Will Greece Break the Euro?
This December, Greece has seen more media coverage since it pitched camp outside the walls of Troy in pursuit of a misguided woman. It’s all about the deficit and debt of the Greek government. This year the government’s deficit will reach 12.7% of GDP and the public debt is estimated to be around $430 billion(113% of its GDP).
There are governments that have deficit and debt levels similar to that of Greece but here are three factors that make the Greek situation unique:
- A very weak, small and often parasitic private sector. At least since the early 80s Greece has followed a policy of a steady expansion of the state. Most notable is the huge numbers employed in government, perhaps somewhere north of one million in a workforce of approximately 5 million. Of the 4 million left, five hundred thousand are unemployed and eight hundred thousand are heavily subsidized EU farmers of very low productivity. Without taking into account all of those of the private sector who make all or some of their living indirectly from the state, it falls on around 2.7 million Greeks to support a million public employees, 800 thousand farmers, 500 thousand unemployed and 1.7 million retirees.
Of course it would be impossible for those of the private sector to support such a heavy burden and that’s why Greece is so dependent on continuous and high levels of borrowing no matter how good or bad the times are. Paying via taxes for even a lower than average but reasonable slice of the ongoing government expenditures would bring the economy to a complete halt.
- Demographic trends. Greece is an aging society with a median age of 41.8 years. Almost a fifth of the population is over 65 and the life expectancy is nearly 80 years. Economies like that in order to survive economically must be very competitive with a dynamic export sector. But Greece’s huge public sector, red tape and corruption have made its demographic trends lethal. Like someone who is struck by two ailments each one exacerbating and precipitating the symptoms of the other, Greece suffers the consequences of a declining private sector at the same time when it would need it the most in order to manage its changing demographics.
An actuarial analysis by the Labor Institute estimated that by 2050 the deficit of the social security system would be 600 billion euros. The social security system should have already accumulated reserves of 500 billion euros in order to pay its future obligations but up to now it has less than 20 billion set aside. Meantime, Greece already has one of the highest social security taxes in Europe.
- Political Culture. Although the figures related to Greece’s finances are at best mind-boggling and outright scary, its political culture is the most important obstacle it faces. Economic liberalism and conservatism are dirty words in Greece. Governed by a political class that is timid, incompetent and often clueless, it cannot find a way out of the economic abyss it has entered. Some local commentators call Greece the Detroit of Europe or the last socialist country of Europe. Either way, it’s one country very much committed to its statist ideals, hoping that staying in denial will eventually force reality to surrender to its wishes.
Up to now membership in the European Union has fed Greek illusions. With annual economic assistance averaging 3.3% of GDP and membership to the euro club that earlier this decade made public and private borrowing cheap, Greece was able to finance an unsustainable economic system. Kostas Kallitsis, a financial commentator, describing the years before the crisis wrote that “each year we were generating a 10 billion government deficit, we were increasing public debt by 12 billion and private by 27 billion, saddling the trade deficit with 5 billion, and all that in order to increase the GDP by… 16 billion euros – of that 16 billion, 6 billion were coming directly from the European Union as aid.”
Since the mid-90s, Greece has convinced herself that economic growth and prosperity were compatible with her statist model. Substantial increases in public and private debt fueled a consumption binge that created the deception of a well functioning economy.
Now things have changed though and the Greeks are called to face reality. On December 9th the Financial Times wrote:
In classical Greek tragedy the protagonists’ attempt to circumvent the will of the gods leads to their downfall. In the farce that is Greek sovereign debt management, Athens has been guilty of more modern hubris: cooking its books to outwit markets and the European Union.
Not only was Greece using the EU to sustain her semi-socialist economy but in the meantime she was cooking the books in order to show a lower public deficit and debt. The Greek governments did so repeatedly. When caught they always promised to mend their ways but never did so. Now in a time of dire need Greece’s partners are extremely skeptical (to put it mildly) and rather unwilling to foot the bill one more time.
The era of cheap and easy borrowing is over and the markets have started to be rather jittery about sovereign debt. Greece being a member of the euro club does not have the easier option of devaluing her currency. The hard options are to cut public spending in a time of recession angering the humongous public sector constituency and/or hitting the chronically anemic private sector with new taxes.
Dr. Desmond Lachman of the American Enterprise Institute, told me that:
Sadly, Greece has got itself into a very difficult situation by its profligate ways of the past that has resulted in a 12.7 percent of GDP budget deficit and a 30 percent loss of international competitiveness. Trying to fix these problems within the constraints of Euro membership will almost certainly mean many years of recession, high unemployment and deflation for Greece.
Yet leaving the Euro is not an option for Greece since that would inevitably lead to debt default for the Greek government with dire consequences for the Greek economy. Greece is lucky in that the ECB [European Central Bank] will not want that scenario to occur since it would have a domino effect throughout Europe with Ireland , Spain and Portugal next in line. So the most probable scenario is that the ECB will try to get Greece to agree to an adjustment program and then hold its nose while it provides Greece with funding.
Namely as the Greeks would say, they stand somewhere between Scylla and Charybdis, the two sea monsters of Greek mythology who occupied the opposite sides of the Strait of Messina. One passing through would have to face one or the other but could not avoid both. Painful choices juxtaposed with other equally painful and hard choices.
As the U.S. contemplates the introduction of a new entitlement program, big increases in debt and new stifling regulations perhaps it should take a look at the small Mediterranean country, which in many things she considers her precursor. Because the similarities between Athens and D.C. might not limit themselves to political theory and architecture and may at some point enter the economic realm as well.
A commonly accepted point of departure in modern Greek history is the election in 1981 of Andreas Papandreou as prime minister. He was the one who initiated a radical expansion of the state, of the entitlements and of public debt. Before he got elected he was known as an ex-academic with limited governing experience but great oratorical skills and lots of charisma. The slogan of that very big and transforming election victory 28 years ago was one word, ??????, or as it is known in English: Change.