looking at what is happening in the UK and saying "Imagine what would happen here".

So whatever happened to all those EU funds that Greece has received from the EU as "regional policy' since the 1990s? A lot went to training but most went to roads and other infrastructure. But much of this modern infrastructure has too high user charges for the average citizen and company in crisis Greece! Many in Greece have retired early but unemployment benefits last only 12 months and are approx. 400 Euros, after that you get zilch. So how do most of the 23% unemployed survive? Good question. You see people dumpster diving in crisis Athens, you did not before 2009.

Is Greece "beyond repair"? Should it be given a new debt haircut and be left to drift away from the Eurozone? Will there be a huge rise in exports to kickstart the heart of the economy and the job market if Greece abandons the Euro? Is Greece in coma or recovering 2009-present?

You can debate the issue in the Eurodebates Facebook group:

420,000 Greeks have emigrated since the crisis started.

One third of the remaining Greeks are now living below the poverty line due to joblessness, depressed wages and other factors. No one knows exactly how many are homeless. Pray for them, in any case.

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