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Saturday, November 17, 2018

Beware Of Greeks Bearing Bonds --- Or Perhaps Not?

In October 2010, Vanity Fair published Michael Lewis' classic piece titled "Beware of Greeks Bearing Bonds." One of the major parts of the piece was the story about land exchange deals between the Athos monastery Vatopedi and the Greek government. Needless to say, the article - although not written in an accusing but, instead, entertaining way - was a condemnation of Greeks affairs in general and of the financial empire building of Vatopedi in particular.

There are always two sides to a story. By accident, I only now found out that shortly after Vanity Fair published Lewis' article, Father Matthew of Vatopedi was given the opportunity for a rebuke by Vanity Fair. And that rebuke is quite surprising. Still, Lewis was then given the chance to rebuke the rebuke and at the end of this exercise, it still boils down to a judgment of whom one believes. Still, I decided to publish the below links for the benefit of those who, like myself, may only have seen one side of the story.

Incidentally, for good order's sake it should be noted that, in 2017, all 14 defendants in the land exchange trial were acquitted.

Beware of Greeks Bearing Bonds
Rebuke by Father Matthew and Rebuke of the Rebuke by Michael Lewis

Tuesday, November 13, 2018

The Evaporation Of The Greek Banking Sector

The below statistics (source: Bank of Greece) show the development of the aggregate balance sheet figures of the Greek banking sector (all banks except the Bank of Greece) since the beginning of the financial crisis. Aggregate means that the figures are simply added up and not consolidated, i. e. there may be overstatements in some categories. For the years 2010 and 2015, the figures are as of June. For 2018, the figures are as of September (in BEUR).

2018 2018
vs vs
2010 2015 2018 2010 2015
Claims on domestic financial institutions 19,1 2,1 5,6 -13,5 3,5
Claims on foreign financial institutions 107,4 26,0 13,5 -93,9 -12,5
Domestic loans 273,9 217,1 181,2 -92,7 -35,9
Foreign loans 7,0 4,8 3,1 -3,9 -1,7
Domestic securities 42,9 13,6 11,6 -31,3 -2,0
Foreign securities 35,3 56,2 13,8 -21,5 -42,4
Domestic equities 7,0 4,8 3,6 -3,4 -1,2
Foreign equities 11,7 9,1 4,1 -7,6 -5,0
Remaining assets 40,4 52,8 54,8 14,4 2,0
Total assets 544,7 386,5 291,3 -253,4 -95,2
Debt to Bank of Greece 96,1 126,7 12,2 -83,9 -114,5
Debt to domestic banks 7,5 0,3 1,1 -6,4 0,8
Debt to foreign banks 63,8 7,6 23,2 -40,6 15,6
Domestic deposits 223,1 130,5 147,5 -75,6 17,0
Foreign deposits 25,5 9,8 6,9 -18,6 -2,9
Remaining liabilities 98,6 42,7 33,2 -65,4 -9,5
Total liabilities 514,6 317,6 224,1 -290,5 -93,5
Capital & Reserves 30,1 68,9 67,2 37,1 -1,7
Total liabilities & equity 544,7 386,5 291,3 -253,4 -95,2


In 2018, total assets (291 BEUR) were only a little over half the total assets of 2010 (545 BEUR), i. e. a decline of 47%. Put differently, almost half of a most important sector of the Greek economy evaporated.

When banks' assets decline, one of two things can have happened: cash was received in exchange for those assets or assets were written off (i. e. no value received in exchange; instead, losses incurred). It is safe to assume that the 2018/10 decline in domestic loans (93 BEUR) and domestic securities (31 BEUR) included substantial write-off's. On the other hand, the declines in claims on foreign financial institutions (94 BEUR) and foreign securities (22 BEUR) undoubtedly represents a chase for liquidity.

A key statistic is the 'debt to the Bank of Greece'. In classic theory, a central bank is a lender of last resort, i. e. banks borrow from the Central Bank when they have difficulty obtaining liquidity elsewhere. Until mid-2008, last resort borrowings from the Central Bank had been minimal (below 10 BEUR). In the second half of 2008, foreign banks began reducing their loans to Greek banks and the Greek banks had to revert to the Bank of Greece (and the Bank of Greece, in turn, reverted to the ECB). By June 2010, last resort borrowings had increased to 96 BEUR and at the peak of the drama, in June 2015, they had reached 127 BEUR. Since then, last resort borrowings were reduced by 115 BEUR!

