Myths About the Greek Crisis

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.

Americans Inflating Euro Crisis

Americans are aggravating the Euro crisis for their own ends. While there is indeed a problem with the Greek economy, America has made sure that it has developed into a full-fledged Euro crisis.

Euro Crisis?
If the news stories are to be believed, it seems as if the Euro is about to fall apart, and countries will have to revert to their own currencies. This is a myth. In the first place, Greece (and Ireland & Portugal) are small fish compared to the Euro area as a whole, and their problems could not bring the whole currency down. But the main reason why the Euro won’t fail is the strength of the German-France commitment to the Euro. This is something that no American can really understand.

Germany and France see the Euro as the embodiment of their European project, and this means they are committed to it fully. Germany felt the same way about German reunification, and it poured trillions of Euros (then DMs) to make East Germany catch up with West Germany. People were willing to even pay an extra tax just to finance this. The European project is seen by Germans as the thing that ensures the peace and stability of Europe, literally. If the Euro falls, the EU will break up, and a depression and even civil wars may ensue. Germany and France had fought 3 wars with each other, in rapid succession, before the European Community was formed. No sacrifice is too big to prevent this from happening yet another time. There is absolutely no way that the Germans and French will allow the Euro to fail.

Ignorance
America has been doing its best to inflate the Euro crisis. This is due to ignorance, self-interest, and in some cases even malice. Americans are ignorant in that they don’t understand how the EU works. The EU works slowly; but is capable of making huge changes if necessary. EU decision making is a very public affair, with many negotiating positions discussed in the various parliaments and the media. In the end, though, Europe is very pragmatic, and it is actually easier to decide among the 17 members of the Euro-zone, or the 27 EU countries, than it is in the US with its two feuding parties.

In  a sense, the Germans are using the ‘crisis’ for their own ends. The crisis is convenient to force the Greeks to give concessions. But this is part of the public way in which the EU decides on policies. The Germans, and everybody else in the EU, have been using tactics like this since the beginning.

Many Americans, who depend on their 401k funds for their pensions, do not understand the EU dynamics. And they are driven to panic by US  ‘analysts’ and even political leaders who have done their best to inflate the problems with the Euro.

Self Interest
The US government is consciously undermining the Euro in order to stabilize the US Dollar. Because, in the face of the dollar’s instability, to have a stable Euro that could function as a safe haven and even alternative reserve currency would cause a flight away from the dollar. Thus, US government officials are constantly reminding the public (mainly the panicky holders of 401k accounts) that the Euro is in crisis. Obama would say something like: “European countries are as able to repay their debts as America is” – which on face value may pass as some kind of support for the Euro, but which is calculated to remind Americans that investing in the Euro is risky.

Geithner’s supposedly unfortunate comments during the recent EuroFin meeting in Poland (16 & 17 September) is passed as a gaff, but it was perfectly consistent with their policy of overly emphasizing the Euro’s problems. The Euro crisis is just what Washington ordered – as far as they’re concerned, the Eurozone’s crisis should extend at least till after Obama is reelected.

Malice?
There are also those in America who are actively sabotaging the Euro for financial gain. Hedge-fund managers buy CDSs (Credit Default Swaps, financial instruments that ‘insures’ against sovereign default) on bonds from countries such as Spain, Italy or France or sell their bank stocks short. Then they spread rumors that that country’s banks are overexposed to Greek debt.  As a result, the price of the CDS skyrockets and bank stocks fall, and the hedge funds cash in.

Hedge funds have been rightly blamed by European governments for undermining the Euro. Some EU governments have prohibited short selling of bank stocks. The EU and specific countries are investigating the speculation in CDSs. But hedge funds are nimble, and are very difficult to pin down. Hedge funds love doing their dirty techniques against the Euro because they can get away with it. The American public is nervous enough that even small rumors are picked up and could have big effects. Another reason is that hedge funds fear EU investigators much less than US monetary authorities. If they attacked the dollar similarly, they would face far harsher punishment than if the EU catches them.

What Now?
There is now a real Euro crisis, thanks to the Americans. This crisis has depressed the value of the Euro and stock prices. Even though the Euro will not fall, EU governments now have to scramble to control the immediate problems.

While the France-German commitment to the Euro is absolute, this does not mean that they will bankroll Greece forever. They just might opt to have an ‘orderly default’ of Greece, or even kick Greece out of the Euro-zone. After all, Greece didn’t properly qualify to enter the Euro-zone; it had doctored its economic figures to qualify.

