Euro on a knife edge — are the Greeks to blame?
“Bloody Greeks — corrupt and lazy, born cheaters who think the world owes them a living. Why should the hard-working taxpayers of the euro zone core economies like Germany have to fund billion-euro rescue packages for those scoundrels?”
That’s the vicious tone of Germany’s tabloids and conservative politicians towards Greece’s galloping public debt crisis and the Greek people’s protests against the austerity programs.
The austerity has been imposed on them by the European Union, European Central Bank and International Monetary Fund (the “troika”) as the price of bail-out funding.
In Australia, columnist Paul Sheehan offered his September 14 Sydney Morning Herald readers a cruder version of this caricature in an article titled “Throw out cheating Greece before the rot cripples rest of the world”.
Not only are the Greeks (whose “national sport is cheating”) bludging off German taxpayers, they’re devaluing Aussie superannuation payouts.
But Sheehan’s “solution” — to cut off the gangrenous limb to save the euro and “the rest of the world” — finds very few supporters in Europe.
That’s because Greece can be “thrown out” of the euro, but its €350 billion debt and tottering banking system can’t be “thrown out” of the European and world economies.
In Germany, the Rosa Luxemburg Foundation, associated with left-wing party Die Linke, has answered the German tabloid version of Sheehan’s slanders with some simple facts:
* Average hours worked (before the crisis struck): 44.3 for Greek workers, as against 41 for Germans. Since the crisis, fewer Greek workers have had the chance to prove they aren’t lazy — the troika’s austerity policies, including cuts of 80,000 public sector jobs, have helped boost official unemployment to 15%.
* Greek wages: 73% of the European average, with 25% of workers earning less than €750 ($A1015) a month.
* Holidays: Greek workers have a right to 23 days a year — as against 30 days for German workers.
* Pensions: The average is €617 ($830) a month. Two-thirds of Greek pensioners have to survive on less than €600 a month.
* Tax evasion: Yes, it’s pretty common in Greece, especially among the self-employed, but the culture of tax evasion was the work of Greek capitalists and rich. Greek shipowners, for example, pay no company tax at all. No wonder the popular reaction has been: “If the fat cats don’t pay tax, why should we?”
* Budget deficit: It’s true Greece ran large public sector deficits even in the boom years up to 2008. But that was because it was more convenient for the conservative government to borrow on money markets at very low rates of interest than to get the rich and corporates to pay their share of tax.
* Transparency: Yes, the Greek government lied about the size of its budget deficits in order get into the euro. But this was not a uniquely Greek sin.
Citi chief economist Willem Buiter said: “What Greece did was just an exaggerated version of the deliberate data manipulation, distortion and misrepresentation that allowed the vast majority of the euro area members states to join the Economic and Monetary Union, including quite a few from what is now called the core euro area.
“The preventive arm of the euro area, the Stability and Growth Pact, which, if it had been enforced would have prevented the Greek situation from arising, was emasculated by Germany and France in 2004, when these countries were about to be at the receiving end of its enforcement.”
When the 2008 financial crash hit, the vicious cycle began for Greece: easy credit disappeared, the interest rate on debt started to climb, and the already inadequate tax intake collapsed — widening the deficit and increasing the need for Greek debt to find buyers.
At the same time, as a direct consequence of the crash of 2008, private bank debt across Europe was shifted onto public sector balance sheets with the taxpayer bailing out the banks and guaranteeing bank deposits.
Yet in Europe it was decided, under German pressure, that bank deposit guarantees would not be backed by the European Union (through the European Central Bank) but by the individual member states.
This lack of a common, shared mechanism to issue European debt (“Eurobonds”) exposed the weaker, more indebted European states to the doubts and speculative raids of players in the government (“sovereign”) debt market.
After the November 2009 default of Dubai’s sovereign fund, the market and rating agencies started to look for the next likely candidate. Greece came into the frame as the weakest link in the chain of euro economies.
The Greek economy was in deep recession, private investment was at a standstill, major exports (shipping and tourism) were down 15% and depositors were shifting their money into Swiss and German banks.
The Greek government approached the EU-ECB-IMF troika for a bail-out package.
