A Country On The Edge: The Collapse Of Greece

I spent four months living in Athens from January 2011 to May 2011. Despite impressions to the contrary, Athens is not a beautiful European city. It was constructed predominantly in the 1950’s and 1960’s — an era that could not exactly be called the pinnacle of beauty in architecture. Many of the older buildings that weren’t destroyed by the Nazi’s in WWII were destroyed during the building boom that followed.

What it lacks in physical assets it makes up for in its history and the drama of the situation the country (of which Athens is overwhelmingly the most important part) faces. The astounding amount of debt they are responsible for poses a threat not just to the viability of the country, but of the entire Eurozone, and by extension the whole European Union project. The eyes of the world fall on this one tiny country with the power to break the most impressive and successful political and economic alliance potentially in all of history.

Greece is €328 billion in debt ($450 billion), a quarter of a million dollars for every working adult in the country. The deficit the government runs is currently 10.5% of GDP, down from 15.4% in 2009, but still far from the levels desired by the “troika”, comprised of the EU-IMF-Germany who provide the bailout. Thus the problem of getting out of debt is compounded by the fact that they are getting further and further into debt every day. While many countries in Europe are struggling mightily with their budgets, Greece leads in terms of overall debt compared to GDP (150% and rising quickly). Meanwhile, the GDP of Greece is currently shrinking at a 5% annual rate with unemployment at 15% of the workforce. By any metric, Greece is in a colossally painful depression.

The state has no money and would be bankrupt if not for a 110 billion Euro loan from the troika of Germany, the EU and the IMF. This loan has been very controversial in Germany, which is the only country in Europe with a stable budget and is paying the lion’s share of the loan. It’s been controversial in Greece as the Germans have asked for severe austerity measures on the part of the Greek government, including spending cuts of up to 20% for many public workers, privatizing public companies, and selling as much publicly owned land as they can. In part, this has all been easier for the government to do because it has been mandated under the memorandum by the bailout lenders and is not internally decided. With that being said, the austerity measures have caught tremendous opposition from groups familiar with mass protests and mobilizations.

Greece having problems with money is nothing new, nor is taking loans from the Western European powers, nor is, for that matter, defaulting on those loans. Greece was bailed out financially following its war for independence in the 1820’s with the result that the Britain, France, and Russia controlled the newly “independent” country. They installed a Bavarian king as a compromise. Although it went through ups and downs, that monarchy was not officially removed until 1974. In 1893, after decades of growth and overspending, they again defaulted on their loans from European powers. That year the Ministry of Finance had to be taken over by the British in order to assure that the loans were repaid. The current complaints from Greeks about losing national sovereignty to European powers vis-a-vis the austerity measures being imposed on them should then not be considered new ones.

Explaining the Financial Crisis

Professor Yiannis Stournaras is one of the top economists in Greece. In the 1990’s he served as Chairman of the Council of Economic Advisors at the Ministry of Economy and Finance and was a negotiator in getting Greece on the Euro in the first place. He explains that the problems of today stem in part from the political system which established democracy in 1974 and that a good deal of blame falls on New Democracy, the center-right party that took over in the 1990’s with the aim of liberalizing the economy and cutting spending. Stournaras says many of the problems:

Have started since 1996 under Kostas Simitis. But it was strange that although its rhetoric was positive, the New Democracy, the conservative party said that we’re going to curtail the state, to cut corruption, to impose the rule of law, actually they’ve done completely the opposite. They expanded the state, they appointed 100,000 more civil servants, 10% of the labor force in the state, they increased salaries and pensions, state salaries and state pensions, so that was the main reason why this happened in the last 3 or 4 years. Of course, on top of this, we had the collapse of Lehman Brothers, which led to the repricing of risks by the international financial markets, and countries like Greece, which found themselves with a very large public debt at that time, exceeding 100% actually they have been excluded from any borrowing. So, this situation is not fiscal. It was fiscal derailment. It is not like Ireland where the situation started from banks. The problem in Greece started from the public sector.

