Griechenland: Quo Vadis?

By Costas Ayiotis

The President of the European Commission, Jose Manuel Barroso announced today that the EU had reached agreement on a bail out plan for Greece. It seems that the risk of Greek default and contagion spreading to other EU countries like Spain and Portugal has been contained for now. Greece has been a delinquent member of the EU for many years with its serial flouting of the financial rules, running a budget deficit of 12, 7% of GDP; the highest in the EU and more than four times higher than the 3% limit which EU rules allow. As a result the country ran into serious financial trouble amassing sovereign debt of close to a whopping Euro 300 billion. Currently the debt to GDP ratio runs at over 120%. Greece’s debt primarily lies in global bond funds, pension companies and sevral banks including French, Swiss and German banks.

The fiscal accounts and cash flow of Greece are to put it mildly, in a disastrous state and it will take many years of painful and unpopular austerity measures to rehabilitate the troubled country. The Government of Prime Minister George Papandreou now faces the unenviable task of finding the cash it needs to inject into its economy, while simultaneously drastically slashing government spending, freezing the wages and the hiring of government workers, raising the retirement age and increasing taxes on alcohol, tobacco, income and property. The burning question now on everyones lips: Can Greece afford to service its soaring debt and interest payments without outside help?

It was clear to see who the main architect of the latest bail out plan was. Chancellor Angela Merkel of Germany emerged out of the EU meeting all smiles and reassuringly announced: “Greece is part of the EU and will not be left on its own.” Without losing her smile for a second, she rather ominously also added: “but there will be strict rules!” And we all know what happens when the Germans impose and apply strict rules. But this may not be such a bad thing. So it is clear that German assistance in whatever form, will come with intrusive conditions. Maybe the concept of economic sovereignty is overrated after all.

Meanwhile the USA faces its own Greek style fiscal crisis. The USA for too long has behaved like an over-indulged and spoilt brat. It has shown that it is equally incapable of running its own finances with China owning a great big chunk of the USA’s debt. The fiscal position of the US does not inspire much confidence with the federal debt running into trillions of dollars. Unlike Greece the USA sets its own monetary policy and has tried to delay the pain with "quantitative easing." This is a nicer way of saying that they potentially have an unlimited capacity to print money and thereby buy time and secure more debt but I still don’t quite understand how you cure debt by getting deeper into debt. Maybe they're hoping that soaring inflation will erode the value of the debt and mop up the excess liquidity injected into their system to rescue US banks and soften the recession.

The markets indicate that as a result of non-specific pledges of EU support for Greece, it has become a little less risky to own Greek debt. But as a bond investor would you have confidence in Greek or for that matter US debt? The USA is certainly no safe haven when it comes to money matters, be it their banks or bonds and even if the dollar still remains the world’s reserve currency for now. As for Greece, on a personal note I would sooner owe money to a Greek than have him owe me money. And whether you are a country or a household, the same old-fashioned golden rule applies: always spend less than you earn. But maybe that is being too simplistic.

Critics will of course point out that there is no comparison between the size and complexity of the US economy which looks more and more like a giant pyramid or Ponzi scheme and the world’s first tzatziki economy. They will point out that the USA has an undervalued dollar and an ever increasing tax-paying, working age population to fuel growth in its consumer driven economy. Greece on the other hand, like many of the other weaker countries in the EU, produces very little and when it does like Spain has high production costs and low productivity. Greece sweats it under an overvalued Euro and would benefit from a weaker currency to stimulate domestic growth. Greece in contrast to the USA has a working age population that is in severe decline and even when working, highly evasive when it comes to paying taxes. Retiring from your strenuous half-day job as a bank teller at the age of fifty is common place. It’s not surprising then that some enterprising but unscrupulous Greek politicians were so keen to import Albanians into the economy, initially to mix concrete and push wheel barrows but now these same Albanians are now building contractors and Egyptians and Pakistanis push the wheel barrows.