Positive news are that, since 2015, both funding from foreign banks (+16 BEUR) and domestic deposits (+17 BEUR) increased again even though the increases were far less than the declines in the period 2010-15.

An uninformed reader might be very surprised by the fact that aggregate capital & reserves in the Greek banking sector more than doubled since 2010 and now stand at 67 BEUR. One has to point out that these are book values and book values of equity are a direct function of book values of assets. If it is true, as many commentators have pointed out, that half of total loans are non-performing, then the book value of capital & reserves could quickly be wiped out. For reference, the market value of the current 67 BEUR book value of capital & reserves is currently below 1 BEUR.

In summary, these are figures which one probably has not seen ever in an economy of the First World. If the current book value of assets represented the true value of those assets, one could conclude that the Greek banking sector is in rather good shape but one must have reasonable doubt about that. On the other hand, there can be no doubt whatsoever about the fact that the book value of liabilities ALWAYS reflects the true value of liabilities.

Tuesday, November 6, 2018

WWII Reparations - Does Greece Have A Claim Against Germany?

The media have reported that the Tsipras government will begin during the month of November with its efforts to involve Germany in negotiations about finally settling - hitherto allegedly unsettled - WWII reparations. Greece will allegedly claim a sum of 280 BEUR based on a research report put together by the Greek parliament, of which 10 BEUR relate to WWI claims.

My personal interest in researching the subject, which now led to this article, was to finally obtain some clarity about the validity of Greece's claims. My research efforts were hampered by the fact that only very little original documentation can be found on the internet regarding the history of this issue. Neither could I find an English version of the above research report by the Greek parliament. Instead, one has to rely on authors who have allegedly seen such original documentation (like Götz Aly, Hagen Fleischer & Co.) and a multitude of true and/or alleged experts who have published on the subject.

It seems that 4 dates are of particular relevance as regards Greece's claims:

1946 - Paris Agreement on Reparations
1953 - London Debt Agreement
1960 - Bilateral Agreement Germany-Greece
1990 - "Two-plus-Four" Treaty


A. Paris Agreement on Reparations (1946)
The Paris Agreement started as an understanding among the war Allies (the US, the UK and the Soviet Union; France joined after the war) at the Jalta and Potsdam conferences that war reparations from Germany should be limited to 20 BUSD.  The idea was to learn from WWI and not to overburden Germany with war reparations beyond reason. The Soviet Union was awarded 25% of the total, with 75% to be divided among the Western war victims (18 countries), i.e. the signatories of the Paris Agreement. The Agreement provided only for the distribution of anticipated German reparations. It left their absolute size and nature to later determination, thus allowing for wide interpretations and later haggling. Put differently, the size of each slice was determined without determining the size of the cake. With the increasing significance of the Cold War, and due to pressure from the US, the overall amount allocable to Western war victims was continually reduced by the 3 Western Occupying Powers. The Petersberg Protocol of 1949 finally settled on a total reparations amount for Western war victims that was only a fraction of what these war victims, including Greece, had expected when concluding the Paris negotiations.

Strictly technically, one could argue that the Paris Agreement on Reparations settled all German war reparations once and for all. The line or argument would be: all 18 war victims had signed the Agreement allocating their respective shares. The fact that the overall allocable reparations amount declined over the years was a consequence of the times.

The text of the Paris Agreement suggests otherwise because it included provisions that the Agreement was without prejudice to "the determination at the proper time of the forms, duration or total amount of reparation to be made by Germany" or "the right which each Signatory Government may have with respect to the final settlement of German reparations". These issues would have to be settled, according to the Paris Agreement, by separate peace treaties between Germany and individual war victims (i. e. Greece).

