Stories about Defaults

by ggeorgan

(With questions and answers)

DIMITRIS A. IOANNOU

Embassy Counselor A-grade

October 2011

Greece proceeds in full sail towards default, economic collapse and social disaster, without the dominant narrative having registered, even in small part, the true causes and the extent of the unfolding tragedy. The essential questions are not being asked in the debate between the prevailing sides of opinion, resulting in no right answers ever being given and leaving the ground free to absurdities and prejudices. At the same time in which, in the rest of the world, the crisis, by motivating radical and innovative questioning, provokes a serious debate that shakes and overwhelms habits of thought that had been prevalent for decades, in our country, long-held collective complexes lead to a catastrophic autism that, even today, precludes the shedding of light on and comprehension of the multiple facets of default.

Is there something that makes Greece more vulnerable to the world economic crisis, in comparison with countries in the rest of the Eurozone and the western world ?

The sole fact that Greece, for the entire 10 years between 1999 and 2009, led the kind of life that it led without major objections being raised, while whoever was ringing the alarm bell was being treated as naive, grotesque or suspect, is a disturbing symptom of an ideological and intellectual default that preceded by much the financial default. Such a collective failure in the field of ideas is not, at first sight, to be observed in other countries.

In the course of the decade in question, the average final consumption by households in the Eurozone (excluding Greece), as a percentage of GDP, was about 56%. In our country that same percentage was close to 75%. That is, Greeks directed towards consumption a part of their income that exceeded by 20% the level that one should, arguably, have considered as necessary to secure balanced and steady renewal of the resources of the economy. Of course, the high rate of consumption would not have been catastrophic by itself, if the other categories of expenditure included in the GDP counterbalanced it. However, that was not the case, since both total investment and public consumption in Greece stood at about the average level of the Eurozone. Thus, the total absorption of resources by the Greek economy was much higher that the output produced domestically, resulting in the highest trade deficit in the Eurozone. To manage that accomplishment, Greeks kept borrowing, mainly through the public sector, at such rapid rates of increase as to have (as a percentage of GDP) the highest foreign public debt that any sovereign state has ever had in the whole of world history. In contrast, the colossal public sector debt that both the US and Great Britain had assumed by the end of World War II was held almost exclusively by their own citizens and was denominated in their own currency and this is why they were never at risk of default1. The same conditions hold, at the present time, for the debt of Japan (and to a large extent for that of Italy, as regards the national origin of its creditors). The war reparations that were imposed on Germany after its defeat in World War I, considered as colossal and as the cause of the upheaval in that country in the years 1919-1933 amounted to a foreign public debt of “only” 85% of GDP. Those reparations were not, in the end, ever paid, since this was practically impossible (plus they contributed in large measure to the breakout of the subsequent World War),. Today, the Greek public debt should, by all calculations, be pushing 120% of GDP. It is,thus, so high as to almost not, in reality, exist ! And this is so because not one believes that it would ever be paid back in full, much more so, since it is a debt in “foreign” currency, a factor that precludes its monetisation (the process of inflating the currency to deflate the debt out of existence) by the central bank of Greece. Those factors also imply that not one will lend Greece any amount of money, under normal circumstances, in future decades2.

This particular aspect of reality in our country stays entirely unnoticed in the midst of much mulling about the “failed globalisation” and the “generalised systemic crisis” of which Greece is supposed to be the innocent victim. The truth, of course, is that, even if the world economy had not experienced any crisis and had continued to grow smoothly, Greece would again have been -alone in that case- in a violent spin because its total public debt would have exceeded all tolerable limits and would have, necessarily, aroused the world financial markets, however insensitive and relaxed they might have stayed until then to the problems that excessive borrowing can create. Given, moreover, that Greece is no Japan, so as to borrow, and without limit, from itself, it is certain that it would again have been on the edge of disaster. One can realise this by the fact that countries whose problems are truly due to the “systemic crisis”, such as Ireland or Iceland, respond to the crisis much better than Greece. The claims that it is not us who are responsible for our problems, but the “international system” are of equal value to the view that a jackass can abolish the law of gravity and fly in the air just by flipping his ears.

How could the benefits of growth in the period 1999-2009 have vanished into so much thin air?

The point missed by that question is that the economic structure that arose during that paranoid decade was not viable in the long run. Since every age has as its protagonist a certain socio-economic type, illustrating its character, let us consider as such a government contractor. (If we were examining the period of the German Occupation of 1941-1944 the sociological analogue would, evidently, be the black-marketeer). Our friend, therefore, would be using his income in the traditional Greek manner. That income would, of course, be the part of public borrowing that he would have managed to appropriate for himself through the transaction mores and procedures that we all know. By following the known and time-honoured paths, instead of seeking to do something creative and useful, he indulged in conspicuous consumption and the acquisition of as many positional goods as possible, since this is what the code of values in traditional Greek society stipulates. In that spirit, then, he kept buying at regular time intervals a new Mercedes car to replace the old one. Since the government contractors were numerous and their business was brisk, and since, at the same time, there was a lot of competition with BMW, the local Mercedes dealer decided, in his turn, at regular intervals, to build an new showroom for his wares in various places in the country. (Showrooms that many considered built in bad taste and some others as awesome, but of such an opulence that, however much one may look for, will never find in Germany). Those showrooms were creating significant revenues and income for the contractor that was building them and, who, in that way, was appropriating for himself a portion of the income created by the initial inflow of the money borrowed by the government in the economic circuit of the Greek economy. Naturally, the same effect obtained for the advertising agency hired by the Mercedes dealer to advertise his cars and for the owner of the trendy bar that organised promotion evenings to present the new “series” of car models. So it was, too, for the owner of the agence who would engage the all-gracious females that would need to have their pictures taken alongside the very latest car model and for the owner of the indispensable company that would handle “public relations” and so on and so forth. Overall, there was a true boom of economic activity, in which everyone had something to offer and something to collect and in which the Greek economy, by the medium of that wonder, called government expenditure multiplier, prospered, after that particular process that came to be called “growth”. (Certainly, nobody was content and everybody protested because they thought they deserved much better, either because they were members of the “generation of 700 euro” (monthly salary), or because they were large contractors who had realised that a competitor, by contracting for a larger project and enjoying a wider profit margin, had transacted, more “efficiently” with the Greek government3).