A main problem in Greece today has been overspending and under-taxing. To be more accurate, overspending and under-tax collecting. It’s a known problem that many in the country don’t pay their taxes at all. Due perhaps to the individualistic nature of Greeks, Greece has the highest percentage of self-employed workers in all of Europe. This can be seen everyday from the number of independently-owned stores versus retail or chain stores. A consequence of this is that many people are responsible only to themselves in terms of tax reporting. Add to that the incredibly lax system of oversight on the part of the Greek state and the fact that many of the politicians themselves are finding ways around paying taxes, and the situation comes into clearer focus. According to Stournaras, “It is not like in the United States where you can have a trial in a few months, and either you go to prison or you are set free. In Greece it takes years and years.”

It has been estimated that the government loses 50 billion Euros a year in unpaid taxes. This is an astounding amount, in that if it had a better tax collection system, the country would potentially be financially solvent. The bad loans, the extravagance, the poor accounting, the fudged numbers — none of these would even be in the news, much less have the importance that they do today if the state could just collect its taxes, according to that estimate. Stournaras thinks the whole system should be privatized, “The government should use auditors in the same way that it uses notaries for public service. They should use auditors like PriceWaterHouse to assist the government to tackle tax evasion. The other thing that the government should do is work with the Ministry of Justice because the problem of tax evasion is one that even if you get somebody who is evading taxes it will take such a long time to have a decision by a court.”

In recent years, there has been a concerted attempt on the part of the government to crack down on tax evasion. When you go into any of the numerous cafes that line the cobblestone road across from the ancient Agora or any of the posh nightclubs that surround Gazi Square, they will give you a paper receipt for every drink you buy. It may be working, the state having scared the businesses sufficiently enough to really comply, or it might be simply a show; after all, the records they print could just as easily be the records they throw away.

What Is Being Done?

Greece has 3 available options: they can take loans while cutting spending and increase revenue with taxes and privatizations, they can default on some or all of their debt, or they can leave the Eurozone and return to the Drachma, and revalue it to a level that’s optimal for them. Each of these options will cause pain. Austerity measures cause pain right now, defaulting will cause pain down the road, and no one knows what will happen if they choose to return to the Drachma, but it could be catastrophic.

The path they are currently taking is the one of loans, spending cuts, higher taxes, and sales of public property. With the Socialists in power with only brief interruption since the beginning of the 1980’s, public spending has increased, even, as Stournaras noted during the center-right controlled years of the 90’s. Not only has spending increased, but external money that Greece had been receiving since WWII, first from the U.S. Government, which pumped billions into the country in the 1950s and 1960’s, and then from the European Union, which pumped in Stabilization Funds in the 1980’s, had expired. Thus, this may be the first time in modern Greece that they have really had to account for all of their own expenses.

The current Greek Prime Minister, the Socialist George Papandreou has been to hell and back trying to get these measures passed through a stubborn legislature scared of mobilized public opinion. Even in spite of a significant majority in Parliament, some of his ministers have left the party and now vote against him, and many have been critical of his cabinet, leadership style, and political choices. Still, he managed to get serious cuts through. The problem has since been that the tax revenue is falling almost as fast as his cuts are reducing expenses. This has two reasons. One of them is that the global economy is unstable, which affects Greece as much as anyone else. The other is that the economy was state controlled to a level that would baffle many of those in the United States. Such drastic cuts to the public sector had a debilitating effect on the economy. It was in effect an enormous anti-stimulus spending bill. So while expenses are falling, revenues are decreasing as well, and the problem continues.

There has been severe pressure on Papandreou not to comply with the troika’s demanded austerity measures because they’re so debilitating. PASOK had a significant majority in Parliament and have been able to push through these tough austerity measures, but there have been huge public protests and as of last week the government in Athens was trying to remove an encampment of protestors in Syntagma Square called “The Indignant”. The protests can be large and sometimes violent. At the same time there are a lot of factors that make the protests not as powerful as they might otherwise seem. For one, protests are a way of life in Athens. When I lived there, it was almost uncommon for at least one group not to be striking or protesting something each day, whether is was public transportation, the pharmacies, or anything else. The demonstrations, while more rare in daily life, have a long history as well.

In 2008 there was a month long anarchist uprising following the shooting of an unarmed 15 year old by the police in the Anarchist neighborhood of Athens. During the insurrection there were protests nearly every day, which were accompanied sometimes by looting and damaging of stores and banks. In the 1980’s, during the rise of Papandreou’s father, Andreas Papandreou and his Socialist PASOK (Panhellenic Socialist) party people were mobilized to an astounding degree, with demonstrations of one million people in the central Syntagma Square. All that in a country with a population of only 11 million. In 1973 there were major demonstrations that succeeded in removing the military junta that had been in control of the country.

