Greece: don’t take it at face value!

It seems that there are just hours left to avoid a drastic situation in Greece.

At first sight, the natural sympathies of many people, especially on the left, will be with Greece. Is this not a plucky little country, standing up to the IMF and the richer eurozone countries to oppose austerity politics? And there can be nothing but sympathy for the plight of ordinary Greek citizens after a big drop in their standard of living, high unemployment and cuts to even basic public services.

But anyone who has actually looked into the figures and the details of this ongoing saga will know that it ain’t so simple.

Even before the worldwide financial crisis, Greece had a debt-to-GDP ratio of over 100%. It had fiddled its books to disguise the size of its deficits — not least when it applied to join the euro.

Unlike many other highly indebted countries, Greece’s massive debts really were caused by profligate spending combined with very widespread tax evasion (the latter of about €20 billion a year!)

It’s different from Spain and Ireland, whose public debt was even lower than Germany’s before the crisis hit, but had to bail out their banking sectors. It’s different from Italy, whose debt is largely financed internally. It’s different from Britain — and indeed others — because of the sheer scale of accumulated debts.

Deficits and debts of this magnitude are not a matter of Keynesian fine-tuning or counter-cyclical balancing. And there was little choice but to address them: this would have had to be done whether Greece was in the euro or not, in the EU or not.

I recently travelled from Bulgaria to Greece. Crossing the border was to go to a country with a visibly higher standard of living. But too much of that differential was engineered by the government borrowing money to pay higher salaries, and not for investment. Over the first decade of this century, unit labour costs rose by over 30% in Greece (compared to 5% in Germany). For public employees, this was even more striking: up 117%! It is not surprising that, as a result, prices in Greece rose by 30% above the eurozone median — a massive divergence of competitiveness. By 2011, Greece had a current account (trade) deficit of 9% of GDP.

Continuing to finance this by borrowing meant Greek public debt was well over 100% of GDP even before the world financial crisis hit Europe in 2008. By 2011, it had shot up to 170% of GDP (€355.141 billion). On the markets, no-one would lend to Greece at normal rates as the perceived risk of default rose.

So Greece asked for bailout loans from the IMF and from other eurozone countries. It was given the largest ever loan of this kind in history: long-term (30 years), low-interest (1.7%) loans destined to give it time to turn the corner. It also negotiated the biggest debt restructuring in history, with the private sector writing off nearly half of Greece’s debt. Without this help, the plight of Greece would be far worse. Far from imposing austerity, European solidarity actually attenuated the pain — a point often ignored!

Greece now has a primary surplus and did at last return to growth, after six years of economic decline, in the second quarter of 2014 — and was the eurozone’s fastest-growing economy in the third quarter of last year. It pays 40% less interest on its loans than it did in 2010. Before Syriza came to power early this year, it seemed that Greece had at last turned the corner.

Asking for more assistance does not go down well with the fellow eurozone members helping it out who have a lower standard of living (Slovakia, Latvia, Lithuania, Estonia).

Certainly, the way that deficits were eliminated left much to be desired. The thrust was on cutting expenditure, while the ultra-rich continued to avoid paying extra taxes. A gigantic defence budget (one of the highest in Europe as a percentage of GDP) was scarcely pruned as the military establishment protected its own.

Above all, many Greek politicians presented unpopular measures as impositions from Brussels or Berlin, as if they would not otherwise have happened. The instability of the Greek political system – now on its 6th government in 6 years – and the failure of its leading figures to take responsibility has, of course, not helped.

Unfortunately, Syriza is one of the culprits in that respect. Hopes that, as a left wing party, it would root out tax evasion and tax privileges, were dashed. It formed a coalition with a far-right party. Its talks with its creditors have seen wild swings in its positions from one day to the next — and from one minister to another. Just as agreement was hailed as near, new demands appeared at the last minute.

And now the latest twist: a referendum on the terms of the latest offer from Greece’s creditors, with the government urging people to reject it, but with no clarity of what is the alternative. As the Greek newspaper Kathimerini puts it this morning:

Prime Minister Alexis Tsipras decided to shy away from his historical responsibilities and shift the burden of failure on the shoulders of the Greek people.

One would have at least expected that the burden of the decision would have made this address more profound and cautious … we heard nothing of that kind. What we got was gibberish, topped off with nationalist populism, typical of the speeches heard in university amphitheaters … The shock decision was announced without any previous preparation. Not even the address had been prepared … The Greek people are expected to make a decision about the future generations in the space of one week. They will hardly have any time to read the question.

If Greece were to default, it would not necessarily lead to Greece leaving the euro any more than California defaulting means it leaves the dollar. In any case, if it left the euro and set up a new national currency, the latter would presumably devalue substantially, thereby increasing the size (in its own currency) of the debts. Greece imports most of its food and nearly all its energy, so a devalued national currency could double the costs of such necessities, with dramatic social consequences. And even preparing for an exit from the euro would trigger a wipe out of its whole banking sector, with enormous knock-on effects. It would hurt the euro too, but not as much – Greece is just 2% of the eurozone economy.