The entire process, however, was especially significant because it appeared to unfold around the strategic sector of the Greek economy. Thus, at about the end of 2008, when the world economic crisis started to descend on Greece and sales of four-wheel-drive (in Greek : monster jeeps) vehicles weakened, the Finance Ministry was overwhelmed with panic. The strategic sector of the Greek economy and, perhaps, a pillar of modern Greek culture, I mean the car-lot industrial sector, was facing the spectre of a reduction in its turnover. Of course, such a grave threat to the economic growth of the country could not be left unanswered and for that reason, even at the price of worsening further the fiscal deficit, a solution was enacted right away: the Finance Ministry encouraged the purchase of high-engine-displacement vehicles by means of tax incentives and, thus, facilitated the liquidation of the car-lot dealers’ excess inventory. Growth received a new significant boost. Alas, however, the distance between a paranoid way of economic existence and collapse has never been great.

Naturally, it was not just public works contractors and government suppliers that benefited from the expenditure that was giving life to “growth” in the Greek economy. The beneficiaries included the hundreds of thousands of public employees who were appointed, usually without passing the civil service examination (ASEP), without having a real object of work, in a wider framework of social and growth policy during the period in which Greece acceded to the EMU (Economic and Monetary Union). Every public employee who, for reasons ranging from objective to subjective, was paid an amount higher than his or her real productive contribution to the Greek economy was, also, a beneficiary (In other words, an overwhelming majority of public employees).

The whole of the Greek banking system was benefiting, too, while, under the relaxed supervision of the Bank of Greece, it was chasing unsuspecting passers-by in the street to lend them money, so that they could buy Prada, wear it and go on holiday to Paris. The end result is that today the Greek economy struggles to survive in a regime of credit strangulation, since Greek banks are in a coma, not only because of the Greek government bonds they hold but, also, because of the bad loans created by all sorts of paranoiac “holiday loans”.

For one to decide whether we have had “growth” or something else in the course of the paranoiac decade, one need only do what the Anglo-Saxons call a back-of-the-envelope-calculation to compare the growth of per capita GDP with the growth of public debt. According to the Eurostat data, in 2003 the average per-capita income in Greece, in current prices, was around 15,600 euro (and total GDP 172 billion euro). In 2010, the same figure had reached 20,400 euro, registering a rise of 30% in that period (and total GDP to 300 billion euro). Respectively, public debt in 2003 stood at 168 billion euro (97% of GDP). In 2010 it had reached 326 billion (143% of GDP), that is it had almost doubled in absolute terms. Consequently, the per capita debt of each Greek citizen grew by 90% in the period 2003-2010 in order to have his or her income increase by only 30%. Percentages can, at times, mislead, so it would be better to say that the per capita debt of every citizen of Greece grew from about 15,000 euro in 2003 to 29,000 euro in 2010, in order for his or her per capita income to rise, in the same period, from 15,600 euro to 20,400 euro. The long-term consequences of spending that was financed by public borrowing were clearly negative, since the high propensity to spend the proceeds from such borrowing ultimately on imported goods for final consumption ended up increasing the liabilities in the overall balance sheet of the Greek nation without increasing the assets. If, of course, the borrowings had been productively invested, those investments would have matured today, they would be producing profits, national income would have taken off. Alas, though, the borrowings had not been contracted for that purpose, but to finance a paranoid and ephemeral bout of consumption. Although income and debt are different concepts and cannot be added together or subtracted from one another (income is a “flow”, while debt is a “stock”) nevertheless, if one, in order to get a rough idea, takes the trouble to deduct from the increase in nominal GDP the debt assumed in that particular period, one will realise that the country, in the time in which it is a member of the Eurozone, and particularly from 2003 onwards, not only did nor “grow” or “got rich” but, in fact, got poorer and will get poorer yet. Moreover, the figures for debt and GDP are connected by a specific relationship from a point onwards (for instance when debt exceeds 100% of GDP), beyond which their rates of change move in opposite directions. Today, the Mercedes is rusting and it will be scrapped soon. The debt, however, that was stupidly contracted and used for its purchase continues accruing interest each year and grows at the rate of an avalanche threatening to bury underneath it the whole country, as the payments of interest and principal on the debt bleed away any increase in output.4

Is what we are going through today a deep recession or something else ?

