Economic odyssey
There is no excuse for the way Greece has been treated by Europe
If all goes perfectly, Greece will struggle through the 2020s and early 2030s on the edge of insolvency, still under the tutelage of the foreign commissars. In 2060 it will finally emerge from a half century of austerity just as bankrupt as it is today, with a public debt of 180pc of GDP.
Greece will be back where it started. It will not have escaped the debtors’ prison or the grinding indignity of neo-colonial oversight. It will still have EU officials telling its elected leaders which pensions to cut or how much the country can spend on hospital syringes.
Even this is based on the heroic assumption that the world economy will motor ahead at trend growth rates for 50 years and that nothing will go wrong.
“Greece can finally turn the page. The worst is over,” said the EU economics commissioner, Pierre Moscovici. He knows that the end of Greece’s eight-year “memorandum” this week changes nothing.
Greek premier Alexis Tsipras knows too that his supposed “day of liberation” is a deception, rhetoric by the broken Syriza movement to disguise what it has been forced to swallow. Greece is still on strict probation. Foreign creditors still run the country.
The Commission tortures every key variable to make the figures add up for Greece and to pretend that there is no need for a debt write-off. It offers false hope to the Greek people. It perpetuates the self-serving lies over the last eight years that have so sapped the moral authority of the EU institutions.
The International Monetary Fund – chastened after two mea culpas (one a whitewash, the second ferocious) – demolishes the EU claims in its own analysis. “Improvement in debt indicators can only be sustained over the long run under what appear to be very ambitious assumptions about GDP growth,” it said. “It could be difficult to sustain market access over the longer run without further debt relief.”
That is diplomatic. Staggered interest rate shocks will hit from early 2020s onwards as the grace period tapers off and the country switches to the capital markets. Gross financing needs each year will smash through the plausible pain threshold of 20pc of GDP by 2038, and keep rising thereafter.
This will happen as Greece’s ageing crunch worsens. The workforce will contract by 1.1pc each year for four decades. Economic trend growth is minus 0.4pc. The IMF doubts that reform can lift this much higher. The draconian retrenchment gutted investment and drove the country’s educated youth into exile, lowering the long-term speed limit of the Greek economy.
“It has been an enormous policy disaster,” said Professor Charles Wyplosz, the expert brought in by the IMF’S watchdog to review the sorry episode. “People compare this to the Great Depression in the Thirties but that was a nice walk in a beautiful forest by comparison. Nothing like this has ever happened before to a developed economy.
“When the crisis began in 2010 the debt ratio was 120pc of GDP. Eight years later it is 180pc and the Greek economy has shrunk by a quarter. The outcome is as a bad as it could possibly have been, and the problem is certainly not solved. If you cook the assumptions, you can claim anything is sustainable.
“What the Europeans have now done is put Greece to sleep under
‘People compare this to the Great Depression but that was a walk in a beautiful forest by comparison’
anaesthesia but when the people wake up and feel the pain they are going to be very angry. Economically it is nonsense, and politically it is shameful.”
At the end of the day Greece has not been reformed. After an initial assault on red tape, the country has slipped back down the World Bank’s ranking for ease of doing business. It is now placed 67, lower than Albania. It ranks 145 for registering property.
It still takes four years to enforce contracts in Greek courts. There is no computerised land registry. The €50bn (£45bn) privatisation drive yielded just €6bn. Syriza vowed to end incestuous “clientilistism”, only to create its own client-patronage replica.
Such is the sticky anthropology of clan-based societies in southern Europe, or what Edward Banfield called “amoral familism”. A cynic might conclude that the EU officials were never really much more than debt collectors anyway.
The original sin of the EU-IMF troika was to foist bailout loans on Greece – in violation of the IMF’S own rules – when it was already insolvent. The country needed debt cancellation of 50pc to restore viability, given that the cure of devaluation was blocked.
This was done entirely in order to save Europe’s banks and the euro at a time when the eurozone had no firewall against contagion and no functioning lender of last resort. It still lacks such a backstop, as will become clear when the ECB halts bond purchases at the end of this year. Both the Indian and Brazilian members of the IMF board protested in 2010 that Greece was being sacrificed to save monetary union.
Yes, the world was vulnerable in 2010. The Lehman crisis was fresh. But as the IMF watchdog said, if the real worry was contagion, then costs should have been borne “by the international community”.
There was no excuse for what happened next. The troika tried to force through an “internal devaluation” of 20pc to 30pc by means of deflationary wage cuts. The country was forced to go through a fiscal squeeze of 11pc of GDP over the first three years.
This was scientific malpractice. Overkill set off a downward spiral. The economic base contracted faster than austerity cuts could keep up, causing the debt trajectory to rise faster. When the targets were missed, the Greeks were forced to cut deeper.
The IMF watchdog said there had been a chronic “lack of realism”. Top staff of the Fund had become cheerleaders for the euro project throughout the EMU crisis. Critics were silenced. Officials were prone to “groupthink” and “superficial and mechanistic” analysis.
Needless to say, there is no chance that Greece will muddle through until 2060. The next global economic downturn will push the country back into recession and blow up the debt trajectory.
Indeed, it is an open question whether the eurozone itself can weather another slump, given that the ECB has exhausted its monetary powder and there is still no fiscal union to stabilise the system. The glaring risk is that Italy’s insurgent coalition – armed with its “minibot” parallel currency – will set off a chain of events that causes the rupture of monetary union.
In which case, Greece will be forced out of the euro as a collateral casualty. All the sacrifice and national humiliation since 2010 will be have been pointless. Greece may get its drachma whether it wants it or not.