Greece Heads Into Another Economic Crisis: Time To Finally Exit The European Union?

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Constitution Square has been uncommonly quiet. When looking at the parliament building from my hotel window last month all I could see were cars and pedestrians. The crowds of demonstrators, so common in recent years as the Euro crisis enveloped one of Europe’s poorer states, were absent. But maybe not for long. Athens and its creditors are at loggerheads again.

 

 

When I spoke with the Defense and Foreign Ministers in early December, the conversations focused on Turkey’s crisis, negotiations to reunify Cyprus, and security cooperation with America. The first was beyond Greece’s control. The second has been a political football for more than four decades. The third has been a positive constant for years, with the current left-wing Syriza Party government as friendly to the U.S. as any right-leaning administration.

 

 

However, with Syriza lagging in the polls, Prime Minister Alexis Tsipras recently pushed through a pension boost and VAT suspension which, in Europe’s view, violated the 2015 bailout, worth $92 billion (the value depends on changing exchange rates), by European institutions and the International Monetary Fund. Athens contended that it had met its fiscal targets while its creditors said they had to be consulted to assess the impact. They then suspended the package.

 

 

Insults started flying. The spokesman for the head of the Eurogroup of finance ministers said the moves “appear to be not in line” with the agreement. The spokesman for Wolfgang Schaeuble, Germany’s Finance Minister and chief beta noire of the Greek public, explained “In order to make the program successful, it is necessary that measures are not decided unilaterally or reversed without notice.” A member of Germany’s Bundestag complained of Greece’s “orgy of empty promises.”

 

 

The International Monetary Fund clashed with the Euro-creditors, warning that the overall program was not “credible.” The IMF indicated that additional tax hikes and pension cuts were necessary to meet program metrics and for Greece to qualify for debt relief. While the European Commission predicted that “investment is expected to take off in 2017,” the Fund concluded that “growth prospects remain weak and subject to high downside risks.”

 

 

 

Tsipras mocked “fool technocrats … who can’t even get their numbers right.” Looking toward a possible early election, he added: “we are not going to ask anyone about giving surplus money to those most in need.” His finance minister charged the IMF with “economizing with the truth.” The deputy education minister, representing a small, right-wing coalition partner, charged that his country was being “blackmailed.” Indeed, he added, “For centuries, Greeks have been mercilessly oppressed by the Westerners.”

 

 

 

Interest rates on Greek debt soared. Planned negotiations over debt relief, long demanded by Athens, were postponed. The Fund threatened to pull out of the program. Germany, the biggest bailout contributor, insists on IMF participation before any further disbursements. Moody’s warned that the spat demonstrated a “hardening in creditors’ positions toward Greece, which we expect will prolong negotiations over the second review of the program.”

 

 

 

Yet coming elections in France, Germany, the Netherlands, and possibly Italy could stiffen European resistance further. Kathrin Muehlbronner of Moody’s noted that Europe’s “political dynamics” and “electoral calendar” were “likely to complicate the negotiations and prevent a rapid resolution.” After all, nowhere in the EU is backing more aid for Greece a vote-winner.

 

 

 

However, pressure on Athens for more cuts, especially in popular social benefits, could trigger elections in Greece as early as the spring. Tsipras has proved to be an adept politician, but he now lags in the polls. He can ill afford to retreat from the recent benefit boost or impose new austerity measures.

 

 

Observers again began to wonder if Greece could, and even should, remain a member of the Eurozone.

 

 

 

In recent years Athens looked to America for support. The U.S. has nothing directly at stake in Greece’s economic imbroglio, but the Obama administration, like its recent predecessors, freely offered its opinion on other nation’s problems. It obviously is easy to be generous with other people’s money: Washington urged the Europeans to give to Greece while receiving little in return. That isn’t likely to be the position of the Trump administration. Candidate Trump said “I would definitely stay back. Germany is very powerful and strong. I’d let Germany handle it.” And if that didn’t work, Russia could “save the day if Germany doesn’t.”

 

 

 

Most Greeks have had more than they want of Germany attempting to “handle it,” which meant ever more austerity. Moscow looks like an equally unlikely savior. While the Greek government officially says that it expects no change in U.S. policy, the opposition figures American pressure for debt restructuring will disappear.