Following the tracks of the government contractor that we have met already one can clearly perceive the nature of the diverging paths of public debt and national income, thus pronouncing on whether we are facing a “recession” or something different. Let us consider the consequences of this divergence on the economy5. As soon as Greece got technically in default, by the end of 2009, not only did the business of that government contractor contract sharply and his inflow of payments slow dangerously, but, besides, his view of the future changed dramatically: in lieu of optimism for an ever increasing turnover in the framework of a developed European economy (!), there came misgivings over reduced revenues and uncertainty over the future. So, he decided to not replace his car that year, not to renew his collection of Armani suits, to make rarer appearances in the night entertainment joint in which he used to reserve the table closest to the stage. This change in his behaviour and in the behaviour of his peers was not free of consequences for the strategic sectors of the Greek economy. Car dealerships, jewelers, imported fashions houses, hairdressers etc saw, in their turn, their turnover fall dramatically. The government-spending multiplier started operating again, with exceptional dynamism, only with a negative sign this time. Unfortunately, of course, the reduction in total spending did not originate solely in the contractors and suppliers of the government. Primarily, it originated in the 1/2 of the economically active potential of the country that either works directly for the Greek government or extracts economic rents from it and, second, in all the remaining agents in the economy. Therefore, the present fall in economic activity is entirely natural and is due to the fact that a medium- or high-income economy seeking to have both too many public employees and a “welfare state” (in a manner of speaking), plus one of the highest rates of residential investment in the world, cannot, also, spend on consumption a portion of GDP exceeding 55%6 for a long period of time without unsettling its equilibrium. Noting this fact is the key for one to pronounce on whether the present fall in Greek GDP is a recession that could be overcome relatively easily or whether is is a structural change that brings the economy back to the level of income and consumption that corresponds to its real productivity. If what we face were a “recession”, that would mean that an expansionary fiscal policy would bring the level of consumption back to where that stood in the decade 1999-2009 and, in that way, could also return GDP to its maximum point of 2008 and to the average rate of growth it reached in the course of the paranoiac decade. And all would be happy7. However, this cannot be done because, first, it requires borrowing that nobody is willing to advance. and, second, because we have no goldfish operating in an economy but humans with memories and judgment, humans whose take on reality has changed with respect to 2008, both as regards investment and as regards, most notably, consumption. Therefore, the fall in incomes observed today and the countless “locked-up shops” that make the joy of demagogues in politics, because they offer them a chance to promise that they know how to bring back the boom, are both due to an unavoidable dynamics that will continue relentlessly until it brings the Greek economy to a new (lower) equilibrium point in which the levels of income and consumption will correspond to the true productive potential of the country. The shops that were “locked up” will not open again and, unfortunately, yet more will follow the same sorry fate. The course through which the Greek economy returns to the level corresponding to its real productive potential (close to 200 billion euro) is no “recession”, because there exists no kind of short-term economic policy that can reverse it. Those who do not understand this point either have no clue about economics or are lying or both.8

Already, the cumulative decline in GDP since the start of 2010 has reached 12%. This is not so terrible, if one considers that in other countries output sank a lot deeper (Iceland 14%, Romania and Lithuania 17%, Latvia 22%) without triggering the catastrophe presently unfolding in Greece and that signs of re-stabilisation of their economies are already visible. In our country the problems run deeper and, however much the enemies of “recession” enjoy the ride, stabilisation will not begin before the cumulative decline in GDP reaches at least 20%. (It is quite probable that it will not begin even then, if, on the one hand, self-destructive reactions spin out of control, thus causing irreparable damage to the social and economic fabric and if, on the other hand, this decline is not justly and apportioned among production sectors and social classes. In such a case the distortions that will remain in certain markets will, by creating bottlenecks, cancel the transfer of re-balancing tendencies through to the whole of the Greek economy, forcing it to a tragic undershooting and leading it to collapse to a level of decline of 50% of GDP.

Could not foreign assistance and the Memorandum have provided for a softer landing of the Greek economy ?

The Memorandum, meaning the series of agreements concluded by Greece with its partners from May 2010 onwards, offers the smoothest possible process for the Greek economy to come down to earth. The opposite claim has never been coherently argued or documented. It is simply proffered together with cries of the type usually associated with plaintive folk ballads about sacrifices, privation, injustices etc. It takes the form of assertions that Greece ought to have negotiated harder to obtain “better terms”, taking advantage of the fact that its fate is a “systemic risk” for the Eurozone, that the Memorandum is “wrong” because it leads to “recession”, that a decisive negotiating stance by a newly elected political leadership would allow its “renegotiation” etc. The trouble is that those views come either from people who are unable to do the most elementary pencil and paper calculations or from people that are utterly indifferent with respect to reality and are only interested in creating a sensation and in misleading the naïve and the desperate.

How would the Greek economy have functioned in the event that the agreement to assist Greece were “open-handed” and “generous” and afforded our country the option to continue running exorbitant fiscal deficits of the order of 15% of GDP in 2010 and 2011 ? Given the structure of the Greek economy, such as it continues to be even today, where would that money end up ? Would it go into the creation of new competitive manufacturing industry and export-oriented production facilities ? Of course not. It would find its way to the deprived car-lot operators, fashion designers and public relations advisors, since these are the “productive resources” presently available in Greece. The money that would “flow into the marketplace” to give it “tone” and to prevent “locked-up” shops would be channeled into the real economy, the one economy that exists and not to the imaginary one dreamed up by the detractors of the Memorandum. The one economy that exists is the economy of the largest “bubble” of the developed world, that is the economy in which services and real estate (the “non-internationally tradeables sector”) hold a share of GDP that is four times larger that the share of agriculture and manufacturing9. An the economy in which, setting the index at 100 in 2000, one observes that the former had reached 140 in 2009, while the latter had only managed 10510. This means that further credit facilitation for Greece would have resulted only in the further prolongation and growth in that manner of operating the economy in which public spending feeds gigantic parasitic activities and those gigantic parasitic activities are further recycled into larger and larger deficits that nobody wants to or is any longer able to finance. Thus, after the end of 2011, foreign debt would have reached 180% of GDP and lenders would have undoubtedly lost all their money.

The claim that we represent an element of “systemic risk” and that it offers us a strong negotiating advantage is absolutely nonsensical, because it overlooks the most evident fact that, if the Tripartite (i.e. the Troika) were to allow us the “maneuvering space to adjust” dreamed of by the demagogues, then the systemic risk would have been realised of and by itself. When financial markets are in a state of panic, they see through and discount instantly and in the harshest possible manner the certain failures. The Europeans would have both lost their “facilitation” money and would have seen their banks collapse. (Greece, too, would have been destroyed). Thus, using as a negotiating advantage the argument that we could destroy the Eurozone (not that this was 100% sure) we would essentially be asking them to rush to destroy it by themselves sooner !

