Ground zero

The result of May 6 elections in Greece led to a complete reshuffling of the local political dynamics, shook the relative calmness post the completion of the PSI and brought back with intensity on the agenda the country’s exit from the euro zone.

The undisputed momentum of the radical left party of SYRIZA, combined with the inability of the local political establishment to handle the outcome of the elections in a nationally united manner, will most likely lead to a repeat election mid June and potentially in a prolonged period of political instability and governance void.

SYRIZA’s leader Alexis Tsipras, whom polls last week saw in the first place in the event of an elections re-run, has a revolutionary view of Greece’s relationship with the troika, combined with some radical proposals in terms of the country’s fiscal response to the crisis. This has brought back the stand-off between European officials, in particular Germany, and parts of Greece’s political establishment.

Cornerstone to SYRIZA’s ideological platform is the belief that Greece has a strong negotiating position on the basis that it will never be left or pushed to abandon the euro because such a development would have severe implications for the entire eurozone, already in fragile condition after Spain’s troubles have been added to the mix.

On the other side of the argument, there are those who believe that the euro now has now built strong defences to withstand such a shock with the ability to contain the impact.

Greece, heading back to 2002?

On Friday March, 9 the Greek statistical agency announced provisional national accounts data for Q4 2011.  Measured in 2005 constant prices, the Greek economy contracted by 7.5% in the last quarter of 2011 driven by a significant reduction in final consumption, both private and public, the free fall in investments by approximately 22% and a slow down by circa 6% in exports.  The impact on GDP was partially offset by a substantial decrease in imports by 14.2%.

However, these are not the most worrying signs of this particular release as it was largely expected considering the vice like grip of the austerity measures on the Greek economy.  Most concerning are the implications for the first quarter of 2012.

Given the nature of the Greek economy, largely dependant on tourism, economic activity peaks in Q2 and Q3 with the first quarter of each year being the weakest.  The drop in economic output has intensified significantly since 2008 with a 10.3% decline in Q1 2009, 9.3% in Q1 2010 and 8.6% in Q1 2011 when compared to  Q4 of the previous year. (GDP graph below).

The Greek tragedy, approaching the exode

In the typical ancient Greek tragedy the chorus plays a key role in the unfolding of the drama.  It offers a significant amount of background information to help the audience follow the plot, expresses aspects of the drama such as hidden fears or secrets that the main characters could not reveal and most importantly it is instrumental in the conclusion of the drama in the exode.

Exode, exit ode, is the conclusion of the play where the chorus exits the stage singing a song with lyrics of wisdom, directly linked to the plot with the intention of emphasising the main message of the drama and providing food for thought for the audience.

Watching the Greek Prime Minister Lucas Papademos in his press conference after the 14 hours marathon of the last eurogroup I had a growing feeling that the modern Greek tragedy is approaching the exode.

Greece’s new and old creditors agreed on a combined package in the early hours of Tuesday that relieves Greece from a significant portion of her debt obligations, clinching the top spot in the history of debt restructures, but at the same time the Greek Prime Minister knows that this deal comes with a heavy price for the Greek economy, the Greek society and the sovereignty of the country.

Exactly what it says on the tin

Over the last few months, particularly since June last year when the first major cracks started showing in IMF/EU led program of fiscal consolidation in Greece, there is an ongoing discussion around the failure of the program with a growing body of economists now having the evidence on technical level to present how by design and based on basic macro logic the program was destined to fail.

One of the most concise analysis can be found in the most unlikely of places.  A publication of the Finance and Development department of the IMF, titled Painful Medicine, back in September 2011.  In their research, Ball, Leigh and Loungani, present the impact of fiscal consolidation on incomes and unemployment.  Leigh and Loungani are both with the IMF’s Research Department.

One would think that in the IMF they speak with each other and the extensive research is not only shared but at the same time applied where is required.  In the case of Greece this particular research could not be more applicable.

The chronicle of a struggle

It was May, 15 of 2011 when Plaza del Sol in Madrid was occupied by indignados, Spaniards of all ages and backgrounds that took the streets of Madrid in protest for the government’s policies of austerity, the high unemployment especially in the young population, a youth that did not see any prospects and future ahead.

The story has it that one night in Plaza del Sol the crowd chanted “Be quiet, you will wake up the Greeks”.  In spite of the fact that later on the truth in that story was questioned, it sparked reaction in Athens, it was played in the news and a lot was written about it in blogs and social media.  This spark was enough to form the movement of the Greek indignant, ‘Aganaktismenoi‘. It was May, 25 when at first few hundreds gathered outside the Greek Parliament, at Syntagma square.

