Levy Economics Institute President Dissects the Myth of the Greek “Success Story”
By C. J. Polychroniou
Truthout, May 4, 2014. All Rights Reserved.
When the global financial crisis of 2008 reached Europe’s shores sometime in late 2009, Greece was the first victim of the euro system’s failure. Facing persistently large deficits and very high public debt levels, the country ended up being shut out of the global bond markets, raising the prospect of a sovereign bankruptcy. In light of these developments, in May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed to provide a 110 billion euro bailout loan to Greece in exchange for severe austerity measures and strict conditions. The "rescue" plan, as has been openly admitted by now, was designed not for the purpose of reviving Greece’s ailing economy but to save Europe’s banks. Thus, as many economists had anticipated, the bailout plan made things worse, spreading havoc with its "economics of social disaster." Less than two years later – and with the debt-to-GDP ratio having increased substantially – a second international bailout plan went into effect for the sum of 130 billion euros. All the money lent to Greece was being used to pay off debt obligations on time while the radical budget cuts and sharp tax hikes that were adopted were meant to readjust the nation’s fiscal condition, with no regard for the economic and social costs which these policies entailed.
Four years later, Greece looks like a badly battered boxer. Its economy has shrunk by 20%; the unemployment rate has reached stratospheric levels; poverty has become widespread; the debt-to-GDP ratio has increased dramatically and Greeks are leaving the country in record numbers. However, both EU and Greek government officials are claiming that the country is moving in the right direction, hailing its recent re-emergence in international credit markets as a sign the economy is recovering. Indeed, the government now talks of the Greek "success story," hoping that this narrative will tilt the electoral balance as Greece’s main opposition Radical Left Coalition party (Syriza) is expected to win the European Parliamentary and local elections in May.
C.J. Polychroniou for Truthout: After four years as the pariah of the financial markets, in the course of which 330 billion euros was granted/guaranteed in international bailouts in order to avoid an official bankruptcy, Greece has made a successful return to the international bond markets. Why did Greece return to the bond markets now when the country’s debt-to-GDP ratio is much bigger than it was back in 2010?
Dimitri B. Papadimitriou: The return to the bond markets was an act of pure symbolism. The government purposely made the success of the austerity program dependent on achieving a primary surplus as opposed to the return to growth in output and employment. Recall that the idea of expansionary austerity embraced by the country’s international lenders was spectacularly discredited. Thus, the Troika (IMF, EU and European Central Bank ) and Greece’s compliant government needed to invent a new metric of success, and it was associated with achieving a primary surplus as large as it could be so that financial markets can be impressed. However, no one else is impressed, especially the international lenders, for three main reasons: (1) The primary surplus was achieved by a one-off (non-recurring) excess revenue from the gains of Greek bonds in the portfolios of Eurozone’s central banks and the European Central Bank’s (ECB) holding that were returned to Greece; (2) collections of old tax revenue; and (3) non-recurring spending cuts and delayed payment of the government’s debt to the private sector, whether VAT refunds or non-payments to private sector vendors.
Finally, the return to the markets was costly to the country – the apparent low interest rate of 4.95% notwithstanding – since the interest rate of the funds borrowed from the European Stability Mechanism (ESM) is at a very much lower interest rate. To be sure, the hedge funds and the private sector [parties] buying the new bonds knew that there was an implicit guarantee from the ECB that would accept these bonds under its Outright Monetary Transactions (OMT) program. So the bonds were not backed by the progress of the Greek economy – it would be ludicrous to assume so, for an economy in continuing recession and increasing debt to GDP ratio, especially if its credit rating is still below investment grade. So, all in all, it was an act of desperation and a strategy to give the government extra help in the soon-to-be-held local and European Parliament elections.
The government has hailed the return to the financial markets as a sign that the crisis is over. Yet, the unemployment rate right now stands at 28%; the education and health care systems have been decimated; 1 out of 3 Greeks live below the poverty line and, according to some estimates, the debt could grow to 190% of GDP by the end of 2015. Do these numbers spell out an economic "success story" or a national tragedy?
All these statistics point to the failure of the harsh program of fiscal consolidation, but if you are interested in presenting a portrait of success, you need to invent a condition that will persuade the non-critical mind that things are much better. No one likes Cassandras, even though they turn out to be quite accurate in the end. As has become clear by now, the Greek mass media industry has played an inappropriate role in persuading people that economic conditions are much better than they think, that the country has reached bottom and it is just about to turn the corner. How many times have we heard that we are seeing the light at the end of the tunnel? But the tunnel is unfortunately very, very long and it will take either a decade or more for conditions to be turned around if present policy continues, with more erosion of living standards and very high structural unemployment, or a relatively quick improvement with an immediate reversal of policy. For this, the omens are very clear, but the political will is not. And one should not expect any change of policy to happen without a change in political leadership. Brussels, Berlin and Frankfurt have a lot to lose with a change of the prevailing policy, and thus they must continue to enforce it despite the destroyed lives that it leaves behind as it moves forward. So we are seeing a tragedy which I am afraid will expand unless the European Parliamentary elections give a different message either with a significant showing of the extreme right or left parties. Marine Le Pen’s impressive showing in the relatively recent local [French] elections speaks to my point. It would be ironic if voters, despite the catastrophic consequences they continue to endure, give the present European leadership another message of approval. It will be self-flagellation with a vengeance.