Another aspect of the demonstrations is that the unions feel a responsibility to stand up and protect their workers, or at least not to seem like they are taking things lying down. So they’ve organized protests. It’s tough to tell if they really think these are going to convince Parliament to reject the measures the IMF is mandating they adopt or if they’re only doing it for show. Whatever the case, many people go to them and there is a good percentage of the population that do not support the austerity measures. As always though, it’s hard to tell how many people quietly support them.

The second option is one of partial default, or debt restructuring, where the Greek government would work out deals with their creditors. These deal could include haircuts of 30% or 50% on the loans and/or interest-free extensions on payments. This would give Greece some breathing room and start over more or less, with loans they can actually pay off. The downside is that their credit would be destroyed, and no banks would want to lend to them in the future. That could be very difficult, as basically every country in the world depends on loans to meet their obligations. It would be impossible for Greece to ever run a deficit. Stournaras is strongly against it, saying, “restructuring would bring a huge cost to the Greek economy. If you restructure debt don’t forget that Greek banks own 50 billion of state bonds. Who is going to recapitalize them if there is a haircut of let’s say 40%? There will lose 20 billion euros in capital. It is not a situation now for banks to be recapitalized if they lose that money. It is not a way out.”

There’s more to it though, for Greece to restructure would have an impact on all of Europe, “Restructuring will not help at all. On the contrary it would be a disaster. First of all the European Central Bank does not accept it as a solution. It has imposed the condition that if there is any type of restructuring of Greek, Irish, or Portuguese debt, anything like that, than the European Central Bank is going to stop immediately lending money to banks in these three countries. So it’s out of the question now.” In these opinions however, Stournaras’s optimism is not shared by most financiers in the rest of Europe and America, the markets are betting on a restructuring.

There’s also the possibility of Greece returning to their original currency, the Drachma. This is a total wild card and would probably not be something the Greeks would do voluntarily, it would have to be imposed by the Eurozone countries who no longer want Greece on their currency. Stournaras completely discounts it, “Oh that’s totally out of the question. That would be immediate suicide. If you return to the Drachma, and it is devalued, then foreign debt which is denominated in Euros will be skyrocketing and at the same time a big hole is going to open in banks’ capital, because their money is still owed in Euro’s and assets will be in Drachmas, so there’s going to be a huge gap in the capital of banks. And definitely there would be a huge run. I mean why Greeks who have Euros, if there’s any idea of coming back to the Drachma, people will take their money from banks and send them abroad. It would be a bank run of immense proportions.”

A second bailout was set to be decided on in a meeting on July 3-4th, following the Greek vote last Wednesday in favor of additional austerity measures. The details are still being worked out. Additionally, Sarkozy has convinced French banks to voluntarily restructure Greek debt they hold. The plan is that to help Greece out, all bonds that mature from now until 2014 will be renegotiated as 30 year securities, that is, Greece will get an extension on their debt. This is the same things as restructuring the debt, but Sarkozy said it’s voluntary so it shouldn’t count against Greece’s credit. The French and EU-IMF additional money will help to keep Greece financially afloat for the next couple months or years s0 Greece will be able to pay the salaries of government workers and pay maturing loans.

It is hard to tell what the future holds. Few outside of Greece are as hopeful for the future as Stournaras is. This week Italy’s stock market sustained huge losses and banned short-selling temporarily. Their debt situation is frightening with debt higher than 100% of their GDP. It is feared that they will be the next country to require loans from the troika. Spain is also is horrible shape with unemployment over 20%. If the markets choose to give up on the continent by not lending to most of the countries like they are not lending to Greece, then Germany and the EU cannot take up for all of them. Anti-European Union sentiment is growing across Europe. Political parties like the True Finns in Finland are gaining in elections and in polls.

Up until 2011, the European Union project has been an unqualified success. Europe has been peaceful for the last 60 years since the beginning of the integration process with European Coal and Steel Community. There is the political will to continue for now on the part of Germany and France. There are those like Stournaras who lay out a strong case for recovery, growth, and success. However, it’s possible that “Europe” could dissolve back into individual countries in the next decade and that the great project of European integration has reached its conclusion, not with a United States of Europe, but with a hodgepodge of bankrupt, broken, and restless countries.