The chicken or the egg?
“The memorandum is not the cause of the crisis; it’s the product of the crisis”. This is not one of the many statements made by Greek finance minister George Papakonstantinou back in May 2010 when the Papandreou government signed the memorandum of understanding between Greece and the troika of lenders. This is a statement from Yiannis Stournaras during his first address in Parliament as the new Greek finance minister.
As the country experiences the most prolonged recession of any developed economy in modern history, Greece’s political establishment spent a good part of the three-day debate ahead of a vote of confidence in the three-way coalition government on Sunday night reviving the discussion held in spring 2010 when Greece entered the bailout mechanism.
During a session whose constitutional purpose is for the government to present its policies and broad roadmap of implementation, and which provides opposition parties with the opportunity to present their views in a constructive debate that will set the tone and the dynamics in the new Parliament, this opportunity was wasted by all in a fruitless and outdated debate. If these are the dynamics in the new Parliament then the signs are worrying.
The Greek state in early 2010 found itself locked out of the markets due to the high premium that the country had to pay to refinance its existing pile of debt and most importantly to fund the budget deficit, which back then stood at 36.5 billion euro (15.6% of GDP), 24.1 billion of which was primary deficit. The credibility crisis that started following the October 2009 elections, when it was revealed that the numbers of the previous New Democracy government were not reflecting reality, turned into a full blown funding crisis bringing Greece to the verge of default.
It was the natural outcome of forty years of mismanagement of the state and the public finances, in particular of the five years of the Karamanlis government that increased the public sector wage bill by 45% and the state’s debt burden by 116.5 billion euro after the government had to issue debt to finance repeated deficits and service the existing debt obligations.
Despite statements to the contrary, Prime Minister Karamanlis had said that Greece was “fortified against the financial crisis” that erupted in Autumn 2008, Greece had not reformed its public administration, its services and its costs, did not have a strategic plan for its economy and when attention of the markets shifted to weak sovereigns, Greece was one of the weakest links.
That crisis is entirely the product of political failure, a failure of the local political establishment and was not brought upon Greece by any memorandum.
However, the country now is facing an entirely different crisis. It is a crisis that is hurting the entire economy and is testing the fabric of the society. Greece by the end of this year will complete the fifth year of economic contraction, expected to have lost from the peak 20% of its gross domestic product. Approximately one in four Greeks looking for a job cannot get one and for the first time in decades the inactive part of the society is larger than the productive one. According to the latest quarterly Labour Survey there are just 1.1 persons in employment to support the economically inactive unemployed and elderly. The economy is stripped of any liquidity, the banks are under-capitalised and as a result cannot provide the necessary fuel for firms to invest and run simple daily operations and transactions. The labour market, as a result of the latest MoU and the changes in the labour laws, is on the brink of complete dismantling, without a basic framework to regulate employment and hiring. The country is in a spiral that threatens to become a deep structural damage.
This IMF publication gives probably the most compelling evidence on how painful for the economy a fiscal adjustment can be. Greece’s current crisis is the product of the state funding crisis spilling over the economy through the intense and disciplinarian measures of the fiscal consolidation. It is a product of the memorandum and its associated program and it is this crisis that Greece’s political system should focus on addressing and this collision course that the new finance minister must revert.
At the same time, after the decisions of the last summit and last night’s Eurogroup, Greece is also presented with a unique opportunity, to lift a large portion of the country’s debt burden through the direct recapitalisation of its banks, following this year’s debt exchange, from the ESM. However for Greece to benefit from this development it needs to address the structural issues and the deepening recession that hurts its fiscal efforts, leads to targets being missed, which in turn prompts more measures in a vicious and self-defeating cycle.
The chicken or egg debate over the memorandum is long settled. As Nick Malkoutzis wrote in this excellent post, now is the time for Greece’s political establishment to take strong hold of the steering wheel and navigate out of this perfect storm. Is the time for problem solvers.