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The War Greece Has Lost

For the first time in history, a group of countries is punishing a member state in a time of peace. Normally, such punishment only follows war. The closest analogy to Greece’s calvary is provided by the fate of the Confederacy after the American civil war.

When the war was over, the Confederacy was demolished. Its economy was in shambles. There was no money left; many cities had resorted to printing script, local currencies used to facilitate barter trade. The slaves had disappeared or refused to work for their former masters. Even as late as the 1990s, a southern gentleman complained in a letter to the Washington Post that his great-grandfather had lost 400 slaves taken from him after the war of northern aggression, and that he was still waiting to be compensated by the Federal government.

Greece has lost the equivalent of a war. It had committed what amounts to grand larceny on a huge scale. It was apprehended, accused and convicted to stop playing its Ponzi scheme of loans and repay at least partly those who were cheated out of their money.

After Greece had become a member of the Euro zone, cheap loans and subsidies from Brussels became available, and successive governments indulged in a national spending spree. In a few years’ time, the economy grew enormously due to inflated demand financed by issuing government bonds to unsuspecting investors, and by cheating in the use of EU subsidies.

Even when the bubble finally burst, the reckless spending continued because it had been institutionalized in the shape of government contracts, unproductive investments and employment, spendthrift legislation, luxury lifestyles and large scale corruption.

Only gradually, the self-appointed saviors in Brussels, Frankfurt and Washington succeeded in reducing the Greek government’s deficit spending from 15 percent of GDP in 2009 to 9 percent in 2011. Consumption contracted heavily as a result of the austerity drive imposed by the rescuing troika of Euro zone governments, the European Central Bank, and the International Monetary Fund.

Greece’s economy fell into recession, the debt ridden banks stopped issuing credit. Unemployment, poverty and emigration exploded, shops closed and companies filed for bankruptcy. Cash became so scarce that some Greek cities were forced to issue script. Capital fled abroad and savings accounts were emptied.

The scenario of a country that has lost a war. And yet, the Greek government and parliament accepted the brutal bailout demands of the troika in order to avoid the even worse consequences of a disorderly default. Like in a chess game, the loser concedes when the loss becomes obvious.

The end of the road is nowhere in sight. The Greek state continues paying salaries to hundreds of thousands of unproductive employees. It goes on financing schools, hospitals and an oversized military. In theory, deficit spending should be down to a manageable 3 percent by 2014 — if the troika’s- plans are fully implemented, which is not very likely.

The general public both in Greece and abroad are increasingly critical of the harsh measures imposed by the troika. Economists and politicians predict that a continuing austerity drive will wreck what is left of Greece’s economy after years of recession. Poverty, hunger and unemployment on an unseen scale would make Greece resemble a country devastated by war which was, on top of the damages suffered, forced to pay reparations to the victors.

Instead of continuing to bleed Greece’s economy it was necessary to invest and boost growth, some economists believe. But how? Without a profound structural overhaul the economy will remain as uncompetitive and corrupt as it is today. It is still burdened with a debt-financed sector that originally accounted for an estimated 40 to 50 percent of total GDP. Only when this bulge has finally disappeared and deep structural reforms have been implemented, Greece will have a modern, productive economy which can attract investments and resume growth after many years of uninterrupted contraction.

In 2010 and 2011, Greece's economy contracted by about 12 percent. There is still a lot of old fat to be trimmed. Uri Dadush, a former World Bank official and an economist with the Carnegie Endowment in Washington D.C., says: "We may very well see Greek GDP go down 25-30 percent, which would be historically unprecedented." But which GDP? According to an older estimate of the Greek Industrial Association, Greece has, in addition to its official economy, a black economy of about 40 percent of GDP, built up over decades by successful tax evasion.

Unfortunately for Greece, the end of the tunnel is not in sight. The tough love offered by the troika will need to be applied for years to come. The inefficient monster which is the Greek state needs to be dismantled and rebuilt from scratch. Many Greeks will have good reason to envy those who may have lost a war but got quickly back on their feet because their economy was basically sound and competitive.

The difference between defeat and default is basic: a defeated country can hope for reconstruction and a better future; a country that, for reasons beyond its control, is not allowed to default looks to a future of stagnation and decline. Either way, defaulted or saved from default, Greece will for many years not be able to attract the loans and external investments needed for modernization and growth.

Some of the blessings of the Ponzi years will help to maintain past achievements. A well-educated generation will fight to keep standards of living although the demand for their education has collapsed. Some of the lavish investments of these years will continue to be beneficial although thousands of half-finished vacation homes and land developments will remain sorry reminders of a short lived boom.

Psychologists believe that an animal wounded in fight accepts death more easily. A country defeated in war may accept suffering and structural change more willingly than a country which, for reasons difficult to understand for the common man, suddenly fell out of grace with the world and is punished.

Many if not most Greeks may feel to be innocent victims of a ruthless troika and dream of claiming compensation for the losses they suffered. Feelings have been deeply hurt. It may take decades for the Greeks to accept that their suffering was the right cure for their ills.

The next opportunity for the Greeks to express their feelings is the snap elections scheduled for April 2012. The troika, anxious to ensure full and continuing Greek support for the austerity program, requested the leaders of the governing parties to promise in writing that the program will continue to be implemented after the election.

However, these parties will, in all probability, not be able to form a government. Recent polls see the conservative party New Democracy at slightly over 30 percent; the Socialist PASOK party hovering around 3-5 percent. Even if these traditional competitors would team up in the national interest, they could not form a government.

Virtually all other parties are against the austerity program. The three leftist parties led by the old Communist party KKE could perhaps form a coalition and govern with the tacit support of the remainder of the nearly annihilated PASOK and some anti-troika groups on the right. Greece will not be able to honor its agreement with the troika if only one party in the coming coalition rejects the joint memorandum of understanding.

It would hence be extremely unwise of the troika to disburse any more funds before the election results are known and a new government is in place. Otherwise the troika could see their program shredded, their money lost, and Greece happily defaulting.

But who is going to redeem the Greek government bond of 14.5 billion euro coming due on March 20th?

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—— John Wantock