Wednesday, November 14, 2012

Greece as Iphigenia: the consequences of poor judgment in public policy decision-making in both Greece and the EU

After months of negotiation for the next bailout loan tranche, the plot thickens for Greece in downwards debt deflation and deep recession.  The much touted spring PSI+ loan restructuring now appears too little and too late with the IMF now arguing for OSI (official sector) participation, opening political drama in EU donor countries.  How to explain to their taxpayer- voters these losses from very unpopular bailout loans to Greece? The IMF is expressing deep concerns about deteriorating economic fundamentals in the EU as a major threat to the global economy.  The Greek economy continues with GDP sliding at 7% per annum and 25% unemployment with total GDP shrinkage from the outset of these EU bailout programs surpassing Great Depression levels.  The utopia of the single currency zone has become a nightmare for the Greek people as well as most the Eurozone Periphery.  

Greece is a European periphery country and traditionally a sea power with a larger merchant fleet. Shipping is a major offshore industry, which is as an important national franchise as the City financial services are to the UK. The Greek Diaspora lives in large numbers outside the European Union. The clientele of Greek merchant fleet is mainly emerging markets, all in the US Dollar zone. Neighboring countries like Turkey and Israel as well as the Arab world are outside of the EU. Fundamentally, Greece never met the Mundell criteria for optimal currency zone membership in the Eurozone.

For these reasons, it is very hard to understand why Greece chose to enter the Eurozone and did not take a more prudent stand following the Scandinavians like Norway, Sweden and Denmark, not to mention its traditional ally, the UK. Conversely neighboring Turkey, who at present is only part of the EU trade union without full EU membership and outside the Eurozone, achieved far superior GDP growth rates with a new class of entrepreneurs and burgeoning exports. The Greek economy was not able to keep up. Now Turkish GDP overshadows Greece in totally different league of successful emerging market countries, whereas Greece is locked in an economic zone of losers.

Why did not the business savvy Greek shipping community follow the example of their financial brethren in London City and see the dangers and risks of Eurozone membership, lobby against it to protect their economic interests and thus spare millions of Greek compatriots from the current pain and misery of rapidly declining living standards, business failures and massive unemployment?

Austerity fatigue is rampant in Greece with the third bout of austerity measures passing by a slim parliamentary majority of 153 votes and the New Democracy party dependent on the PASOK Socialists, who have less than 8% of the vote by latest polls.

The pattern over the last few years is Greece falling consistently behind targets with an ever deeper recession and then required to make additional austerity measures for the next tranche of EU bailout money to stay in the Eurozone. The tax code changes every few months as the government runs out of money. No one in Greece except its political class expects that they will ever see the end of new and harsher measure down the line. Accordingly, the Greek political elite has largely lost any credibility with the Greek electorate.

It was amusing in the parliamentary debate to see Alexis Tsipras of the leftist SYRIZA party citing IMF reports about Greek debt unsustainability and need for further public debt restructuring (OSI) - in front of Harvard Business School educated PM Antonis Samaras, stone-faced clinging to the confidence fairy of debt deflation, as the only remedy – something that American economists like NYU’s Nouriel Roubini, Princeton’s Paul Krugman or Wharton’s Franklin Allen sharply dispute. What an incredible role reversal!!!

Economics minister Ioannis Stournaras made straight face budget projections of GDP shrinkage of 4.5% in 2013 at the same time, talking about additional austerity measures for billions of Euro that he was unable to extract this year due falling tax revenues from a moribund Greek economy. Opposition leader Alexis Tsipras was probably more realistic in his projections of 7-8% GDP shrinking in 2013. Stournaras has been systematically wrong in his projections since 2010. He was part of the team who fudged Greece’s ill-fated entry into the Eurozone with EU collusion, yet Samaras rewarded him the Economics ministry portfolio, not a sign of great leadership or critical thinking!

Whilst the Greeks are in an increasingly difficult position to comply with EU demands with the severe carnage that the EU internal devaluation dogma has on their domestic economy, Northern European taxpayers are increasingly outraged by the Greek bailout and concerned about throwing good money after bad.