Greece's share under the Paris Agreement was determined in the form of 30.000 tons of well functioning industrial equipment which was valued at 30 MUSD, a far cry from the original claims which Greece had made (7 BUSD by one account, 10 BUSD by another). The equipment was delivered to the port of Hamburg in 1948 and responsibility was passed over to the Greek Reparations Commission in Germany. The first shipment of 11.500 tons left Hamburg for Piraeus in 1950. A second shipment was sold to the UK as scrap. The rest was either sold in Germany as scrap or disappeared. There is no evidence how much of the 30.000 tons ever reached Greece (not even of the first shipment of 11.500 tons which had left Hamburg for Piraeus) nor is there evidence of payments received by Greece for equipment sold as scrap. The then head of the Greek Reparations Commission, George Lavdas, came under significant fire by Greek media at the time.

Unrelated to the above, the Paris Peace Conference of 1946 led to the signing of peace treaties between the 5 war allies of Germany (Italy, Finland, Hungary, Rumania, Bulgaria) and 7 war victims (Yugoslavia, Czechoslovakia, Greece, Soviet Union, Ethiopia, Albania), thus allowing the 5 war allies of Germany to resume their responsibilities as sovereign states. Under the Paris Peace Treaties, Greece was awarded reparations of 105 MUSD from Italy and 45 MUSD from Bulgaria. Put differently, Greece received more war reparations from each, Italy and Bulgaria, than it received from Germany under the Paris Agreement on Reparations.

B. London Debt Agreement (1953)
This Agreement was a relief treaty between the Federal Republic of Germany (West Germany) and creditor nations. It was not a negotiation of war reparations because those, technically speaking, had been settled under the Paris Reparations Agreement of 1946. And yet, the London Debt Agreement of 1953 included several paragraphs alluding to unsettled war reparation claims against Germany, suggesting a general awareness that war reparations had not yet been fully settled. The most important paragraph, for Greece, is:

"Excluded from this Agreement are claims arising out of WWII by countries which were at war with or were occupied by Germany during that war, and by nationals of such countries, against the Reich and agencies of the Reich, including costs of German occupation, credits acquired during occupation on clearing accounts and claims against the Reichskreditkassen, all of which shall be deferred until the final settlement of the problem of reparation". 

Greece was a signatory to this Agreement which unquestionably recognized that there was not yet a final settlement of war reparations. While the Agreement did not set a time limit for a final settlement, it was understood that a final settlement would eventually have to come and that German Re-Unification would be the starting signal for settling WWII reparations and for concluding peace treaties.

C. Bilateral Agreement Germany-Greece (1960)
Between 1959-64, Germany concluded 12 Bilateral Compensation Agreements for Victims of the Nazi Regime to compensate individual victims of Nazi persecution. In the bilateral agreements Germany settled on paying 972 MDEM in what Germany considered voluntary compensation, without any legal obligation. The Agreement with Greece was concluded in 1960 for an amount of 115 MDM. The Greek state as recipient of the funds was responsible for passing them on to the individual victims. Under this Agreement, all claims by individuals against Germany were settled once and for all. Notwithstanding this, there continued to be national court judgments against Germany on behalf of further individual victims. Germany took the matter to the International Court of Justice, claiming immunity. In 2012 the International Court of Justice ruled in Germany's favor on the grounds that private individuals cannot sue states.

D. "Two-plus-Four" Treaty (1990)
The full name was Treaty on the Final Settlement with Respect to Germany. The term 'final settlement' clearly referred to the 'final settlement' as stipulated in the Paris Agreement on Reparations (1946) and the London Debt Agreement (1953). It was a treaty between the Two (East and West Germany) and the Four (US, UK, France, Soviet Union). No other war ally or war victim of Germany was party to the treaty. The treaty had the function of a WWII peace treaty but for it to be called a peace treaty, it would have required the participation of all countries which Germany had been at war with. To make a multi-lateral peace treaty would not have been in Germany's interest 'for financial reasons', according to the German State Secretary Friedrich Voss at that time (i. e. the open question of German reparations for World War II, especially in the case of Greece).

The treaty's primary objective was "to conclude the final settlement with respect to Germany. Recognizing that, thereby, and with the unification of Germany as a democratic and peaceful state, the rights and responsibilities of the Four Powers relating to Berlin and to Germany as a whole lose their function". There is no reference in the treaty to other countries nor is there any implication that the treaty would also apply to other countries.