The assertion about “negotiating power” is, furthermore, nonsensical for another reason : it claims that, with a larger fiscal deficit, the Greek economy would be able to achieve GDP growth. How much larger, however, would that deficit have to be even for GDP to stay stagnant and not fall in 2011 ? Since in 2009, with a deficit of 15%, GDP fell by 2% and in 2010, with a deficit of 10%, GDP fell by 5%, evidently the fans of the prevalent politico-journalistic theory, if pressed to mention numbers (as they never bother to cite figures, but limit themselves to abstract generalities) would have had to demand for 2010, instead of the 10% achieved with blood and tears, a “stabilising deficit of at least 20%. Let us not ask where they would get the money to finance that deficit. The core issue is that the result would have been exactly the opposite from the one they claim. This would have happened because any agents of economic activity in Greece, once apprised of what would be actually happening, (that is that the economy was on course to collapse shortly, while public debt would have fallen under the purvey of the Astronomy Observatory and not any longer under that of the Treasury), would rush for the exit. Even our well-known government public works contractor would liquidate what he could, we would, also, pack what he could and would leave running for the village of his birth in the hope that he could survive the impending catastrophe by feeding himself on cabbages form his mother’s cabbage patch. What amount could have been withdrawn from banks would have been withdrawn and whatever it was possible to export from the country would have been exported. The “stabilising” or “growth-oriented” fiscal deficit that would have been won by the “proud patriotic stance” of the anti-Memorandum people, and would be equal to or larger than 10% of GDP, instead of bringing the stabilising or growth effects dreamed up by them, would lead the Greek economy not to a simple collapse, but would blow it up into smithereens. And that, before the end of the fiscal year.

The reason that the Greek economy, albeit shrinking and panting, still survives till today is that a slender hope is still kept alive that, possibly after a restructuring of the debt, through the stabilisation programme, it will manage to approach of point of stable equilibrium. (that point could be achieving a primary surplus to which partners would adjust, more by necessity than good will and by the method of bespoke tailoring, the amount of annual debt service so as to enable the Greek economy to move in the traditional Greek method of “a level boat in level water”). This hope, founded on the fact that the economic policy being applied at present aims at a front-loaded, if gradual, reduction in the fiscal deficit and, thence, to a controlled ground contact, is what still keeps some deposits of individuals in the banks, allowing access of the Greek state to short-term borrowing from the money market, affords some marginal engagement of capital into businesses with an export orientation and, also, most importantly, holds consumer spending at a level that, however low it may be, has not fallen to a level that would lead the entire economy to “stall”. If, however, instead of what is actually happening at present, the view that in the country of paranoiacs they attempt to fight the impending debt-induced bankruptcy with yet larger deficits11, were to take hold, the rush to the exit would be immediate. The collapse of the Greek economy would have been equally immediate.

The fact, however, that such plain nonsense (in many disguises, such as of the incorrect “negotiation” of the Memorandum, of the search for a “political” solution of the crisis or of the possibility of its “renegotiation”) has majority support in public opinion and in its managers in the media, proves that intellectual bankruptcy of a society must always precede its financial bankruptcy.

Could it be that the Memorandum is being applied in an erroneous manner and that it is, also, socially unjust ?

The view that the Memorandum is a sacred text is entirely wrong. We have a (series of) text(s), rather badly drafted with numerous repetitions. It does not set forth precisely the way in which it shall be applied. This is a job for the Greek political leadership and the Greek Public Administration. Whether is has been “implemented correctly” is, of course, an important question, but, in order to get an answer, one needs to make clear two things. First, that at the end of 2009 the Greek economy had already gone over the edge of the cliff and was hovering over a vacuum. In those particular conditions, no stabilisation programme could offer complete certainty that it would rescue the economy, however correctly it may have been implemented. The stabilisation programme is, simply, an attempt at a rescue, the end result of which depends to a great degree on the behaviour of the subject of the rescue itself. If the one being rescued is more interested in punishing the unfortunate lifesaver (evidently by demonstrating the meaning of the concept of “systemic risk”) because the lifesaver is shaking vigorously his charge on their way to the beach, then the end of the poor fellow is foreordained. Second, that no stabilisation programme in Greece, however successfully it might have been implemented, would be painless, since it would have aimed at bringing back the economy to a state of stable equilibrium by destroying the parasitic cancer that had been created as a result, mainly but not solely, of the destructive policies of the last decade.

Nevertheless, even keeping in mind those two points, one cannot help remarking that the implementation of the Memorandum could have been more, much more, successful. To be precise, a policy of stabilisation of the Greek economy could have been successful without ever needing any external intervention by organisations such as the European Union, the International Monetary Fund etc. A responsible political leadership should have by itself chosen, in good time, to present to the people the true condition of the economy and to seek their approval for a programme aimed at restoring the economy to health along five basic guidelines. :

– reducing the size of the public sector through the privatisation of those state-owned enterprises, whether profitable or loss-making, for which there are no grounds to justify ownership by the state and through the closing-down of such enterprises and organisations that cannot be privatised for the simple reason that they have been created by fraudsters and for fraudsters and are of no interest to anybody else

– reducing the number of public employees through the immediate discharge of all such employees who have been appointed after ASEP, the body tasked with organising the examinations for selecting public employees, was founded and were, consequently, appointed in contravention of the exclusive powers of that body to select public employees12

– conceiving and legislating a strict and demanding system for determining the (enormous-sized) tax evasion through the recording of the patterns of consumption of the self-employed, the members of the liberal professions and the small businessmen, thus removing the basic pathogen afflicting the functioning of the Greek economy

– abolishing of the incredible regime (of medieval origin13) of “closed professions”, that obstructs the optimal allocation of the productive resources of the economy and brakes its potential and real growth

– voting a constitutional amendment whereby only balanced or surplus annual budgets will be allowed14.

