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New largesse stars in Greece’s theatre of the absurd

Published in Business Spectator (Melbourne), 11 July 2013

On Monday, European finance ministers agreed to the release of €6.8 billion for Greece. This followed the latest report of the European Commission, European Central Bank and International Monetary Fund troika on Greek reform and austerity measures.

In the grand scheme of things, another €6.8 billion for Athens hardly seems worth mentioning anymore. Much larger sums have been given out during the euro crisis, and not only to Greece.

And yet, it is worth reflecting on this latest tranche of aid to Greece. The matter-of-fact way in which these sums are handed over, almost regardless of Greece’s actual circumstances, let alone its economic outlook, is quite remarkable. Has Europe resigned to the prospect of paying for Greece in perpetuity?

In their joint statement, the troika writes: “While important progress continues to be made, policy implementation is behind in some areas. The authorities have committed to take corrective actions to ensure delivery of the fiscal targets for 2013-14 and achieve primary balance this year.”

In other words, once again Greece has failed to deliver on its promises. And once again it has promised to deliver what it previously couldn’t.

It has been the same pattern throughout the Greek crisis. Ongoing support for Greece is conditional on the implementation of tough reform measures. But Greece has repeatedly failed to meet these obligations, without ever being punished for such failings. In the end, the international money flows regardless – simply because the alternative, a Greek default, is feared to be even worse.

On the other hand, no one can deny that the Greek government is reducing its spending. This year, government spending will reach its lowest level in a decade. Down from a peak of €125 billion in 2009, Athens will only spend €87 billion in 2013. Yet even slashing the budget by 30 per cent in just four years is not sufficient to solve the Greek problem. There are two reasons for this.

First, reductions in government spending may be dramatic but they are still not sufficient to balance the books. Second, even if the government managed to solve its budget crisis, this would do nothing to return the Greek economy to a path of growth and jobs creation.

The first problem is obvious. Despite Greek government austerity, debt has continued to climb. From 105 per cent of GDP in 2008, it was up to 157 per cent by the end of last year – despite a first haircut on Greece’s debt. The increase is the result of both continuing budget deficits and a rapidly shrinking economy. For the debt-to-GDP ratio, the decreasing denominator weighs just as heavily as the increasing numerator. It is simple arithmetic.

The second problem is even more difficult to solve. Though it may be possible to balance the Greek government’s books by continuing to slash spending and prevent a sovereign default, it does not give Greece a sustainable business model.

Irrespective of its fiscal situation, Greece has a host of other problems to solve. It has lost about a quarter of its economic output since the beginning of the crisis. Unemployment hovers around 27 per cent. Even if the latest forecasts show a sliver of economic growth for 2014, its quantum will not be enough to substantially alter the picture.

To make Greece competitive and lift its economic prospects, just implementing austerity measures will not be enough. Greece needs to become a different country.

The World Bank regularly publishes its Doing Business studies in which it ranks countries by various criteria related to establishing and running companies. Altogether, Greece ranks 78th out of 185 countries for ease of doing business. This is mediocre for a supposedly first-world country, and abysmal for a member of a currency bloc that includes highly productive economies like Germany. If there is any consolation in the figures, it is Greece’s improved performance – last year it was ranked 89th.

Evidently, a lot of work still has to be done to make Greece more attractive for entrepreneurs and investors. For starting a business, Greece is ranked 146th; for protecting investors 117th; and for registering property 150th. For an economy wishing to grow out of its current quagmire, this is simply not good enough. Why would anyone invest in Greece given conditions like that? No wonder recent attempts to privatise state-owned assets and sell them to foreign investors have failed.

On its current trajectory, Greece is on course for another haircut in the near future. Its increasing public debt burden is untenable. And as long as the economy does not recover sufficiently, even substantial reductions in government spending won’t do the trick.

On top of all of that, Greece remains trapped in a monetary union in which it cannot survive. Its cost structure remains too high to compete with other eurozone economies.

Given these circumstances, there is little hope for a speedy Greek recovery. And so the signing of another €6.8 billion cheque by the troika looks like an act of resignation. The EU, ECB and IMF surely must know that Greece cannot go on like this. That they are still be prepared to release funds to Athens only shows that despite their frustration, they are not prepared just yet to consider the only plausible alternative.

Greece certainly needs another haircut. But this time a homeopathic one would not suffice. Greece needs to shed most of its public debt to have a chance to start again. It also needs to leave the monetary framework of the euro behind and adopt a currency that adequately reflects its economy’s strength (or rather weakness). Only once Greece has defaulted on most its debt and reintroduced its own currency will the economic reforms it still needs to pass have a realistic chance of working.

For as long as Greece remains trapped in a cycle of troika consultations, it will not escape its predicament of economic decline. And the longer the Europeans continue to give Greece bailout after bailout, the more entrenched Greece’s dependency will become.

The euro crisis won’t be over as long as Greece is a member of the eurozone.

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