The Greek movement had completely different characteristics than the Spanish indignados or the recent Occupy Wall Street movement, which was inspired by the occupation and fighting spirit of Syntagma.  The Greek movement directed its indignation towards the Greek political elite that had ruled the country since democracy was restored in Greece in 1974.  The Greek society felt let down and betrayed by the people who ruled the country particularly in the last decades, the people who based their political careers and ascension to ministerial positions on clientelism, abusing the state and its finances as a means of transaction and corruption.  Equally, for over a year the people of Greece were berated and ridiculed by European, primarily, and global media something that hurt the pride of an, in fact, hard-working and modestly remunerated nation, the vast majority of which had not benefited by political favours and the clientelism discrimination of certain in the public sector.

Unemployment and discipline

I have to admit that until recently I was puzzled by troika’s calm, to the extent to be considered indifferent, approach and response to the runaway unemployment in Greece.

Greece’s partners, and new creditors, set foot in the country back in May 2010 with the intention, we were told, to bring order to the public finances and bring them back to a righteous and sustainable path that would allow the country  to pay off its obligations.

The combination of the program’s austerity nature, the Greek government’s hesitation and the public sector’s inability to respond to the challenge led to fiscal targets being missed.  In every single such occasion, the troika did not recognise the impact of the deep recession, refused to accept error in their projections and adjust the program, constantly adding pressure on the Greek government to meet the targets that provided they are short-term could not be done through acceleration of reforms, that usually need a longer horizon to bear fruit, but monotonously looking on the revenue side with increased taxation or one-off solidarity and emergency ‘contributions’ just to make the numbers look good and please the program’s financial contributors.

Austerity Psychosis

The last Friday of 2011 saw headlines of Spain’s new center right government pledge to implement a tough austerity program in an attempt to “turn the economy around”.  It is an oxymoron in itself to have austerity and growth to turn an economy around in the same sentence.

There must not be a single unbiased observer of what has been unfolding in Europe in the last two years that does not recognise the fact that “expansionary austerity” has failed, has failed so miserably since it was first introduced in Greece in May 2010 that has turned a minor deficit issue of a country representing less than 3% of eurozone’s GDP into a full-blown crisis that threatens to bring down the entire euro structure as we currently know it.

Portugal, Ireland, Italy, Spain all going down the same destructive path dictated by Germany in exchange of ECB support and so-called ‘bail-out’ programs that only intended to keep the stability of, the heavily exposed  to the periphery, banking systems of the ‘benefactors’ Germany and France.

When exactly did we forget about fiscal policy?

In his iconic 1948 book Economics, Paul A. Samuelson, one of the most respected and influential economists of the 20th century,  wrote “…, it is absolutely certain that, just as no nation will sit idly by and let smallpox decimate the population, so too in every country fiscal policy always comes into play whenever depressions gain headway”.

At a time when austerity is the dogma of key European leaders and iron fiscal discipline perceived as the response to the escalating eurozone crisis, it is worth looking back at the basics of positive fiscal policy and how the prudent use of it can be the actual response to regaining growth, stability and confidence in the eurozone.

“Countercyclical compensatory” or “anticyclical” fiscal policy is a powerful tool in the hands of governments, used to dampen down the amplitude of the business cycle and, equally importantly, it involves a budget that is balanced over the business cycle.

A little bit about Germany

Historical events often have such gravity and impact that leave lasting scars on a nation and shape a country’s beliefs and policies for decades.

Germany throughout this eurozone crisis has been heavily criticised on a number of decisions, reluctance to adopt different policy mixes or deployment of alternative solutions to avert the contagion of the crisis from the euro periphery to the core.  However, taking a closer look at one of Germany’s most destructive periods, both for economy and society, and the years that followed, one can easily identify parallels and interpret why the modern-day German leadership is standing firm, almost stubborn, in its beliefs for the resolution of this crisis.

The German hyperinflation of the early 1920s is probably the most famous hyperinflation in history and the most damaging ever to hit an advanced economy.

A real national unity government

At the time of writing, the situation in Greece remains fluid, with the parliamentary majority (PASOK) and the major opposition party (ND) only last night agreeing on a general framework of a transitional government with elections to be held mid February next year.

Aside from the fact that the uncertainty since Friday left the country exposed to a number of catastrophic developments, disorderly default by mid December the most imminent, one of the most concerning aspects of the current situation is the obvious interpretation that the two main players in this effort of a coalition government seem to have put forward proposals that are based on short sightedness, personal and partisan agendas.