Still, it was recognized that any final settlement with regard to Germany required the involvement of other countries. If not directly as parties to the treaty, then indirectly. This was achieved by the Paris Charta ("Charta of Paris for a New Europe") which was adopted by 32 European countries (including Greece) and the US and Canada only one month after the Two-Plus-Four Treaty had been concluded. The Paris Charta did not reference the subject of war reparations but it included the following paragraph:

"We note with great satisfaction the Treaty on the Final Settlement with respect to Germany signed in Moscow on 12 September 1990 and sincerely welcome the fact that the German people have united to become one State in accordance with the principles of the Final Act of the Conference on Security and Co-operation in Europe and in full accord with their neighbors."

There are 2 ways of interpreting this paragraph. One is that, by signing the Charta, the signatories joined the Four Powers in "waiving the rights and responsibilities relating to Berlin and to Germany as a whole". Put differently, all signatories waived all rights and claims which they may have had before against Germany. The other way of interpreting this paragraph is that all it means is that the signatories noted "with great satisfaction the Treaty on the Final Settlement with respect to Germany." No more and no less.


What can be concluded from the above?

Two aspects appear near-certain: First, Greece, by signing the Bilateral Agreement Germany-Greece in 1960, waived any and all future rights to make further claims against Germany on the part of private individuals. And, secondly, there is no evidence whatsoever that Greece ever waived its rights to make additional claims against Germany as war reparations (the German government confirms this). On the contrary, reference is made in various places that, over the years, Greece presented on several occasions formal notes to Germany outlining its position that there were still open war reparation claims. The last formal note was presented shortly after the conclusion of the Two-plus-Four Treaty. Germany's position that the Greeks should have made their demands in 1990 and, by not making them, they accepted that the issue was closed, does not appear valid because neither the Paris Agreement on Reparations of 1946 nor the London Debt Agreement of 1953 stipulated a time limit for presenting such claims. "Noting with great satisfaction the Treaty on the Final Settlement (Two-plus-Four Treaty) with respect to Germany" can hardly be considered as consent by Greece to that Final Settlement when Greece was not party to the Final Settlement.

Germany has repeatedly stated that, in total, they have made reparation payments in multiples of the 20 BUSD which the Allies had considered as appropriate at Jalta and Potsdam. That may be true overall but with respect to Greece, reparations have totaled only the following: industrial assets valued at 30 MUSD in 1948 and compensation for private individuals of 115 MDM in 1960. More than that cannot be found anywhere. Anyone who has read books or seen documentations about Germany's warfare in Greece from 1941-44 must conclude that these are minute amounts. Germany argues that from 1956-63, it provided Greece with financial reconstruction aid of approximately 1 BDM. That may be true in the sense that Germany provided low-interest loans but, still, they were loans and not reparations.

The German government argues that "70 years after the end of WWII and after decades of peaceful, trustful and fruitful collaberation on the part of the Germany with the international community including NATO-partner Greece, the issue of WWII reparations has lost its validity." If that is indeed the case, then it should be put into a formal agreement between Germany and Greece.

The German government states that the Two-plus-Four Treaty includes the final settlement of all open legal issues stemming from WWII; that it was clear that there would be no further peace treaties beyond the Two-plus-Four Treaty (no statement to that effect is included in the treaty); and that the issue of WWII reparations has been deemed by the signatories to be closed. That all is correct but it applies only to the 6 signatories of the treaty.

Considering all of the above, it seems far easier to defend the position of Greece than that of Germany.

What is Greece asking for?

