A trip to Greece
Another visit to my homeland came to an end in the weekend and as much as I would like to take back with me only memories of family and friends, it is impossible to ignore the broken spirit of many Greeks. Having spoken to people from all types of economic activity – employers, employees, young and much older job seekers, small or larger tourism business owners, self-employed and pensioners – it is evident that the depression the macroeconomic indicators are reporting month in and month out is also reflected in people’s daily lives.
Even for the informed follower of the Greek crisis, the headlines coming out of Greece do not capture the full extent of the economic deterioration the country is experiencing and the complete disconnection between the people and the state, a disconnection that will inevitably test the strength of the social fabric.
Business owners have seen their revenues decrease by 30-40% since last year when the country and the economy were already feeling the impact of a full year of the policies dictated by the troika. The drop in revenues is more than 50% compared to the summer of 2010. My trip also coincided with the clearance of the tax returns for the 2011 tax year. Families that received last year minor tax rebates for their 2010 income, this year have to pay in the region of 2,000 euros extra as a result of the various tax measures the Greek government had to implement in a bid to comply with the program’s targets and secure the disbursement of bailout funds necessary to continue basic state functions. This process is the result of the recession-driven repeated misses in revenues targets.
Greece is heading into yet another tough winter with the economy in a tailspin. Disposable incomes across the board have taken a severe hit and, most worryingly, the public is exhausted from two years of draconian austerity, with no hope in sight. In this environment, Greece’s coalition government – going against the pre-election pledges of the parties and the collective agreement that helped shape the coalition – has spent its first two months in an effort to finalise a new austerity package of approximately 11.5 billion euros in spending cuts in yet another attempt to appease the troika of lenders, secure the next tranche of the program, in hope that in return it may get some leniency from the people holding the purse strings in the form of a two-year extension of the fiscal consolidation effort. This extension has become the cornerstone of the Greek government’s ‘negotiating’ tactic.
This tactic is absolutely flawed and the most probable outcome is that it will undermine the coalition government’s own existence.
As seen in the new program’s documentation, these austerity measures aim to bring Greece to a primary surplus of 4.5% of GDP in 2014 and for the following years until 2020, something that translates to an estimated 9.2 billion euros of surplus in 2014, before the state has to service its debt obligations.
Following the PSI at the beginning of the year, apart from the significant debt reduction, Greece secured favourable terms with regards to the servicing of the debt held by the private sector. Interest payments up to 2015 on privately held debt are only 2% annually and there is no repayment of principal before 2023.
In the near term, Greece’s debt obligations are linked to the official sector, bonds held by the ECB, which were excluded from the PSI, that either mature or have interest payments, bilateral loans with eurozone counties that have regular interest payments and need to be repaid and loans from the EFSF as part of Greece’s new program that was agreed back in March. The 4.5% of GDP primary surplus in the design of the program aims to bring Greece in a position to start meeting these obligations without the financing help of the troika, combined with an unrealistic – in the current economic climate – estimate of privatisation proceeds.
Looking at the schedule of the country’s new program until the end of 2014, a total of 32.3 billion goes towards interest payments; 41.6 billion in maturing bonds and loans – approximately 30 billion of which are for debt held by the ECB – and 9.1 billion for the repayment of the IMF. The vast majority of the combined 83 billion of the troika’s financing, returns to the troika either through interest payments, the payment of bonds held by the ECB or the repayment of IMF loans.
Greece does not need to request a two year extension to the current program, more financing or look for other financing means that will only add to the country’s debt burden. The program is designed in such a manner that the coalition government only has to have an honest discussion with the official sector and request some breathing space before the economy blows up and the political system suffers such instability that it could eventually lead to a complete collapse, a messy default and potential euro exit with severe consequences for Greece and the euro itself.
Even if the ECB refuses to be paid back at the purchase price of the bonds it holds (between 60-70 cents to the euro), a simple re-profiling with extended maturities and reduced interest payments, in line with the PSI, could provide a significant relief to Greece’s near term debt obligations. If eurozone partners have a genuine interest in helping Greece – having repeatedly expressed their sympathy for the sacrifices the Greek people are making – they could extend the maturities of their own loans and even provide a grace period for interest payments until the economy regains its footing and growth returns.
Such simple moves that do not require additional funding can reduce the magnitude of cuts required in order to bring a primary surplus and significantly reduce the impact of the further fiscal consolidation not only on the economy but on people’s lives and standard of living.
The 11.5 billion austerity package that the troika demands has nothing to do with reforms or rationalisation of public spending. Despite the failures in the reforms efforts, Greece has painfully managed to reduce the state’s primary deficit from 24.1 billion euros in 2009 to just over 3 billion as of July this year, with a 2012 target of just over 1 billion. This target will get missed not because of failures to control the public expenditure but due to recession driven misses on the revenue side which lead to continuous accumulation of arrears and effectively a moratorium of payments other than salaries and pensions.
It is because of this moratorium and accumulated arrears that socially insured patients have to pay for their medication and doctors visits out of their own already depressed income as pharmacists refuse sales on credit and doctors have stepped down from their agreement with the Health Social Fund. A pensioner of 600 euros has to pay a quarter of her monthly income for a post cancer treatment medicine that might get refunded by her social security fund after three months. More expensive treatments require families to borrow money from friends or pull together savings so lives don’t get at risk.
The new austerity measures plan to cut 6 billion euros (more than half the total package of reductions) from pensions, social welfare and health. The measures go as far as cutting 10% of annual income from pensioners getting 600 euros monthly, the complete scraping of the seasonal unemployment allowances and cutting disability benefits to just over 200 euros monthly. This is unnecessarily self-inflicted pain that will push Greece deeper into the recession/austerity spiral with unprecedented structural damage to the economy.
The numbers have been reported over and over again but the fact that, by the time this program is implemented as currently designed, Greece would have lost in a period of five years over a quarter of its economy and unemployment will be edging 30% requires an honest re-thinking of the medicine currently supplied. It also urges changes that would give Greece the time it needs to reform, to build a modern and flexible public sector and a competitive economy. This competitiveness will not be achieved with fixed capital formation, the investments that business make, reduced by 40% over the last two years and without a well functioning banking sector that will facilitate the flow of funds in the economy.
For all its admitted shortcomings over the last two years, Greece cannot continue to be made an example of due to its lenders reservations about appearing to show leniency and the implications this might have for other existing or future programs, as has often been stated by European officials, in particular from Germany. This is not a case of leniency but one of common sense and genuine partnership, the kind of partnership for which the European Union was born in the first place. It is about a nation that has been ridiculed extensively over the last two years and does not deserve to be punished any further for the repeated failures of its political establishment over the last three decades.
As American economist Robert Solow wrote, clinging to rigid beliefs in the face of disconcerting evidence is one of the more dangerous forms of irrationality, especially when it is practiced by those in charge.