Nobody disputes Greece’s enormous contribution to Western civilization in diverse fields such as politics, architecture, art, aesthetics, science, mathematics, medicine and literature. The country has produced many great thinkers and philosophers like Socrates, Plato and Aristotle but unfortunately in more recent times it has also produced many unprincipled rogues, brigands and goat thieves who could not find gainful employment in the towns, cities, mountains, the plains or on the farms so they became politicians.

How did Greece get into this mess? The usual litany of ills, come to mind. Greece like South Africa is run by kleptocrats. Years of economic mismanagement, a succession of inept and corrupt governments from both sides of the political spectrum, a lack of political will and fiscal discipline, access to unlimited, cheap & easy credit, endemic short term thinking and disastrous internal policies, a bloated and inefficient civil service used as a dumping ground by politicians to secure sheltered employment for family, friends and cronies, an ageing population, unacceptably high levels of tax evasion, endemic bribery and corruption at all levels of society and numerous high level scandals involving embezzlement of funds by top government officials.

Transparency International lists Greece alongside Bulgariaand Romania as the most corrupt countries in the 27 member EU, rubbing shoulders with the likes of Colombia. The Greek Finance Ministry reports that a massive 30 % of all economic activity in Greece produces no revenue for the government because of active cheating on taxes by companies, employees and professionals like doctors and lawyers.

The EU should have seen the makings of this Greek tragedy coming. This toxic brew has been bubbling away for years. Crisis and deficits are not something new in the Aegean. They have known about Greece’s irresponsible behaviour as a member state for years and did nothing to bring Greece to order. Therefore they are partially to blame for this fiasco. Some countries are good at balancing the books while other countries are good at cooking the books. Greece clearly falls into the latter category. And Greece is not only good at cooking the books; it has also shown remarkable flair in fiddling with all sorts of statistics. The old saying was: beware of Greeks bearing gifts. It is now beware of Greeks bearing statistics.

I read recently in John Mauldin’s Investor newsletter that a prominent Swiss investor pointed out that Greece has been in default in 105 of the last 200 years. Not a great track record but he is stating the obvious. Greece has always been a volatile country battling to overcome the legacy of Turkish rule and the lack of vision of its own rulers. The Greek people will ultimately foot the bill as they always have throughout history for the stupidity and greed of their political and economic oligarchy or elite. I use these words deliberately because Greece has never had leaders in the true sense of the word, a leader being someone who is prepared to serve and protect the interests of others. I would also like to remind our Swiss commiserator that Switzerland may have clean streets but it also has dirty money. It's banking record is not something to inspire confidence and pride. Self-inflicted deficits and defaults morally speaking, are infinitely less objectionable than protecting the money of despots and dictators or hoarding the treasures, gold and artworks looted by the Nazis from the Jews of Europe.

Nonetheless the unruly Greeks should never be entrusted with state funds and high finance. I would happily outsource the running of Greek finances to a secretariat sitting in Berlin as long as I get an ethical pledge and clearance certificate from Angela Merkel that Siemens will have nothing to do with it. And I would rather live with Germans running Greece’s fiscal policies under German rules than those of the USA or China. Germany is after all the richest, largest and most economically advanced state in Europe. Greeks wearing aprons, a form of national dress in many parts of the country, have in any event been serving wealthy German tourists for years and occasionally stealing their wives. We all get a bit nervous when the Germans are around mainly because the serious-minded, work-seeking, uber-efficient Germans have been known to invade the odd continent in search of lebensraum but thankfully that’s all in the past.

Germany today is an uneasy giant, an embarrassed, bashful power almost reticent to flex its growing financial and political muscle in Europe. They need someone like the hyper-active and energetic Sarkozy to occasionally prod them out of their collective guilt and self-reflective stupor. But Germany also faces a domestic problem. With elections coming up soon, even limited German participation in a Greek bail out plan will not be very popular across the Rhine and may come at a considerable political cost. German taxes are already very high and the disciplined German electorate has very little excess debt to pay off. Why should Germany care and what does Germany get in return?