If the Greek people consented, all would be all right. If they rejected that proposal, it would, also, be all right, since one cannot save one who does not want to be saved. Staying, however, with the case of the affirmative vote, since the negative would not be logical, one must note that none of those proposals has been enacted, neither at the time in which the Memorandum was signed, nor until today. Therein lies the cause of the ineffective implementation of the policies of the Memorandum (since, unfortunately, 11 million people were unable to find out what was to be done and needed the Troika and the Memorandum to tell them). Of course, the defective implementation of those policies is not the exclusive cause for the social dysfunction and poverty the country is living through. They would have been present in any case. When, for instance, the shop of the promising entrepreneur, who aspired to get rich by embellishing with works of art by Christian Louboutin the lower extremities of all the ladies with sentimental ties to public works contractors and government suppliers, closes down his shop (since “there is no more money in the marketplace”), apart from the businessman himself, the fortunes of whom are of no particular interest to us, misfortune will also strike his employees, who are not to blame at all for the business incompetence of their employer or for the excesses in the public finances or for the plundering of public wealth that are the ultimate and real causes of their unemployment. The most significant difference between two cases of implementing a stabilisation policy is the following : in the first, favourable, case in which the political leadership of the country would had started in good time implementing decisively the required policies, the economy would have approached the point of stability and equilibrium in a relatively short time and the unemployed workers would have been able to find in an equally short time new employment (if only with lower rewards and reduced prestige since they would no longer be selling works of art for the lower extremities). Conversely, in the present case of “poor implementation”, in which, not only the right policies are not enacted but the required stabilisation policy is being undermined by the ones that are supposed to be implementing it, the result is that, when the bill for government small-mindedness and inaction comes due to burden “horizontally” the just and the unjust, the big and the small, the point of stabilisation get further off, rather than closer. Consequently, the unemployed are condemned to stay in unemployment for a longer time and in an environment that will be turning ever more uncertain and menacing.

As to the accusation that the Memorandum is socially unjust, this is the greatest possible distortion of reality, since the exact opposite is happening : the Memorandum is, perhaps the most revolutionary, subversive and radical attempt at social justice in the history of modern Greece. It aims at overturning a series of abuses such as the “class-based” taxing only of salary- and wage-earners and productive entrepreneurs to benefit well-known parasitic classes specialising in tax-evasion or, also, the striping of the right to work for young qualified professionals in favour of the”closed professions”. The main goal of the Memorandum, though, is to redress two monstrous injustices that are constitutional conditions underlying the present Greek society and economy and stand at the kernel of its present calamitous dysfunctioning.

The first injustice regards the morally unacceptable and economically hurtful fact that the minimally productive excessively in-surplus and willingly or unwillingly tragically ineffective public employees enjoy higher rewards than their colleagues in the private sector. The latter, by any objective measure, commit a multiple of effort to carry out their duties, are, without any doubt, much more productive and, also, work and live in a very adverse system of labour relations, for employers that have not yet left behind the 19th century. Moreover, they lack the benefits of lifetime employment and lax discipline enjoyed by the employees of the public sector.

The second injustice regards the repulsive sight of a generation of parents destroying the standard of living of their children in its quest to enjoy ephemeral and cheap material goods at a level of consumption that does not correspond to its productivity and to the real income that it is capable of creating and loading the resulting unavoidable debt burden on the back of subsequent generations, thus condemning them to take on themselves an onus such as no other generation in modern Greek history has been forced to shoulder. Seen in that light, the universal opposition to the Memorandum (and especially to its provisions on curtailing pensions) dictates sad thoughts, not just about the backwardness of Greek society, but, also, about the total dearth of feelings of care and solidarity, such as, if they existed, would have led even the most uneducated to comprehend the necessity of the Memorandum.

Besides, the crisis itself, for which neither the Troika nor the Memorandum bear any responsibility, is an extreme case of social injustice since it was caused by some and its weight is borne by others. The crisis was caused by the long-lasting stupidity of the majoritarian, parasitic social group of the Greek population that consists of three basic components : first the lumpen small-to-medium-to-large “entrepreneurs”, self-employed, members of the liberal professions etc, then the shiftless public employees and, last, the ones who tend to the unfortunate Greek soil who are driven by the unbelievable rallying call ”all the kilos, all the euros”, initially a call for unlimited subsidies for cotton growers. The weight of the crisis is borne by the numerically minoritarian group of those earning their wages and salaries in the private sector, who, without having shared in any of the excesses of the recent and farther past, is facing and carrying the heaviest burden of the nightmare and the barbarity of unemployment and impoverishment.

As to the summit of small-mindedness and paranoia, that is as to the widely shared conviction that, in reality, there exists no “Greek crisis” and that all that is happening is make-believe by the Germans and their allies (the germano-zionists !) aimed at appropriating for themselves the ever-so-valuable productive capacity of Greece ( OSE, i.e. the Hellenic Railways Organisation, the enormously loss-making state railway !) so as to “turn us into servants of theirs that would be paid 200 euros per month” there can only be one answer : stand fast brothers and yield ye not. Anytime now the El (extraterrestrials that gave birth to the Greek race, according to some cranks) are coming in their spaceships to rescue us all ! ( Rational people, however, know that in a well-functioning capitalist market economy, if your productivity is 1000, nobody can force you to get 200. They, also, know that, if you hold fast to moral values, dignity and love of freedom, nobody can turn you into a slave, a helot or a servant. Unless, of course you do not hold fast to any of the above).

Is it likely that the Greek crisis will persist for a long time ?

The difference between a recession and a crisis of structural disequilibrium is that, while the former can be overcome by the appropriate mixture of fiscal and monetary policies, the latter can only be overcome with the systematic implementation of an economic policy that allows and facilitates rapid rates of economic growth. In the economy, the criterion distinguishing the “short run” from the “long run” is the creation of new production capacity.

In the case of recession, when economic units have reduced their output because of reduced demand and, thus, generated unemployment and a fall in total income, the goal of economic policy is to bring back the existing production capacity to its previous level of utilisation by bolstering demand and thus lead to increased employment again and to a recovery in income.

Conversely, in cases of long-run structural disequilibrium in the economy, engendered by errors in the economic policy that had been adopted, the time horizon to achieve stabilisation is totally different because stabilisation requires a realignment of production capacity made necessary by the chronic state of disequilibrium during which producers were receiving the wrong “signals” through the prices mechanism and, thus, focused on activities that were temporarily profitable but, in the longer term, totally devoid of value and non-viable.

