Myths About the Greek Crisis
Posted by butalidnl on 10 August 2015
In the days before the 13 July deadline for Greece’s bailout there were a lot of analyses by economists, politicians, etc especially from mostly from non-Euro-zone sources; and many were distinctly biased against the EU and the Euro. Because these analyses have not been sufficiently rebutted (in the English language world), many people continue to believe in them. Here, I will try to respond to the many myths these ‘experts’ had been spreading about the Greek crisis..
Bailout Benefitted Mostly European Banks
The 2012 bailout forced private holders of Greek debt to accept an average writedown of 52%, a long grace period and low interest rates. The banks could not be literally be forced because this would technically result in a default; so governments ‘persuaded’ them to do so. Part of this persuasion tactic was that the governments took over the bank loans.
Banks did not benefit from the transaction. Even if we consider the higher interest rates they charged before the bailout (around 6%), the 52% writedown more than negated any profit they made. Banks and governments throughout Europe had to shoulder the burden of the bailout. Especially heavily hit were Cyprus’ banks, which held a lot of Greek debt. The government bailed out the banks, but this meant that Cyprus itself had to be bailed out.
Austerity is needed so that Greece can Repay its Debts
Most of Greece’s debt is to other EU governments. This debt has a 1.8% interest with a 10-year grace period (meaning that no payments of interest or on the principal will take place in the first 10 years, i.e. till 2022). It would thus be some time before Greece would need to start repaying most of its loans.
What Greece needs to do in the meantime is to institute reforms to its financial system, upgrade its judicial system, and other reforms that would result in a healthy, modern economy and a balanced budget.
Grexit will Lead to the Collapse of the Euro
Greek Prime Minister Tsipras’ negotiating strategy from January up to 13 July was based on the premise that other Euro countries were so scared of a Grexit (a Greek Exit from the Euro) that they will give in to Greece’s demands (which were, in essence to get money but to do only minimal reform) at the last minute. So the Greeks dragged the negotiations to drive things to the climax where Europe was supposed to give in.
Tsipras was wrong. During the 13 July negotiations, a number of countries were offering a Grexit scenario to it. It was clear that not only were Euro countries not afraid of a Grexit; many were openly advocating for it, saying that it would be the preferred outcome.
The situation in 2015 is vastly different from that in 2012. In 2012, many Euro countries were in trouble: Ireland, Spain and Portugal needed bailouts, Italy suffered from very high bond rates. The ECB and the European Commission had to step in with extraordinary measures to prop up their economies. The Eurozone banking system was highly exposed to Greek debt. Many banks were not sufficiently capitalized. There was a real danger to the Eurozone’s stability if Greece left the Euro at that point. This was the reason why the Eurogroup decided not only to bailout Greece, but also to significantly cut its private debt (they forced private banks to write down their loans ‘voluntarily’).
But in 2015, the Eurozone is much more able to absorb any problems a Grexit could cause. Tthe crisis in all other Eurozone countries is over. Former problematic countries e.g. Ireland and Spain have high growth rates. They, and Portugal, have exited their bailout program. Even Cyprus (which needed a bailout in 2012 because it suffered a lot from the 2012 Greek bailout package) had lifted its capital controls. Banks all over the EU had been significantly strengthened, and Eurozone-wide financial decision making had been streamlined, including giving the ECB more powers. European leaders were quite confident that a Grexit would hardly affect the Eurozone as a whole.
European leaders did not want a Grexit not because they feared a contagion of the crisis, but because of possible negative political consequences, and because the Greek people would suffer a lot from an economic collapse.
Austerity will only make the problem worse
There are two things wrong with this myth. First, is the use of the term ‘austerity’; and second, on the nature of the problem that is supposed to get worse.
The Germans are supposedly pushing the Greeks to make budget cuts out of some ideological logic. But the Eurogroup (not only the Germans) did not call for many cuts in the Greek budget. In fact, the $100 million euro proposed cut to Greece’s bloated military budget is the only budget cut that was proposed by the Eurogroup. Greece is spending outrageous amounts on money on its military, even though the country is surrounded by allies, and is not threatened by anyone. Greece has, for example, more tanks than the UK; and the percentage of its GDP for defense is higher than that of Iraq. The Greek military budget is clearly one item that needed to be cut.
Europe didn’t propose to raise Greece’s Value Added Tax (VAT) to 23%; VAT was already at that level. What was actually proposed was to classify hotels from the low VAT rate of 14% to the regular rate of 23%, which will align Greece with the rest of the Eurozone. Hotels across the EU are charged the high VAT rate. The VAT basic rate of 23% is in the range of the Eurozone (where VAT varies from 21% to 25%).
Now to look at what the problem is. Americans think that the Greek problem is its negative GDP. They think that the solution of the problem is economic stimulus. But Greece’s problem is worse than that. Its government has been spending way beyond its means because of structural reasons including: generous social benefits (for some groups of people); a huge military budget, poor tax systems and tax compliance (e.g. there is no nation-wide land and property registry), a ponderous bureaucracy (up to 1 in 4 employees work for the government) and a balkanized labor force (with many groups of ‘protected’ workers and professions).
A glaring example of Greek overspending is its pension program. The country allowed government employees to retire as early as 52 years old (‘allowed’, because after 13 July the retirement age was raised to 67). Early retirement meant that the government had to pay pensions (which used to be quite generous) for longer than the rest of Europe (where the retirement age is 67 years).
Increasing growth will be like giving more booze to an alcoholic.What is needed is to address the biggest structural problems of the Greek economy. Greece has managed to ‘protect’ its severely handicapped economy through the years, and rebuff Europe’s attempts to reform it. So now, in order to get money to avoid an economic crisis, Greece needs to make a real start at reforming its economy.
Greece was already in a deep economic crisis before the first bailout in 2010. While the bailouts may not have resulted in Greece ending its crisis, it had saved Greece from economic collapse.
The Troika Blackmailed Greece
Tsipras accused the EU, the European Central Bank (ECB) and IMF (the so-called ‘Troika’) of blackmailing it by plunging Greece into a crisis during the final negotiations. Specifically, Tsipras accused the ECB of cutting off emergency financing (its Emergency Liquidity Assistance program), thereby forcing to Greece to close its banks and have capital controls.
The ECB was not blackmailing the Greeks. The uncertainty on Greece had resulted in massive withdrawals of money from the Greek banks in the weeks before 30 June. During that time, the ECB had provided 79 billion euros to Greek banks through an extraordinary channel called the Emergency Liquity Assistance program. The ECB had been technically violating its own rules in doing so, because it didn’t want to plunge Greece into crisis while negotiations were going on. After the Greek government broke off negotiations on 26 June, and defaulted on its IMF loan on 30 June, the ECB was forced by its rules to stop providing emergency credit.
It was Greece’s decision to break off talks and to let the IMF payment lapse that eventually forced them to establish capital controls. The ECB’s moves were forced by its rules.
Germany and other Surplus Countries should Transfer Money to the Poorer Countries
This statement is made by American economists who know little about the EU. Transfers have been going on for decades through the EU’s structure funds, which are supposed to help the EU’s poorer countries improve their competitive position. Greece itself received around 100 billion euros through the years.
While the EU is already making massive transfers of money to the poorer countries, increased fiscal coordination would probably mean that the fund transfers will increase. But these transfers will only be politically acceptable if there would be much closer convergence of fiscal policies among Eurozone countries.