There is resignation down the phone when I talk to friends who live in Greece. The incredulity of the voices at the other end is palpable. Older relatives are quick to remember the leaner times of the 1940s and the 1950s – and shudder. It seems to them that the image with which they have lived: that of growth and a continuous increase in living standards has been a mirage. “How much more am I going to suffer at the end of my life?” asked an 80-year-old aunt of mine who’s lived through Word War II, the Greek Civil War and the junta.
I could offer no consolation. But what I can provide is to prick some more myths. I have written before that, yes, tax evasion and corruption are rife in Greece to the shame of all its citizens. But Turkey is as corrupt and it is booming; Brazil and India, too. Iceland was supposed to be a model country and look what happened to it. So: just because corruption exists, an economic crisis doesn’t necessarily follow. But then, Turkey, Brazil, India and Iceland have better PR departments whereas Greece suffers from the ‘sun-soaked Southern slacker’ denunciation which I rebutted here.
There is, however, no question that Greece is bankrupt. But what is the best option for the country is not the best option for everyone else.
Let me start with the famous bailout or ‘rescue package’ which has succeeded in turning the debt/GDP ratio from 110% to 160% in eighteen months. Clearly if the measures adopted make a recession worse (GDP, the denominator, goes down) the ratio will increase even though the absolute debt itself is decreasing (as it is). The bailout had nothing to do with Greece and everything to do with those European banks that owed Greece money. Instead of the EU bailing out the French and German banks, they gave the money to Greece, and Greece paid the banks. Success! The banks retained their credit ratings!
The second myth is that a country’s bankruptcy is bad – tell that to Argentina (2001) or Iceland (2006). The point about a debtor country rather than an indebted individual is that sovereign debt is subject to the country’s own laws. So if Greece in 2010 (or now) declared itself bankrupt no one could do a single thing (except stop giving her more credit). But what is happening with the famous bailout is that debt on which the Greek Parliament was sovereign is being transformed to debt under International (i.e. British) law. Slowly but surely Greece is being turned from a sovereign debtor country to, effectively, an indebted PLC.
The third myth is that the Papandreou government dragged its heels. Well, in two budgets within eighteen months, it has:
- Eliminated the Xmas and Easter bonus salaries of public servants.
- In addition, all public salaries were cut between 10% to 50%, as well as all pensions.
- An extra property tax was imposed to be levied via electricity bills.
- An extra solidarity tax of 3-6% was imposed ‘for the unemployed’.
- Car tax increased. Bus ticket prices were up 20%, metro by 40%
- The non-taxable personal allowance dropped from €12,000 to €5,000.
- VAT almost doubled from 13% to 23% (which hit the tourist business).
- 16,000 public sector workers were forced into early retirement with a view that another 30,000-odd younger workers will be laid off. (This was the latest requirement by the EU and IMF).
And these are just the economic measures – nothing to do with competitiveness legislation such as the freeing of closed shops, the abolition of professional minimum wages and so on.
Imagine the headlines in the UK if there was a single budget with just three points from the above, let alone all of them. And this happens because the political class in Greece as well as that in all EU countries have swallowed the Big Myth. What is the Big Myth? That the euro is good for Europe – or Greece.
I tell you what the euro did for Greece, Italy Spain and Portugal: it changed the government’s lending pattern. Normally a country borrows from its banks and if there is a shortfall, its central bank prints money to cover it. [Only if this is excessive, does it lead to inflation or currency depreciation]. This is what happens in the UK, this is what Gordon Brown did during the recession to buy the failing banks, this is what Cameron wants the European Central Bank to do and this is what Greece did, like everyone else. But when the euro came, the Greek government could borrow Euros from French and German banks at lower rates – especially for that money-sink of the Olympics – without changing its spending pattern. However, it found that it couldn’t ask its own Bank to print more money to cover its deficit any more, so voilá – the crisis.
Frankly, the country can only become competitive in my eyes, if it leaves the euro, revalues the debts in drachmas while it can and asserts its sovereignty. What will happen? A run on the banks? It has already started. €50bn or around 30% of savings have been cleared out of Greek accounts in two years.
Depreciation? A study by Nomura estimates that the drachma will lose about 40% of its euro value if it were 1:1. Immediately the debt denominated in drachmas (while it is still possible) would be lower and competitiveness would soar.
Impoverishment? Sorry the bottom of the barrel has been scraped. In two years 20,000 families have lost their homes. Bin ladies have started appearing in the streets of Athens. Unemployment was 25% last time I looked.
Oh, I forgot. What will happen to the euro?
Strangle the evil infant before it becomes a teen, I say.