Monday, April 9, 2012

The Gounaris Syndrome: Greece, Expansionary deflation and the Euro

The Greek political elite have taken public debt to 168% of GDP, done a debt restructuring that crams down private creditors, but increases E.U. public debt by roughly the same amount (€110bn “haircut”/ €130bn EU Ponzi loan money), hoping to reduce public debt to 120% of GDP by 2020. Greek GDP is declining at a rate of 5-7% per annum in this deep recession. The elite’s efforts are reminiscent of former Greek Prime Minister Dimitrios Gounaris, who chased Ataturk into the depths of Asia Minor for an elusive victory. Will the current obstinate, incompetent leadership meet the same tragic end of Gounaris at Goudi?

With a growing pre-election climate, the Greek political class does not seem to have learned much from the Greek sovereign debt crisis. They seem dangerously out of touch with changing circumstances in Greece and the EU, with slogans that largely belong to the past. The major Greek parties still see Eurozone membership as the key to prosperity, despite massive 20% unemployment, bankruptcy of 25% of the Greek private sector and 15% GDP compression to date from IMF/ EU financial engineering. They continue to cling to EU transfer money and public investments as a developmental model. The two major parties – PASOK and New Democracy – claim an economic recovery around the corner totally overlooking the difficulties in implementing needed structural changes and the rapidly dimishing capacity to service crushing debt burden as the country moves into every deeper economic depression in a Fisher vortex.

They discard the work of economists like Nouriel Roubini and others, who see deep structural flaws in the Eurozone system and Greece with an insurmountable debt load in a state of debt deflation that may well oblige Greece to return to the drachma. They ignore that Greek EZ membership never met the Mundell optimal area criteria. They are indifferent to trade balance issues and the real exchange rate. They do not seem to have any understanding of the purpose of central banks much less the fact that the ECB's failure to stabilize and restore nominal spending to expected levels - as proxied by the 1995-2006 trend - during the crisis as the real culprit behind the Eurozone crisis.

They continue to see a bright future in the EU with the domineering Germans, the inflation-hawk culture of the ECB inherited from the Germans and its influence on the evolution of ECB monetary policy. This expansionary deflation crank economics does not address the serious trade balance problems from these locked exchange rates and puts the adjustment entirely on the EU Periphery, (trade deficit countries) without any demands for change in German export policies that largely generate these trade imbalances; thus, the Greek leadership has not even come close to a proper framing of the issues. Their mind-set remains in the previous status-quo. It still has not dawned on them that these policies drowning Greece and impoverishing the general Greek population have changed everything in the minds of the voters. There is really no open debate in Greece on these matters.

The Greek political establishment has not been truthful to the general population. Their psychology seems dangerously close to their predecessor, Dimitris Gounaris. They want to be liked by their allies with a false sense that they will always support them without dealing with the substantive challenges. They chase impossible targets without the slightest scruples to put the heaviest of burdens on the Greek population; meanwhile, they retain their positions and privileges despite their enormous policy failures

If economic conditions do not improve in Greece and Greece is obliged to move to hard default and Eurozone exit, as many American economists foresee and is reflected in market pricing of Greek securities; it seems that no one in Greece has any Plan B to leave the Eurozone and renegotiate its debt in as orderly and negotiated a matter as possible. This means a very high risk of disorderly default. How will Greece’s political elite survive such an enormous Tsunami?

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