The feeling one gets as a result of the implementation of austerity in the case of Greece and the other fiscallytroubled countries in the Eurozone is that this is not simply a fine-tuning policy. If that is indeed the case, what is then the ultimate strategy of austerity?
In my view, the idea of austerity was not a policy of fine-tuning. To the contrary, it was a policy of radical change to allow markets to reign supreme with no government interference. This is a doctrine first put to test by the late US President Reagan and UK Prime Minister Thatcher. They both embraced the view that government is the problem to economic ills and not the solution. But the real world has taught us time and again that government at difficult times and downturns is the only solution. We saw it to be the case in the US, Germany, China, Japan and every other economy in trouble. Why Greece and the other fiscally troubled economies should become experiments of contrarian policy whose results were predicted is something that really boggles the mind. No one would dare apply the idea of austerity to the extent it has been applied to countries such as the US or even Germany and other countries of the industrial world irrespective of how high their debt-to-GDP ratios are. Why aren’t we forcing Germany and France with their mighty GDP machines to have high public surpluses so they can decrease their debt to GDP ratios to the 69% limit as required by the Maastricht Treaty? After all, Germany is a growing economy. So it is clear that member states in the Eurozone are not equal. When Germany was the sick man in Europe, it was acceptable for the government to follow the Keynesian prescription, but now that its status has changed to that of hegemon, the laissez-faire paradigm returned in vogue. There will always be many thoughtless leaders, but sooner rather than later people take steps to remove them from positions of strength and power.
The advocates of austerity claim that this policy will improve the external fundamentals of fiscally troubled countries in the Eurozone. Has this happened in the case of Greece?
People who are not knowledgeable about structure of economies on which they impose policies should never be surprised with contrarian results. The Greek economy cannot be improved just because policy makers impose policies that supposedly restructure labor markets – read here, suppression of wages and eliminating labor rights and standards – if import and export elasticities are different than those assumed in the policy implementation. The sum of import and export elasticities in Greece is barely above one, which makes a substantial increase in net exports the goal of a wild imagination, at least in a relevant time frame. No wonder Greece’s net exports have failed to offset the public spending cuts, and thus not contributed to the growth of GDP. And those increases are primarily from oil-related products that are volatile in concert with oil price volatility. To be sure, tourism is important, but despite last year’s "huge" increase in foreign tourist arrivals to Greece, net employment continued to plummet. The external fundamentals are not dependent on labor reforms, but on large investment, public partnership with the private sector, which will not be forthcoming any time soon. It won’t happen with the privatization of the old Athens airport or with other similar "privatization" schemes.
Radical structural reforms, which include labor and product markets and blanket privatizations, constitute the second component of the conditions behind Greece’s bailout plans. First, is there in economic literature a direct connection between labor market flexibility, productivity growth and national economic performance?
The economic literature, as economists know, can produce conflicting results. It will not be surprising to find cases when statistics will prove that there is a positive outcome in terms of increasing productivity with flexible labor conditions, but this is always dependent on the level of technology diffusion. To be sure, German workers have the highest productivity in Europe along with those in the Netherlands, but it is not because they are paid less than other Eurozone workers but because of the high level of effective technology used. So they are about 70% more productive as compared to Greeks, Portuguese or Spaniards despite the fact that the latter work substantially many more hours during the week. Clearly, Germany’s and other North European economies enjoy better economic performance, but this is not due to so-called labor flexibility only. Germany is successful because it is lucky, having an extraordinary number of idle and low-wage workers from East Germany when the unification took place. Unification gave Germany the ability to hold West German wages down. But this should not be used as an example of a successful application of a labor flexibility policy. The literature also abounds in studies showing that labor productivity is not dependent on labor flexibility. Indeed, the theory and policy of "efficiency" wages, promoted by none other than Nobel Laureate George Akerlof and current Fed Chair Janet Yellen, is part of the economic research which shows there are productivity gains and other positive outcomes to firms which pay higher than market wages. All in all, then, the argument of flexible wages does not, I am afraid, hold water.
The international experience with privatizing electricity, gas, water, sanitation, and public health services indicates that there are anti-social effects behind privatization. So why are Greek governments so eager to privatize virtually everything in Greece?
As has been shown in certain cases, the public sector can be inefficient, but this is not tantamount to the private sector being efficient either. There are key industries that must be in the public domain because their goods or services are considered public goods. In many advanced countries, such as in the US, the goods and services mentioned are mostly in the private sector’s hands, but it does not mean that they are efficient or price competitive. To the contrary, whenever a service was privatized or became unregulated, it never gave the desired effects in being price competitive. For countries like Greece marked with high income distribution inequality, some of the services (such as health services, for example) must be the business of the public sector. Other services can be privatized, but they must be highly regulated. The privatization process in Greece is a fire sale of public property just because the international lenders have imposed it. If profitable, and in the public interest, then some of these services can be privatized, but should continue to be regulated. In the US, however, no one would dream of privatizing the national lotteries; they are the most profitable and high revenue sources of government revenue, yet in Greece it was the first public company to go on sale. There is no general rule that these services should be privatized. They need to be run efficiently either under the aegis of the government or the private sector – absent the corruption, nepotism or other ills of the up-to-now Greek clientist political system. The absence of transparency should not be the reason for privatizing them.