A structural disequilibrium crisis is the one afflicting today the economy of the US. It originates, mainly, in the excessive indebtedness of American households (evidenced by the particularly burdened by debt liabilities -implicit- balance sheet of theirs, giving rise to the term balance sheet crisis)15. In a state of such structural disequilibrium, applying an aggressive mix of economic policies inspired by keynesian principles is again necessary, not, though, to bring back the economy to full employment, but, simply, to prevent a yet deeper drop in economic activity. The return to conditions of full employment is a long-winded and perilous process, only considered likely to get completed when a functioning equilibrium is restored (that is, in the USA, when the economic agents will have paid down to a sufficient degree their debt and will have freed their balance sheet from its present excessive burdens).

The case of Greece is the latter case, that of structural disequilibrium and not the former, that of simple recession. With two small differences, however : first, that the problem is so great as to force us to term it not structural disequilibrium, but structural collapse and, second, that, given the tattered balance sheet of the public sector, the option of implementing a keynesian policy that would absorb some turbulence just isn’t there at all. Beyond those two remarks, though, the problems in Greece and the USA, in spite of the difference in their scale of intensity, show strong analogies. The strongest of all is that in both cases the crisis revealed to the citizens of the two countries that, in reality, they were much less rich than they thought they were. In the case of the USA, because the houses and credit securities that constituted the assets in the portfolio of households corresponded to a much lower flow of future income than households considered attainable when they were going into debt to acquire them. In the case of Greece because the expectations about the profitability of the “investments” that were undertaken in the period 1999-2009 were entirely groundless, since they considered the temporary upsurge of consumption figures in the market, fed by debt money, to be a permanent upgrade of the level of income attributable to ”growth”. Following this false “reading” of economic signals, the behaviour of “economising agents” was not optimal, neither in the case of the US, nor in the case of Greece. The result was that certain sectors of the economy got inflated to the point where they are no longer viable in the medium or long run (mainly in services and construction), while other sectors (those that are directly productive) stay at levels inferior to their long-term optimal size, thence the high trade deficit in both cases. This, in turn, means that the adjustment of the economy requires the “destruction” of excess capacity in the inflated sectors and investment in the “deprived” ones. (Or, alternatively, a total overturning of the consumption pattern of an economy). Under normal circumstances and with the most conservative calculations, this process is calculated to, possibly, get completed in the USA around the year 202016. In Greece, where the problem is much more serious and where any element of endogenous economic dynamism is absent, it is a joke for one to assert that the crisis can be overcome in a short time by following some “alternative policy”.

Just as in the USA, so, too, in Greece the barometer of the course of exiting the crisis is one very well documented figure : it is the balance of external payments (and the trade balance). If Greece had a stable or surplus balance of payments in the decade 1999-2009, it would have had no reason to resort to borrowing from abroad, a practice that destroyed it in the end. It was, however, registering a gigantic deficit, as, indeed, other Eurozone countries presently afflicted by crises were, only of a size smaller than the Greek one17. That deficit is fed by the divergence between the consumption propensities and the productive potential of Greek society (a divergence that carries the the opposite algebraic sign in surplus countries, such as Germany). The unavoidable realignment of consumption with production can take various paths. One of them is the increase of production, another is the reduction of consumption, a third one is the simultaneous reduction in both production and consumption. Except that the third path, the one that appears today to be most likely, runs in parallel with the eventuality of Greece descending gradually from the level of a country with a potential GDP of 200 billion euro to the level of a country with a real GDP of 100 billion.

Although we are still at the heart of the first period of the crisis, the data so far are not particularly encouraging : despite a fall in disposable income by 12%, the current account deficit, as a percent of GDP, is still almost at the same level at which it was standing for the whole length of the decade of paranoiac economic behaviour. It is estimated to be standing at 8.5% for 2011 (while it was at around 10% in the whole of the decade). The precipitate drop in income, even if, because of the country’s staying in the euro, it was not accompanied by an exchange rate devaluation, ought to have engendered a reduction in imports, not only in absolute terms, but, also, in terms of proportions. The drop in the income level of the public ought to have changed the typical consumption “basket”, by reducing the part of luxury goods, supposed to be imported mainly from abroad, and by increasing the part of “necessary” goods that, theoretically, are produced proportionately more in Greece. Such a thing did not happen and so, despite the crisis, the Greek consumer continues to pay for tomatoes imported from the Netherlands a stable percentage of his or her income. An “accountant’s” explanation for this inelasticity is that the extensive support extended by the European Central Bank (ECB) to the Greek banking system, by trickling through to the economy, allows imports to remain in a nearly stable proportion to nominal GDP18. ( this particular support – absolutely invisible and unknown to the wider public – totaling an amount exceeding 75 billion euros since the beginning of the crisis, if added to the unknown amount committed by the ECB to buy Greek government bonds from the post-issue market and, on the other hand the tranches of financing transferred to Greece through the Memorandum, raise the expenditure on the effort to rescue the Greek economy to truly astronomical figures).

However, the “political” interpretation of the inelasticity of imports is that, even in its direst moments, Greece cannot rely on its own forces. The mirror view of the inelasticity of imports is the lack of any “flexibility” on the part of Greek producers who should, by taking advantage of reforms to “deregulate” the labour market, have been increasing their share of the domestic market, so as to be able to keep their level of production steady in absolute figures. Their failing to achieve this goal indicates an inherent growth disability of the country, since the reduction in consumption stemming from the debt crisis is not counterbalanced by any sort of redistribution of the respective shares of Greek and foreign production in the ever-shrinking domestic market. Up to this moment, the Greek economy, except for a small increase in exports, has not shown the required “flexibility” to respond to the crisis. As a result, the balance of external payments deficit, for as long as it stays at the present inconceivably high levels, not only will signal, but will also feed back into the continual retreat of production, operating as a “black hole” that keeps absorbing and destroying productive capacity. The inelastic foreign deficit is an insatiable pacman in the viscera of the Greek economy that keeps gobbling up incessantly incomes and jobs.

The solution to the Greek problem lies in the decisions and behaviour of the rest of Europe or on those of the Greeks themselves ?