But Americans are now being bitten back for their anti-Euro efforts.  Their stock markets (and thus the pensions of millions of Americans) have declined dramatically. International investors and even Central Banks are buying gold at an alarming rate, pushing the gold price ever higher. And the relatively cheap Euro means that the US trade deficit with Europe will only continue to grow. American trashing of the Euro is proving to be only a temporary solution to the US Dollar’s problems. It has led to the US losing precious time that it could have used to decisively address its own problems.

Euro Crisis?

These days, if you watch CNN (and most other American or British media) you would get the impression that the Euro is about to collapse as a currency; and that European countries will have to reinstate their old currencies. It is truly amazing how the Americans especially have fooled themselves into believing that – and now, they are panicking at the possible effect a fallen Euro will have on their investments.

Well, I think this is quite ridiculous; but don’t take my word for it, look at the facts.

Greece Crisis is Over
In the first place, the crisis with Greece is over. The Greeks have implemented deep cuts in government expenditures, and the rest of the Euro zone (and the IMF) are granting them enough loans to be able to rollover their existing debts for the next three years. After 3 years, Greece will still have a deficit, but this will be more manageable; and there would be enough safety nets in Europe to be able to ensure that Greece could rollover their debts easily by that time.

Structural Problems with Euro are getting addressed
In the meantime, Euro zone countries have put up nearly a billion dollars worth of loans and loan guarantees in a special fund to be able to aid other Euro zone countries who might come into trouble with their deficits and debts. This is a fund which is more than the US’ TARP funds that were used to save the US banking system. I believe that this fund is big enough for any problems Euro zone countries could face.

And then, the European Central Bank (ECB) has been given authority to buy up bonds from individual countries. This means that the ECB will in effect be doing “quantitative easing”, or printing money to be able to rescue member countries, if this is deemed as necessary. Of course, I expect that the ECB will use this new authority rather sparingly. The US Fed and the Bank of England has been using “quantitative easing” quite a lot these last couple of years.

In addition, various southern Euro countries have cut back on their expenses, way before the markets have any chance to attack them, like they did with Greece. In recent days, Italy, Portugal and Spain have announced new budget cutbacks (including cutting the salaries of Cabinet officials) , showing the world that they are taking serious steps to reduce their budget deficits.
And there are continuing discussions among Euro finance officials to set up a mechanism to ensure that countries do not exceed the 3% limit for budget deficits.

Panicky Americans
So, with the concrete causes of the crisis avoided, why are Americans panicking about the Euro? Well, I will attribute it to two things; first, it is to the interest of those who speculated against Greece or Spain to somehow make a profit. Rumours may not cause the bankruptcy of Greece or Spain, but they will maintain the price of their put options or Credit Default Swaps (CDS); the price of these will not go down as long as some people think that there is a chance of default.

And second, is that Americans do not understand the mechanics of European decision making. When Angela Merkel of Germany talks about the possible fall of the Euro, this may be true, but only in the long term. For domestic consumption, though, she would be quite grave about it, so that parliamentarians will be forced to support the various rescue programs etc. However, this is the way Europeans come up with common policy. European politicians are known for their brinkmanship, and their hyperbole especially towards domestic audiences. Then, they sit down together in marathon sessions, and viola – they agree on a solution, at the last minute.

We in Europe are used to this kind of brinkmanship and hyperbole of our leaders. We may be concerned about the Euro, but we know that most of the problems are on the longer term, and that our officials are well on their way to solving them. So, we don’t worry too much about it.  But Americans are a panicky lot – they think that the Euro is about to fall apart, that Spain is about to default, and as a result they withdraw their portfolio investments from Europe. This consequently lets the exchange rate of the Euro fall, and then the Americans panic even further – thinking (correctly) that this will decrease European demand for American products.

Well, Europeans don’t worry about their Euro falling apart any time soon.  True, the devalued Euro may make imports more expensive and make travel outside Europe costlier; but exports are booming, and imported products are low-priced anyway as it is, and they just need to plan their vacations within Europe instead of to more distant destinations.

So, for as long as it lasts, Europeans are going to enjoy the low value of the Euro. Of course, this can’t stay this way forever, especially with the growing surplus trade with the dollar zone. But it will be nice, for as long as it lasts. Actually, if I were an American, I will be well advised to buy European stocks or bonds now, while the Euro is still low; I will be sure to make a big profit in a year or so, when the Euro will be back to more “normal” levels.