You have argued in a number of publications in the recent past that what Greece needs is a European type of a Marshall Plan. Doesn’t this suggestion run counter to existing political structures and economic realities in Europe?
I am pleasantly surprised to read of late that even the government speaks of a European Marshall-type plan of aid to Greece. The existing political structure in Europe may be seeing such an aid program as anathema, but I believe it recognizes that if the European project is to be kept intact, it must begin to think along those lines. An economic and monetary union requires various types of support from the economically strong to the weak. This will eventually take place willingly or not, and the evidence shows that it not to the benefit of the weak only – but more so to the strong. The announcement of the creation of a Greek Investment Fund with the support of Germany’s KfW is a step in the right direction even though the details of the plan are rather sketchy. Thus, even though I have been labeled by many the Cassandra of Greece, I want to be optimistic that such aid may not be that farfetched.
The European Union and the International Monetary Fund have disagreed all along about the sustainability of the Greek debt load. Who is right, if any?
There is no question in anyone’s mind that the debt load is unsustainable. It was known from early on that a debt restructuring will be needed. The haircut that took place was ill-conceived and hurt the country more than it helped since it decimated the balance sheets of Greek and Cypriot banks along with public pension trust funds and middle-class Greek citizens. It occurred much too late after the German, French and Italian banks unloaded their Greek holdings to their counterparts in Greece and Cyprus. When it happened, it was a thoughtless decision despite the government celebrating it as a major accomplishment. I haven’t agreed on anything with former ECB Vice President Papademos’ views about the Greek economy except with his opposition to such a haircut when it happened. All in all, the IMF is, of course, correct – but Brussels, Berlin and Frankfurt are trapped, having convinced every European citizen that Greece’s debt load is sustainable. The government will celebrate a new accomplishment after the European elections when the debt will be restructured by extending its maturity to perhaps 50 years and lowering the interest rate. This is in economic terms a present-value "haircut," but not a debt-load reduction. It is the proverbial kicking the can further down the road, which will subject the country to continued vigilance and restrict its sovereignty over its fiscal policy stance.
Syriza represents itself as a viable alternative to the current economic, social and political malaise in Greece by claiming that, when it comes to power, it will put an end to austerity and will force the European Union to rethink its policies towards Greece. However, while a good percentage of Greek voters have shifted to the left, many others seem to believe that Syriza’s political rhetoric rests either on naive thinking or plain opportunism. What are your own thoughts on this matter?
I believe Syriza is the only viable alternative that Greece has at the present time if a change in policy direction is to be achieved. Its mandate to change policy would be very difficult indeed. But it can be done, although not free of risks. But risks are endemic in any policy prescription that would be implemented, and I believe the current policy being followed entails higher risks for the economic future of Greece. What I fear more is the disappearance of what used to be a middle class, let alone the immiseration of low-income, low-skilled workers. What these groups need right now is a lifeline – which, unfortunately, is not in the cards. Given the additional financing that will be needed in 2014 and 2015, more austerity will be needed which will affect even further the country’s living standards, a process which will have even further adverse effects for the middle class and the low-income and low-skilled segments of the population. With conditions worsening, even more people are expected to question the prevailing policy. And if there is one political force which can offer a viable alternative to the current nightmare, it is none other than Syriza. Yes, perhaps there is an element of political naivete characterizing Syriza, but there is seriousness of purpose and the work of the gifted in its midst is very refreshing and encouraging. To be sure, political analysts talk about the importance of the incumbent candidates and this would be a very difficult problem to overcome. I want to believe, however, that despite the internal squabbling which frequently occurs among the different groups inside Syriza, the party will, at the end, prevail. At least I hope so. To those who oppose them, I can only respond by saying be careful what you wish for.
If the economic "success story" of Greece turns out in the end to be nothing more than a politically constructed myth, and the prospects of the European integration project remain what they are today, why shouldn’t Greeks opt to leave the euro?
There is plenty of evidence that the success story is a politically constructed myth with the acquiescence of the European leadership. The question about the country remaining in the euro club is interesting and very important. I believe that Greece cannot leave the euro since the costs associated with an exit are very consequential. As I have written elsewhere, Greece has a number of options that it can follow, if the European leadership continues with its intransigence and continuing policy of the dangerous idea of austerity. If all other options fail, the introduction of a carefully designed parallel financial system is a very viable alternative in order to get a handle on both domestic financial market liquidity and employment growth and output. This is not a novel idea. The Greek government used a similar program in 2010, although very haphazardly conceived, but it was introduced nevertheless. It is not a crackpot idea and has been embraced by both conservative and liberal thinkers. This will address some of the most serious challenges the Greek economy and society face without endangering the country’s membership in the euro. So, there are other alternatives available before the unthinkable becomes the only option.
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