But a default within the euro would also do enormous economic damage, leaving the government unable to pay salaries and pensions, firms unable to borrow and frightening tourists away just before the crucial summer period that is also vital for the Greek economy.

There are just hours left to avoid such drastic scenarios.

This post is updated and adapted from an earlier post on the same subject. It has been republished by Left Foot Forward.
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  1. Yes, it is correct that Greek public debt had shot up to 170% of GDP (€355.141 billion) by 2011, but this was mainly the result of a drastic decline in GDP due to imposed austerity policies.

    Yes, unit labour costs had only risen by 5% in Germany, but this was the result of enormous downward pressure on wages and an increasing flexibilisation of the labour market. German export success has been based on extreme exploitation of large sections of the German working class.

    Disappointing to see a Labour MEP talking the talk of austerity and competitiveness and overlooking completely the plight of Greek people, who have suffered the collapse of the health system, high unemployment, drastic cuts to pensions and salaries as well as a radical undermining of trade union rights at the hands of the Troika and European capital.

    What can we then hope for the UK from New Labour?

    • You have ignored Richards comment though that debt was already over 100% of GDP prior to the financial crisis. Categorising Richard as “New Labour”, apart from being wildly inaccurate, is easier than addressing the points he makes?

      • “You have ignored Richards comment though that debt was already over 100% of GDP prior to the financial crisis.”

        You have ignored that Greece’s Debt to GDP ratio sat at around 100% from 1993 to 2008. Strange that it would take 15 years for the problem to come to a head.

        In fact the debt was sustainable throughout this period because money was being – as pointed out by Andreas – taken by businesses out of the salaries of their French and German workers and transferred to Greece (et al) in the form of debt, where yields were higher because risk was higher.

        Having played this game to the hilt, and have it explode in their faces, the same chancers turn round and expect the very poorest Greeks to cough up to redeem them. Even though the money – as the Labour MP inadvertently admits – was in the first place stolen from the salaries of the German working class !

      • Greece’s debt to GDP was at 100-105% for decades before joining. One of the reasons Greeks like the euro so much is because of the constant devaluation of the drachma in prior decades.

        I think Corbett has missed a lot here.

        For one, the tax evasion question. Greece is at 28%. A huge amount. But that can’t be reduced to zero. Most EU countries are at 17-19% evasion. The USA is at 14%. Realize that this big number for Greece needs to be compared to actual tax revenues to GDP which came in at 40-45% for decades. And this is considerable when you realize 15% of GDP came from shipping which went relatively untaxed. 15% is also in cash heavy tourism. When you account for these factors, Greece was practically collecting 50%+ of GDP in tax revenue even with 28% in tax evasion. And this is on the back of 86% of workers being taxed in a bi-weekly paycheck. 14% of Greek workers are responsible for that 28% tax evasion figure. Compare this to the USA which collects 20% of GDP in tax revenue. One can easily argue that this is a legal form of avoiding taxes that pay for services (education, health) and infrastructure (the USA’s is not like Germany’s).

        I also take issue with Corbett’s idea that Greece fudged numbers to get in. It is very true that Greece lied about its deficits under the New Democracy party in 2006-2008. This is why Greece is being punished by the EU. But the story of Goldman Sachs and Greece’s entry into the EU is just so false and overblown. The Goldman deal was known by all, many countries had done a similar deal, and it was even written about in the trades ( for instance covered it thoroughly in 2003). Eurostat’s accountants were upset about such deals, and resisted them, but the national FMs overruled the accountants. Greece’s budget upon entry was at 1.5% deficit, well under the 3% threshold (which Germany blew through to 6% in the middle part of the decade). Greece used the Goldman deal to reduce its overall debt from 104% to 101% because the deal was not considered debt.

        Lastly, Greece did not blow out expenditures on services. This is a country without a social welfare system. None at all. Which is precisely why the pension issue is so big in Greece. It is the one return citizens receive for their taxes. But consider this: Greece built up 300B in debt by 2010. AND, it spent 150B on military weaponry in the prior decade, to the tune of 6% of GDP yearly, often in vendor finance scams approved by connected industries and their cohort foreign banks. Bribes are on the order of billions to gov’t ministers. This is the real issue. Greece differs from Ireland and Spain not because of social spending but because of the degree of corruption and kleptocracy.

        And when you have this much thieving, it’s not a matter of spending or tax evasion, but rather who will pay? Should the cronies and creditors and thieves pay? Or the people?

        Greece’s massive black market does not even figure in the tax evasion. The black market is both a response to the kleptocracy, and also works with it. But one could easily argue that given the economic dynamic (massive taxes for the 86%, little in social services) the country needs (or needed) a black market just to operate.

    • Well the German working class may feel exploited, but I don’t imagine that many of the them will be moving to Greece.

  2. I think all those who support Tsipras without knowing, because one has to support David against Goliath, should read your post.
    Most people in the eurozone do not realize Greece is going to cost money. Okay for money to help the Greek but not for fullfilling careless election promises.
    And as you point out if I were Bulgaria or Slovakian, more money for Greece would outrage me.

