Long road to recovery, if any
Greece, previously home to great warriors and mightier philosophers. Current status: Fiscal graveyard.
It took a long, continued bout of financial irresponsibility for Greece to get here. Being part of the Eurozone had its perks. One was Greece’s ability to borrow at nearly the same interest rates as those of the French and German governments. Which in retrospect seems like quite a loophole. Did the market miss something there? Of course, cooking up figures in order to prevent your fiscal debauchery coming out in full view would have helped immensely. No wonder then that part of the bailout package is centres on Greece ensuring the independence of its statistics agency, ELSTAT.
For some odd reason, and having learnt nothing from history, the Greeks were under the false impression that the good times would last forever that they could keep borrowing at the same rates as the Germans. And for very obvious reasons, the good times didn’t last. They never do. Every economist knows about the boom bust cycle. Economy grows, people spend and suddenly it all comes crashing down. A bad harvest, political instability, run on the banks, something happens that brings a halt to the good times. At least for a while. More than a while for some, case in point, Japan.
From 2005 till 2007, private debt in Greece grew at an average of 35 per cent each year. As an illustrative case, if a Greek citizen held on to $100 worth of debt at the start of 2005, his/her debt would have ballooned to $246 by the end of 2007.
From 2005 till 2007, private debt in Greece grew at an average of 35 per cent each year
So as the financial world came crashing down, the Greeks found themselves face down in the sand, completely unprepared for what was to come. To be fair to the Greeks, no one was prepared really for the magnitude of the crisis. Not only were they not prepared, with their policies they almost seemed to be courting disaster. Having hidden their fiscal deficits from the world, the financial crisis brought in view Greece’s financial shenanigans in full, glaring, equatorial sunshine.
Compare this with Chile under Michelle Bachelet. As iron and copper prices rose, the government of Chile amassed a huge cash reserve. The commodities boom was especially kind to Chile. However, Unlike most other countries and despite enormous pressure from inside and outside Ms Bachelet’s party , the Chilean government decided against spending its hard earned capital, deciding instead to place it in a rainy day fund.
It has been seven years now and with little to show in the way of progress. The IMF reckons another year of near zero growth. Youth unemployment tops 50 per cent in Greece and reforms focusing on austerity along with Greece’s drive to privatise state assets have all but stalled with the election of Alexander Tsipras’ Syriza party.
Syriza is especially squeamish regarding cuts to the pensions system, which take up nearly 16 per cent of GDP each year. A comfortable retirement system is not an anomaly in Europe, in fact, Europeans take great pride in their highly evolved social security systems. France, Italy, Austria all have a pensions-to-GDP ratio greater than 15 per cent. However, all three countries have checks and balances in place which make their pensions’ systems more efficient than Greece’s pensions’ system. Greece, for example, up till recently, allowed early retirement for hazardous occupations, which for some odd reason included jobs such as hair dressers and TV presenters.
The austerity program imposed upon Greece by the EU, ECB and IMF Troika focuses upon a number of areas of reform. Pensions, privatisation, government restructuring are all key areas of reform to be tackled in the Troika’s program. The Greek government has made headway in the pension’s arena, increasing retirement age to 67 years, reducing the number of early-retirement occupations. However, loopholes were left in the last round of reforms that allowed older workers to opt for an early retirement.
Europe won’t stand for piecemeal reforms though. Their contention is that austerity is required given Greece’s irresponsibility in dealing with its finances. Already fed up with Greece’s dithering attitude towards serious reform, the EU has not offered up any concessions’ in its latest bailout package. The pension’s system is especially under review by the EU. As already stated, cushy pensions are not an anomaly in Europe but the EU contends that during times of crisis, Greece must reform its lopsided pensions system, thus saving the country anywhere from 0.50-1.00 per cent of GDP worth of spending.
Privatisation is another area where the EU is applying immense pressure on the Greek government. Syriza has had a very clear stance on privatisation, on assuming power, the party halted all privatisations. However, despite stubborn opposition from Syriza, the privatisation program seems to be a key cornerstone of the bailout package. Over the next years, Greece will have to manage a fund with 50 billion euros worth of assets placed in it. Current understanding is that some of the assets will be privatised whilst the Greek government will try to run the remaining assets profitably. Eventually, funds generated from this portfolio will be used to recapitalise Greek banks, invest in the economy and pay down Greece’s debts.
There are measures included in the reform that might help the Greek economy regain some of its competitiveness
Consider, however, that the Greek government has been unable to privatise its state assets, despite best efforts being made before Syriza came around and scuttled all such plans. As part of the previous bailout plans, the Greek government had promised to privatise 22 billion euros worth of public asset. Of the promised 22 billion only three billion were to materialise, reinforcing European doubts regarding Greece’s seriousness in privatising state assets.
Despite a large trust deficit, the EU will be investing 35 billion euros over the next years to help Greece in generating jobs and employment. Though with an economy as uncompetitive as Greece’s and without the ability to depreciate the value of its currency, investors might be wary of investing in the country, at least for a while.
There are measures included in the reform that might help the Greek economy regain some of its competitiveness. Labour reforms, anathema to Syriza’s ideology, have been included in the bailout package. Part of the bailout includes a demand that Greece ‘undertake rigorous reviews and modernisation’ of collective bargaining and industrial action, a stance that is diametrically opposed to Syriza’s pro-union views. The bailout also demands that Greece open up sectors of the economy that have hitherto been closed to the private sector.
The fight is far from over as Syriza faces an internal rebellion of sorts. Hard-line members of the party are repulsed by the string of concessions offered by Alexander Tsipras. A feeling of having sold out their electorate pervades through sections of the party. It is to be seen whether Alexander Tsipras will be able to convince the Greek parliament in passing the reforms seen by some as another round of economic misery and humiliation, especially given the IMF’s recent tirade against the latest bailout plan. Either way, Greece’s road to recovery seems to stretch to the horizon for now.