This was evidenced in the slow pace of negotiations between Greece and the European Union since the June 2012 elections and increasingly tough conditions set for Greek compliance to release the bailout money tranche. The IMF suggestion of an OSI restructuring poses a substantial political dilemma for northern European politicians. Understandably the Germans are avoiding the subject with upcoming parliamentary elections next year.

Clearly, there is increasing pressure to limit losses and cut Greece loose from the Eurozone, but the Greek political elite seem ill-prepared for such an eventuality. Ironically the only politician, who has dared to publically to raise the subject of a Plan B for Greece going back to a national currency as suggested by eminent people like Nouriel Roubini and Franklin Allen cited earlier, is Alekos Alavanos, former leader of SYRIZA.

Added to this is high drama of the Lagarde list. In 2010 Christine Lagarde, then financial minister of France, sent a list of 1991 names of Greek customers with bank accounts at HSBC's Geneva branch to the Greek government. This list traces offshore companies to their principals and word has it that it contains significant representation from the Greek shipping community – not only high profile Greek ship owners, but also middle level Greek management.

Shipping is an offshore industry and under law 89, shipping companies have no tax liability. Bonuses and salaries are commonly paid in US dollars. It is no secret that some circles German creditors have been pressing for abolition of the Greek shipping free zone. Greek politicians have done their best to avoid the subject but as economic and social conditions deteriorate in Greece and the EU increases its demands for more bailout money, anything could happen.

The Greek shipping community not only risks the Greek government confiscating a significant portion of private savings money in foreign currency accounts abroad for the ultimate benefit of foreign Greek creditors for debts and mismanagement that they played no part in creating; but even more sinister, the eventual abolition of their off-shore business zone status as part of the price extracted for Greece to remain in the Eurozone in these interminable and indeterminate bailout negotiations.

How many in Greece are now seriously considering that the price of remaining in the Eurozone is becoming intolerably high simply to perpetuate the whims of the Greek political elite, who have so mismanaged the country and have no alternative games plan?

Jettisoning the current failed and discredited Greek political leadership may well prove a more prudent sacrifice…. Returning to the Drachma may well prove a salvation from the current economic and social hell in the Eurozone.

Greece should denounce the Troika for wrecking its economy with five years of debt deflation that has created suffering and poverty for large parts of the population and bankrupted over 20% of the private sector, press hard for OSI debt restructuring as per IMF recommendations and ask to leave the Eurozone consensually with a bridge package for the transition instead of any more Ponzi bailout loans.

PS I am appending the impressions of Nouriel Roubini from his spring trip to Greece. I find very true what he says about the present psychology and unsustainability of the present course:

I attended a public debate on whether Greece should exit the EZ; three-quarters of those who attended were against that option. One caveat is that most of the attendees were middle class folks who work in the private sector, speak English, are europhiles and blame the government and public sector for all of Greece’s problems. Lower-income individuals, employees of the large public sector and left-of-center voters have different views.

In my conversations with a large sample of private-sector businessmen — shipping magnates, other manufacturers, representatives of the financial sector — and members of the government, a similar view emerged: No one wants to even consider an exit from the EZ. Many forcefully argued — without any evidence — that Greece doesn’t have a competitiveness problem — despite data suggesting that unit labor costs rose by over 40% in the decade before the crisis — and blamed all of the problems of the private sector on the inefficiencies and tax burden of the public sector. Again, this sample of prominent Greeks is obviously as europhile as one could get, so can be regarded as somewhat biased.

… it was quite dissonant if not outright disturbing to hear 5 billionaire shipping owners claim that they care about Greece, but forcefully argue that they should not pay a single penny of tax because: Their shipping businesses are highly competitive globally; they cannot afford to pay tax; and, if the authorities try to tax them, they would move somewhere else. With its own business elite being so willing to contribute to Greece’s fiscal problems, one may rightfully despair that the country can ever successfully tackle its tax evasion problems.

Like what I saw in Argentina in 2000-01, when most Argentines wanted to stick with the currency board and fixed peg to the U.S. dollar, most Greeks have an irrational faith that, by some miracle, economic growth and competitiveness will be restored without an EZ exit. Frankly, most discussions with Greeks become emotional rather than rational assessments of whether an exit from the EZ — with all the collateral damage that it would imply — would be preferable to 5 more years of depression after 5 years of a deepening recession.

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