  3. While Greece may have culpability for their severe problem, it seems an inescapable conclusion that the Troika have culpability for the failed recovery. Shedding light on the whole picture is important, but the article also seems testament to a headstrong EU anger with Greece while t insists on an austerity plan that will crash the country.

  4. As a Greek I can attest that this article is spot on. There is tiny minority of productive people in Greece that know all of this since long. Greece has been a huge kleptocracy for a very long time. The Greek Dream was to be a public servant so that you get payed for life for not working.

  5. Sadly, I found this article such a typical Labour Party response. The party has turned it back on any radical thinking about neo liberal capitalism and the joke on working people that is austerity. Of course you cannot support anything that Syriza does, or you would be forced into supporting Left Unity in the UK. How tragic that most of the social democratic parties of Europe have forgotten any links they might once have had to socialism. I am older sadder and wiser now and I can see what the European Union has become, and aid to the financial organisation as they become ever more rich and powerful. History just goes on repeating itself, doesn’t it? Adlelante!

    • What “socialist” policies has Syriza proposed that Richard says he opposes in the piece above?

      When he says that, “Unfortunately, Syriza is one of the culprits in that respect. Hopes that, as a left wing party, it would root out tax evasion and tax privileges, were dashed. It formed a coalition with a far-right party. Its talks with its creditors have seen wild swings in its positions from one day to the next — and from one minister to another. Just as agreement was hailed as near, new demands appeared at the last minute.Unfortunately, Syriza is one of the culprits in that respect. Hopes that, as a left wing party, it would root out tax evasion and tax privileges, were dashed. It formed a coalition with a far-right party. Its talks with its creditors have seen wild swings in its positions from one day to the next — and from one minister to another. Just as agreement was hailed as near, new demands appeared at the last minute.”, are you arguing that this is inaccurate? If not, what is “socialist” about the actions and behaviours he describes?

  6. No doubt Greek newspapers are as rightwing biased as ours.
    ps I completely agree with Nina Davies’ comments.

  7. I would have liked to see a recognition that austerity economics does not work, here or across Europe. That is the essence of Syriza’s resistance. More austerity makes the problem worse. The Labour candidate that accepts that gets my vore for Leader. The EU has no rationale is it isn’t for the common purpose across the nations’ people. I’m with Nina.

  8. I think Einstein said that doing the same thing and expecting a different results is a sign of stupidity.
    When the European political classes threatened the Greek people in Dec’14 & Jan’15 is drove the people towards Syriza.
    So why are the European political classes making the same threats again, are they expecting a different result?

    I’ve found the link above on Alain Lipietz Facebook page. Alain Lipietz is a former MEP, whom Richard knows well.
    Alain Lipietz writes: “Excellente analyse de DSK sur la Grece. C’est exactement ce que me disaient mes amis grecs de Syriza (dont Maria Karamesini, la plus brillante de mes ex-thésardes, aujourd’hui présidente du Pole emploi grec), à Athènes, la semaine dernière : “Nous ne vous demandons pas d’argent ! nous demandons juste que vous nous laissiez tranquille un moment, et vous verrez que vous serez remboursés plus vite, finalement”.

  10. Richard Corbett fails to explain how further savaging the living standards of the Greek people, driving its economy even further towards the stone age, is somehow going to make the world a happier place.

    He also fails to explain why rich people tax-dodging and the government cooking the books is somehow the fault of Greek workers and poor. He fails to point out that the vast bulk of the money “given” to Greece has gone to bailing out predominantly French and German banks for their bad gambling debts, and he also fails to blame these people for lending the money in the first place.

    He says Syriza haven’t brought in enough left-wing policies to satisfy him. He can’t see the wood for the trees! Syriza have been opposing the austerity agenda and playing hard-ball with the neo-liberal EU, IMF and ECB, rejecting a new memorandum of cutbacks and privatisations. And this outstanding left-wing policy of Syriza’s is exactly what Corbett criticises them for!!

    I have many criticisms of Syriza, number 1 of which is that they have been far too weak and vacillating in opposing the austerity agenda. They deserve criticism for this, and for their naive illusions that the troika would listen to reason. But for being the only government in Europe standing up against austerity, they deserve massive praise.

  11. So there you have it: £100bn invested in replacing Trident is better than bailing out Greece. City boys, go to work! Find those investors.

    Has anyone considered a debt for asset swap? Britons can’t afford homes. Greece has many. How about bailing out Greece and in return taking ownership of assets e.g. Property, so that people from places like Britain and Germany will visit Greece, thereby spending money? It could work with businesses as well, get the Greek unemployed placed in London where there’s plenty of jobs and not enough people to fill them.


  12. This is a spectacularly naive view that uses selective statistics to try to push the view that the whole crisis is the fault of the lazy/corrupt/money grabbing Greeks. It never ceases to amaze how little mainstream politicians know about economics and the monetary system and especially about banks including central banks and the IMF/World bank/Bank of International settlements. Suffice to say that if every government ran a surplus the world economy would collapse.

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