Despite the (incredible) new-fangled accusations against the Europeans that they are twice to blame for the crisis, since, in addition to the torment they are subjecting us to, shrink from economically “growing” us, creating the conditions for growth of the Greek economy is the responsibility and duty of the Greek citizens alone and of nobody else. A first necessary step in trying to restore healthy economic growth is to assess the situation objectively and sincerely, without lies, demagogy, wishful thinking and ostrich reactions. This means one knowing that the task ahead is of herculean dimensions and that, in case of failure, the price will be terrible. For example, most of the firms of the services sector that closed will not ever open again, at least with the same object of business, however many politician’s promises their unfortunate owners and even more unfortunate employees may receive. For both sets of people there are just two possible outcomes : either that they will not manage to start something else and that they will remain in unemployment, poverty and privation. This is the case of the broader eventuality that the aggregate GDP of the country decline gradually from 200 to 100 billion euros and that Greece turn into something similar to Bulgaria or Romania ( with, however, a clearly worse style of decline and much greater national security problems). The second option for the unsuccessful entrepreneurs and their truly unfortunate workers is quickly to manage to work on something more productive, something in either the primary, or the secondary, or the tertiary sector of the economy that would either export its output or would substitute imports. In that second case, Greece will manage to remain a country with a GDP at the level of 200 billion euros and will slowly start to grow ( this time, perhaps, normally).

Except it is not clear who will be the prime mover of this economic revitalisation. In the one side the existing “universe of entrepreneurs” of Greece belongs, in its greater part, to another reality and era and probably continues to dream about the “saviour” who will bring again “growth” policies to get “money to flow in the marketplace” and to get “shops to open again”. On the other side, international investors, except of course the ones wishing to sell sun and sea, would invest in Afghanistan or Somalia rather than in our country. In that sense, the only faint hope of growth (and salvation) of the Greek economy rests with the emergence of a category of new entrepreneurs that are not connected with the past with any kind of virtual umbilical cord and that, therefore, do not expect the state to create profit opportunities by restricting economic freedom, as was happening regularly in the past and, subsequently to offer them to businessmen in the framework of a euphemistically-called “growth policy”. Here is the critical question : is the Greek society capable of sprouting such new, dynamic and free entrepreneurship ? (Very doubtful, but one must never cease to hope and try).

Moreover, before resolving (or not) its long-term growth problem, Greek society must resolve the immediate and short-term problem of its impending default. The tragic devaluation in the collective conscience of the monstrously large amounts committed so far, at the expense of European taxpayers, by the EU to the rescue of the Greek economy, masks a great misunderstanding, the consequences of which can be tragic. The Greek people, drawn to this view by the whole breadth of the political spectrum (itself in a state of permanent divorce with reality) thinks that the European support aims at allowing us to continue to live in the future as we have lived in the past. (The Greek people believe, also, that this is an “entrenched right” and this is the reason why the EU support appears insignificant and we react in anger and rage that the money is not enough !). The reality, of course, is that the 20% above what we produce (that is 10% through the stabilisation programme and at least another 10% through the invisible financing of the Greek banks), the amount that, in spite of our lack of creditworthiness, the EU keeps providing us aims at exactly the opposite, that is to facilitate the immediate productive transformation of the Greek economy. For as long as this dangerous misunderstanding continues and the Greek people is not warned by any of the local public opinion leaders and, besides, does not by itself try to understand what is happening, the probability of a catastrophic crisis keeps rising. Whether triggered by internal shocks (due to the total deconstruction and disintegration of all social functions) or by external ones (a spike in the crisis, such as the collapse of Lehman Brothers), the probability of “sudden death” of the Greek economy is ever present. The collective effort of all of us should have been to minimise that probability and not to maximise it, as we do now.

The errors and historical missed targets are debited to the whole of our society and not to a few isolated leaders or politicians. Besides, the Greek people took particular care in the course of decades to create its leadership in its image and likeness. The present crisis is the consequence of cumulative collective errors and paranoical choices and actions of a long period. The country acceded to the European Economic Community (EEC) in 1981 in the wrong time, in the wrong way and, critically, with an entirely false way of comprehending matters, taken on by the thrill of an extremely frivolous doctrine of salvation (The “Great European” is being worshiped and honoured unfailingly by his or her faithful servants !). The country acted inside the EU as a classic free rider, a choice that has resulted in the country going backwards instead of modernising. Next, Greece decided to enter the Eurozone, a step that ought to have been prevented by an elementary understanding of the modus operandi of its economy (and of economic theory). In order to take that step, it formulated appropriately its economic data by the well-known method of Greek statistics.. (As though data could stop us). Once inside the Eurozone, the country behaved in the most stupid and self-destructive manner, by borrowing without limit in order to consume ostentatiously in bad taste and without, of course, giving a damn about its obligations towards its partners nor about the risks it was creating for the whole system to which it had been admitted by polite acquiescence. Today, standing a step from disaster, it is is not bothering at all with avoiding it but wastes itself in bad mouthing the long-suffering Europeans that it -entirely paranoically- considers to be responsible for its troubles. At the same time, in a classic manifestation of the phenomenon of bipolar disorder, it hopes and wishes that its executioners themselves finance it generously through the National Strategic Reference Framework (NSRF, ESPA in Greece), that they will issue Eurobonds to build up funds to keep rescuing it in the future from defaults and that, in general, they will do all that they can so that it is not inconvenienced by losing the comforts it has conquered with such arduous labour in the framework of its “European journey”. The question is if, at this ultimate moment, with help from the self-preservation instinct, common sense can take the place of decades of absurdity.

1    See Figure 4, p. 11 in Carmen M. Reinhart and Kenneth S. Rogoff, “This Time is different: A Panoramic View of Eight Centuries of Financial Crises”, NBER, 16 April 2008. Also, in the same, p. 9: “….contrary to much contemporary opinion, domestic debt constituted an important part of government debt in most countries, including emerging markets, over most of their existence…”.

2    “Greece’s default in 1826 shut it out from international capital markets for 53 consecutive years”. ibid. p. 82

3    “Did bite harder” in the vernacular of the profession.