The austerity measures imposed as the price of receiving funding from the newly established European Financial Stability Facility were described by ratings agency Fitch as the most draconian ever imposed on an advanced economy.
They have had disastrous consequences.
Greek Gross Domestic Product shrank by 2% in 2009 and 7.6% in 2010. Greek finance minister Evangelos Venizelos expects negative growth to continue in 2012.
Over the year to March 2011, 65,000 companies went bankrupt and private consumption fell by 18%. Tax revenue also collapsed. First quarter 2011 revenue was 7% below first quarter revenue for 2010.
Also, the €50 billion privatisation fire sale dictated from Brussels will rake in much less than projected.
The end result is that Greece’s budget deficit is now poised to leap as high as 8.2% of GDP. This is more than the 7.4% target set by the finance ministry at the time of the second troika bailout package in July.
Some economists believe the deficit could hit 10% of GDP by year’s end.
Public sector debt, which stood at 127.1% of GDP in early 2010, rose to 143% by the end of 2010. By the end of this year, Citigroup expects it to reach 167%.
Clearly, the Greeks, least of all Greek workers, pensioners and students, are not responsible for this catastrophe — they are being scapegoated by those in Berlin, Brussels and Washington who are.
What next? If Greece was forced out of the euro, what impact would it have on Greece and the rest of Europe?
A planned reintroduction of the Greek currency, the drachma, would see a run on Greek banks. People would race to get their money out before the introduction of a currency that would instantly devalue against the euro.
Buiter predicted: “The Greek banking system would be destroyed even before Greece had left the euro area.”
Defaulting on loan repayments would also invite retaliation from foreign investors and banks, cutting Greek access to foreign funds. The price of imports would increase, potentially creating “stagflation” (combined recession and inflation).
A study by UBS economists Stefane Deo and Paul Donovan concluded the cost of the euro break-up would be “horrendous”: “For a weak economy like Greece to leave the euro zone, it would cost citizens between €9500 and €11,000 in the first year, and €3000 to €4000 per subsequent year.”
Then there is the likely impact of a Greek default on the euro and the European banking system.
A Greek exit would focus market attention on the next candidate with sovereign debt problems. Depositors would shift their savings into the safer “core” euro zone and out of the vulnerable “periphery”. Potential investors would shy away.
This funding strike and flight of deposits would create financial instability, and increase the chance of a recession in the Mediterranean and eastern European euro periphery.
Exposed European banks, especially in France and Germany, would face bankruptcy, especially as it is impossible to judge the value of much of many of the financial instruments they still count as “assets”.
Germany and France would then face the choice that former US treasury secretary Hank Paulsen faced exactly three years ago when faced with the moribund Lehman Brothers — let them fall or bail them out. And since the vulnerable European banks are “too big to fail” a variant of the US taxpayer-funded Troubled Assets Relief Program (TARP) would have to be put in place.
If Greek default was followed by a cascade of other countries defaulting, leading to the end of the euro or its reduction to core economies, even the strongest economy, Germany, would lose out.
The value of the euro reflects the average of labour productivity across its European member economies.
A new German currency (deutschmark), or even a “core area” euro, would have a higher value than the existing euro. This would undermine export competitiveness when the German economy is more dependent on export income than ever.
That appreciation would be amplified as speculators sought the “safety” of the new currency as the other post-euro currencies fell in value.
A new deutschmark or “core euro” would follow the recent path of the Swiss franc. In early September, the Swiss National Bank began to try to hold down its rapid appreciation because it is hurting Swiss industry.
These facts of life explain why the European lead powers Germany and France, far from adopting the Sheahan “throw the bastards out” approach, are doing everything they can to keep Greece in the euro.
They are supported in this by Barack Obama, who sent US treasury secretary Timothy Geithner to a September 16 meeting of European finance ministers to stress the urgency of the situation, and demand united action.
The question is, if the euro crisis is so serious, why are the European powers finding it so hard to agree on a common solution? That will discussed in part two of this article.
[Dick Nichols is from the Green Left Weekly European bureau, based in Barcelona. For statistical sources contact email@example.com .]