I don’t know why they are complaining. Angela Merkel may simply be protecting the exposure of German banks to Greek debt. Besides we didn’t ask them to invade us in 1941. Greece also provided German factories with cheap labour in the 50's and 60's. Will the country ever eventually free itself from the guilt of its old sins? Normally we should not hold sons accountable for the sins of their fathers but nor should we forget what they did under Hitler and maybe the Germans should shoulder the burden for Greece’s future stability especially if Germany benefits in the long term as well. The Germans should see the bailout plan as a form of minor reparations or pay back plan for wiping out entire Greek villages and flying the swastika over the Parthenon.

Anyway it seems the Greeks for once are not asking for money. They may be simply be asking France and Germany if they can rely on the superior credit record of these two countries, so that Greece can raise money on the international bond markets at less crippling rates. Being the reluctant financial custodian of the county which gave us democracy may not be sufficient reward. Greece does not contribute much to the GDP of the eurozone but the future viability of the EU may be at stake here. Allowing Greece to collapse may be the fall of the first domino which threatens the very future of the EU, an EU with Germany at the head as its pre-eminent political and economic power. Germany has always been the biggest contributor to EU finances but with the EU a bigger market than the USA, if the EU fails everyone suffers including Germany. The bottom line as other experts have pointed out is that Germany may have to continue paying to maintain its leadership position and to make things work in Europe.

Greece has quite sensibly resisted the urge to follow the American example and sell the country to China. The Greeks don’t like melamine in their famous yoghurt. This anti-China sentiment has mostly been as a result of persistent pressure on the government from the very powerful souvlaki vendors lobby which has vowed that dog meat will never find its way into the venerated souvlaki. In the past dogs were not treated very well in Greece and packs of stray dogs roaming the streets was a common sight. Today following the example set by Diogenes the Cynic who in ancient times roamed the streets of Athens with his staff, lantern and faithful hound at his side searching for an honest man, dogs in Greece have made a fashionable come back and are now understandably more loved and trusted than people.

Greece will never die, so says a famous line in the Greek national anthem and the Greek people are a resilient lot. The country has faced far greater perils than a fiscal crisis in its long and bloody history and endured with its ancient fighting spirit intact. It has resisted invasion from Persian hordes, accommodated Roman occupation; lived through the devastation of its lands by invading Goths and Huns, survived four centuries under the yoke of the Ottoman Turks and more recently Nazi occupation during World War II. Living with German financial planning now necessarily imposed on Athens is a welcome picnic by comparison. And things won’t be so bad. It may be blitzkrieg by other means but rule by the cheque book is far better than Stuka bombardments and Panzer invasions.

Most of the Greek debt is due in four years time but of more immediate concern, the country has to honour an important debt and interest payment in May with more than 50 billion Euros needed just to make it through 2010 alone. The old stock market adage may well apply in reverse. My advice to my compatriots: Pay in May and go away. Go away and lick your wounds. Go away and sing and dance and drink your troubles away as you always have done when things looked bleak. The world is dysfunctional. It has gone mad and nobody should be pointing fingers. We are all collectively responsible for the mess this fragile planet finds itself in today.

And go away they will this summer, to their villages, country homes and islands. The islands will still look beautiful; the Greek flag will still fly over the Parthenon although I suspect the flag pole is made in Germany. And when the sandal clad German tourists come visiting, either be nice to them or lose them to Turkey. One hope of lifting Greece out of this mess is to boost tourism.

Even with limited means, people will still go to the pavement café’s, to the tavernas, to the open air theatres, cinema’s and the bouzouki joints because that is the Greek way of life. With Germany’s help Greece will survive this crisis. Stranger things have happened. The German-Greek partnership may not be such a mismatch after all. Let us not forget that it took a German coach behaving like a Greek and unfancied Greek soccer players behaving like Germans to win the coveted UEFA European Football Cup in 2004. And if things don’t work out and the German financial Polizei from Berlin turn native, go Greek on us and lose their will to work, the ever resourceful Greeks can always follow Diogenes’ celebrated frugal lifestyle and live on the side of the road in a barrel. It’s only money and the ancient Greeks admired austerity and never trusted great wealth anyway.

11 February 2010