The Greek Syndrome


How much is enough, or how much is not enough? This is the question…

ByGrzegorz W. Kolodko

The Greek drama evolves before our eyes like a slow motion train crash. On the one hand, there are the irrational expectations of the foreigners – be it the Eurozone finance ministers or the IMF, the private banks, driven by reckless greed in the past while borrowing too much and too easy, or certain opinion-influential media – which would like the Greek austerity measures to go yet further. On the other hand, there is a brave and responsibly acting new government of Greece, which seems to be pushing its society to the limits. How far can one go to this end?

I’m afraid there is no more room for further cuts of public expenditures. Enough is enough. Imposing the budgetary cuts the government is cutting the branch upon which it is sitting. The fifth consecutive year of recession has eroded the tax basis significantly and the fiscal revenue, instead of growing, can only shrink further, even taking the tax increase into account. Austerity is recessionary, which is now acknowledged even by the IMF. Three years of Greek austerity raised the debt over GDP ratio from 113 to 163 percent. The Greeks are spending less and their debt is higher by a half of their GDP! Such policy doesn’t make much of sense.

As a consequence the rate of unemployment is one of the highest in the world among industrialized countries and stands at 21 percent, with a staggering 48 percent of young people out of work. Expecting that they will be watching TV, and not demonstrating and fighting in the streets is extremely naïve. The homelessness has jumped over the last three years by 25 percent. Furthermore, close to 28 percent of the population is on the brink of social exclusion…

Thus, expecting that the Greeks will tighten their belts more and more is unrealistic. One should not push the people beyond the limit of their tolerance. Such pressure is not a policy. This is stupidity. If one wants to have “the Greek Spring” – and, later, “the European Spring”, why not? – one can continue an illusion that people of a great nation are so unwise that they will starve to pay an exorbitant debt to the foreign creditors forever. It must be stressed that a lion share of public debt results not from the fact that indeed the Greeks were living beyond their own means for quite long, but from speculatively high interest rates imposed on refinancing credits. Therefore a plan – or rather a fiction – that the Greek debt from a current 160 percent of GDP will be brought down to 120 percent by 2020 is another sign of a lack of pragmatism. Even if it would happen (and it won’t), such financial burden would remain unmanageable.

It’s true that Greek macroeconomic policy prior to the crisis was unaccountable. And the Greek people must pay for it dearly. They are already doing so. But is also true that the foreign bankers didn’t show a great deal of intelligence and responsibility when they were lending too much money to Greece. And they must pay for it dearly too. So far they haven’t. It is also true that the Western leaders – especially Chancellor Angela Merkel and President Nicholas Sarkozy – have made a series of policy mistakes by postponing the decision to cut down nonperforming Greek debt and by trying to protect the interests of private investors. As for the debt reduction too little has been done too late. Some politicians and policymakers must pay for their mistakes too, and the forthcoming elections in France and Germany make a good occasion to draw proper conclusions…

So, where do we stand now? We are certainly at a crossroads. But I think it is indeed the time to face the truth: the Greece syndrome is like a slow motion train crash. Is there still a chance to avoid it? Definitely not by believing in completely unrealistic scenarios that the Greeks will fast as much as it needs to pay the mounting debt, with completely unacceptable high private debt interest rates that would make a rich man poor. And not by lying and sweeping part of the challenge under the carpet, as the Eurozone finance ministers and certain leaders of the European Union are tempted to do again and again.

The only chance for a working solution is an escape forward. That implies a comprehensive – and executed very fast, in a matter of weeks, not months – reduction of 80 percent of foreign debt, and significant loan, provided by the EU, with zero interest rate. The easiest solution would be for the European Central Bank to buy new issues of Greek government bonds, but its hyper-liberal statutes and German establishment will not allow it to do so. The ECB has off-balance-sheet resources of 3.3 trillion Euros, an equivalent of the current value of its seigniorage (or times Greece’s GDP). If it is only used properly the issue of sovereign debt can be resolved for the whole Eurozone.

Otherwise there will be the misguided policy of restructuring the debt by raising it an amount that is already unsustainable. Hence the alternative is default and chaotic bankruptcy. It will be followed by serious and unpredictable consequences not just for Greece, but for the Eurozone and other partners from the EU and from elsewhere, starting from South East Europe, Turkey, and – due to the contagion, domino effect, and psychological influence upon the market expectations – from a number of other regions and countries. My point is clear: let’s help Greece – and ourselves – now, with the lower price tag attached, or it will cost us much more, in the near future. Cheating the public, and miscalculating and misleading the market, is neither a strategy, nor a policy. It is sheer stupidity.

After the meeting of the Eurozone finance ministers and decisions about releasing the new tranche of Euro 130 billion bailout, we can continue saying that things are on the right track. No, they are not. They are on the track of a catastrophe which we are already witnessing, yet the picture is shown in slow motion…