 

 

 
Greece is a bit like your dissolute brother-in-law. A spendthrift, he gets himself into financial trouble and asks for a loan. You give it to him based on his promise to stop drinking, smoking, and romancing the ladies. He doesn’t, of course, but you really didn’t expect he would do so. However, you still want your money back. Although he promised to repay you, he doesn’t understand why you are asking. Your wife gives him some more money, based on his redoubled promise to reform his bad spending habits. And so it goes.

 

 

 

Greeks long have enjoyed a Mediterranean culture very different from that of the northern European states. Time is flexible, leisure is mandatory, and work is unfortunate. Government is a tool by which everyone attempts to live off of everyone else, though politics is the only sure means to succeed in doing so. Generous public benefits are the norm, irrespective of whether or not there is any money to pay them. It’s a wonderful system as long as everyone feels comfortable living a lie. And if it’s how Greeks want to live, why should anyone else complain?

 

 

 

The system worked for a long time. But then along came the Euro. It seemed like a brilliant idea for encouraging a tighter political union, but in the short-term it suffered one particularly grievous flaw: the Euro tied nations together monetarily without synchronizing their fiscal policies. Which meant by joining the Eurozone Greece got to borrow money at interest rates comparable to those paid by Germany while spending money like, well, Greece.

 

 

Athens lied when it claimed to meet the Eurozone’s official economic criteria. But the rest of the Europeans knew Greece was lying when they approved its membership. Then Athens cheerfully borrowed to fund its unsustainable welfare state. The scam was truly grand, but by 2009 the good times ended. Greek leaders admitted that their economic statistics had little to do with reality. The lenders wanted to be paid and Greece was almost out of money. At particular risk were German, French, and Italian banks, which had lent the most, and German, French, and Italian politicians, who had put their people’s fiscal security at risk.

 

 

Which led in 2010 to the start of three bail-outs cumulatively worth almost $370 billion. Greece was the nominal recipient of the cash, from the infamous “Troika,” the European Commission, European Central Bank, and International Monetary Fund. To them more recently was added the European Stability Mechanism.

 

 

To solve a problem of bad loans which could not be repaid, the Troika loaded Greece up with more loans to pay. As Syriza’s original Finance Minister, Yanis Varoufakis, explained: “The Greek state became insolvent a year or so after the eruption of the 2008 global financial crisis. Against all logic, the European establishment, including successive Greek governments, and the IMF extended the largest loan in history to Greece on conditions that guaranteed a reduction in national income unseen since the Great Depression. To mask the absurdity of that decision, new loans—conditioned on more income-sapping austerity—were added.”

That’s a pretty accurate description of the Grecian mess.

Greece’s debt to GDP ratio hit about 100% in 2000, with the country preparing to replace the Drachma with the Euro. Debts began heading up in the latter part of the decade. When creditors finally noticed that Athens might be in a bit over its head back in 2009, Greece’s debt to GDP ratio was about 127%. Today Greece owes around $320 billion and its debt to GDP ratio is roughly 174%, second in the world only to far wealthier Japan. (The debt relief being discussed would only drop that by about 20 points—by 2060!)

 

 

 

How will Greece ever pay back all this money? Since the onset of the crisis both manufacturing and the GDP have dropped by about 30%; economists hope the economy will stabilize this year. Unemployment is at about one-quarter, with youth joblessness double that rate. Most of the unemployed have been without work for a year or more. The overall poverty rate is an astonishing one-third. While there still is money in Greece—my hotel hosted a fancy fashion show while I was there—connections often are necessary to get it. Although some creditors took a hit along the way, the primary purpose of the bailouts was to preclude Greece from lightening its economic burden by writing off its debts.

 

 

 

Germany, France, and Italy wanted to save their banks. European Union leaders desired to move continental consolidation ever forward. Along the way the EU and European Central Bank ignored their own rules to shovel money Athens’ way. The price paid by Athens was austerity and reform, which the Greek people greatly resented. Why should they have to pay for the party that the Europeans were well aware was likely to occur when the Eurozone inducted Athens?

 

 

 

Perhaps even worse, however, there has been far less reform than austerity in Greece. Economic officials talk about creating a “business-friendly environment,” but that’s not evident in practice. According to the World Bank, Greece was number 61 in the world in “ease of doing business” in 2015. It rose one place in 2016, then fell back to 61 in the 2017 rating, where it is below Kosovo, Albania, Rwanda, Serbia, Moldova, Kazakhstan, Croatia, and Russia. In Europe only Malta and Bosnia are further behind.

 

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