4    Since it is a national duty to always tell the truth, even if it concerns the state of intellectual health of the nation, one cannot fail to note that in a single decade Greece lived through two episodes of collective delusion with an exceptionally unpleasant ending for both. First, the stock exchange “bubble”, during which Greeks had believed that they could all become super rich with none of them working and simply by selling papers to one another. Then, the “bubble” of the euro and the Olympic Games, when they all believed, again, that they could do the same by simultaneously opening either shops to sell imported items of clothing, or cafeterias, or “public relations companies”.

5    See. Gros Daniel, “From Pain to Gain on the EU Frontier”, Project Syndicate, 25 August 2001.

6    An eloquent proof of that is to be seen in the economy of the USA, that stood at the level of 65% for many years, bringing it into a deep crisis. (Albeit not as deep as the one of Greece). See Michael Spence, “Closing America’s Growth Deficit”, Project Syndicate, 23 September 2011.

7    This is the point being advanced by some incredibly naïve, on both ends of the political spectrum, many times armed with academic qualifications, who, thus, defame in the worst possible way the greatest economist of the 20th century, who, of course bears no responsibility whatever for the stupidity of those who invoke his name.

8    This, is ,besides, the reason why the IMF estimates of the decline in income in Greece went off target by a large margin. Its staffers, in examining the Greek case in a typical mechanistic and doctrinaire manner, pulled out of their policy toolkit a classic public expenditure multiplier without realising that in that particular case there existed an entirely different problem of long term imbalances collapsing. That weakness of theirs is observable in their pre-crisis reports on Greece, in which they failed to foresee what was coming and kept recycling well-known commonplaces.

9    The proportion of “non internationally tradeables” to “internationally tradeables” of the order of 4 to 1 registered by the Greek economy ought to be compared to its value in developed countries in which it varies between 2.5 to 1 in the “exemplary” case of Germany to 3.5 to one in the “problematic” case of the USA. Any failings of the economy of the latter are attributed precisely to the inflation of the “non internationally tradeables” sector. Moreover, economic theory (the Baumol effect) teaches – and statistical measurement confirms – that the sector of “non internationally tradeables” must be proportionately larger in economies with a higher productivity. This means that if the Greek economy were to be structurally sound and given its lower productivity, the relationship between the two sectors would have to stand at a value even lower than the 2.5 to 1 of Germany. This is what underlies the shrinking in Greece of the “internationally tradeables” sector and the inflation of parasitism.

10    See the relevant table in T. Barnebeck Andersen, M. Barslund, D. Gros, “Can Greece grow solvent?”, CEPS Commentary, 8 September 2011. For information on the monstrous gigantism of the Greek commercial sector and the distortions in the economy, see in “Unleashing Greece’s medium-term growth potential”, Greece economic & market analysis, National Bank of Greece, November 2010. For information on the relation between “non internationally tradeables” and “internationally tradeables” in the Greek economy in the European Monetary Union (EMU) , see D. Ioannou, “Chronicle of a Grand, Fallacious Listlessness”, (in Greek) Bulletin of the Centre for Analysis and Planning (of the Greek Ministry of Foreign Affairs) no. 70, Μarch 2011.

11    Claiming, too, that this is what Keynes would have recommended !

12    In such a case we would not only have adopted a policy to promote economic efficiency, but, also, a policy to promote social justice. It would, also, be a policy that would pay politically : no future corrupt administration will bother to abolish ASEP in practice, as many have done until now, because it would know already that the party dogs it will have appointed will not remain in the public payroll for long.

13    Notwithstanding that in the middle ages the relevant process was meritocratic, because the candidate, following a long period of apprenticeship only was admitted to the guild of masters, if he passed tough examinations in which he was required, among other things, to present his “masterpiece”. Conversely, licenses to practice the”closed professions” were allocated for free in Greece in the decade of 1950 to those holding the correct political beliefs to reward them for their ideology.

14    A provision that in no case implies total powerlessness to implement a countercyclical economic policy, as the supporters of a fiscal free-for-all most inaccurately claim. Entirely on the contrary, only if a country has a very low public debt or can build up surpluses in the upturn periods of the economic cycle can that country intervene to regulate and bolster demand in downturn periods. See Laurence Seidman, “Keynesian fiscal stimulus: what we have learned from the Great Recession?”, working paper no 2011-11, University of Delaware, August 2011. Given then, that Greece would not be able to “return to borrowing from the world financial markets” for a number of decades, the only option to implement countercyclical policy, when that would be necessary, would be to first settle the matter of its debt and, then, to create a sovereign fund in which it would place part of the surpluses it would need to run as a security against “rainy days”.

15 The excessive borrowing at the root of the disequilibrium may have originated in the business sector, as in Japan (see. Koo Richard, “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession”, Wiley, 2009) or, of course, in the state.

16    See. Adda Jacques, “États-Unis: pourquoi l’ emploi ne repart pas”, Alternatives Économiques, no.305, septembre 2011.

17    A crisis, therefore, that must be termed a balance-of-payments crisis attributable to the structural asymmetry of the Eurozone. Economies with very different levels of income and out-of-phase economic cycles cannot have the same monetary policy and the same currency. See Delong Brad, “The Euro Crisis Is, at Its Heart, Not a sovereign Debt Crisis”, http://delong.type-pad.com/sdj/2011/09/the-euro-crisis-is-at-its-heart-not-a-sovereign-debt-crisis.html.

18    See Aaron Tornell and Westermann Frank, “Greece: the sudden stop that wasn’t”, Vox, 28 September 2011 and the relevant discussion and opinion on the TARGET system.

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Βιβλιογραφικὴ σημείωση – Ἱστορικὸ δημοσιεύσεως

D. A. Ioannou, “Stories about Defaults (with Questions and Answers” (in Greek), Analysis Bulletin of the Centre for Analysis and Planning (of the Greek Ministry of Foreign Affairs) no. 70, pp. 20 39 Μarch 2011.

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