Below are the largest positions of the 280 BEUR war reparation claims which the Greek parliament has put together:

135 BEUR - material damage and damaged infrastructure
  54 BEUR - damage cause by reduced domestic production
  34 BEUR - follow-up damages to the period 1941-44
  18 BEUR - damage to international trade
  12 BEUR - destroyed shipping fleet
  10 BEUR - Forced Loan
    9 BEUR - war damage relating to WWI

The Forced Loan has received special attention of late. Commentators have argued that Greece's case regarding war reparations may be a very weak case 70 years after the end of WWII whereas a loan is a loan and has to be viewed differently from war reparations. That is correct as long as there is proper loan documentation as regards loan amount, interest rate and terms of repayment. If such proper documentation exists, a loan lives forever unless it is repaid or forgiven (neither of which has happened with the Forced Loan). However, no evidence of proper documentation has been published to date. Greece argues that the Nazi-government recognized that debt in 1943 (in actual fact, the Nazis established a Settlement Account in 1943 for all German-Greek payments); that it committed that the loan would be repaid after the war and that the interest rate was set at 0%. Again, there is no formal evidence to that effect, not to mention the fact that a loan disbursed in the early 1940s carrying an interest rate of 0% would be close to worthless today.

The evidence regarding the Forced Loan suggests a different scenario. In 1942, Hitler appointed a Special Commissioner for Economic and Financial Issues in Greece. Hermann Neubacher, former mayor of Vienna, was put in charge and sent to Greece to stabilize Greece's fiscal situation and the exchange rate of the Drachma, both with a view towards increasing Greece's ability to pay for occupation costs. Neubacher's team consisted of 7 departments, one of which was the Economic Department headed by Paul Hahn, Director of the Reichsbank. On April 12, 1945, less than one month before the end of the war, a Final Report was submitted by the Commission in which Hahn summarized, among other things, the transactions in the above Settlement Account. Hahn wrote in this internal document: "If one makes the necessary adjustments in the final reckoning, the remaining debt owed to Greece would amount to 476 million Reichsmark." Hahn then adds that this amount was provisional and would have to be netted with claims which Germany had against Greece resulting from exports and other financial aid to support the Drachma. Hahn concluded that "regrettably, such information is not available at this time which makes it impossible to make a correct adjustment of Germany's liabilities towards Greece."

Götz Aly, co-author of the book "Hitler's Beneficiaries: Plunder, Racial War and the Nazi Welfare State", had described in that book in minute details the demonic financial structures which the Nazis had implemented in order to exploit occupied countries. From that standpoint, one can consider Aly as a non-biased expert. Aly has described the issue of the Forced Loan as a legend. There had not only been substantial transfers from Greece to Germany since 1942 but also from Germany to Greece. While detailed numbers are not available, Aly cites estimates by the then German officials that Germany's claims in the Settlement Account were approximately 300 million Reichsmark. That would leave a net liability towards Greece of 176 million Reichsmark. Aly adds, however, that IF the debit balance in the Settlement Account could be proven and IF the debit balance could be shown to have been a financial loan with proper documentation and IF Germany repaid the open balance (whatever the current equivalent would be), two-thirds of that payment would go to Bulgaria, Hungary, Rumania and Serbia because those countries sourced the transfer to Greece, and only one-third would go to Greece.

In conclusion, it seems unwise on the part of Greece to place special priority on the socalled Forced Loan because the Forced Loan seems to be a weak case which could easily turn into an embarrassment for Greece, which, in turn, could weaken Greece case regarding other war reparation claims.


FINAL CONCLUSION

Based on the evidence available to me, I find it difficult to understand why most commentators seem to be convinced that Greece does not have a claim against Germany under the title of WWII reparations. While the case for the Forced Loan seems weak, the case for general war reparations seems strong. Greece has so far received war reparations from Germany in the amounts of 30 million USD (Paris Agreement on Reparations) and 115 million Deutsche Markt (Bilateral Agreement Germany-Greece). That sum is significantly less that the combined WWII reparations of 150 million USD which Greece received from Italy and Bulgaria (Paris Peace Treaties). It seems beyond doubt that the damage caused by Nazi-Germany far exceeded the damage caused by Italy and Bulgaria.

It seems that most commentators follow the line of argument pursued by the German government, namely: that claims for war reparations have lost their validity 70 years after the end of the war; that Germany fully complied with the Paris Agreement on Reparations; that Germany voluntarily made additional compensations for private individuals (Bilateral Agreement Germany-Greece) and that, if there were still open issues after all that, the Two-plus-Four Treaty, indirectly accepted by Greece through the Paris Charta, finally settled any and all claims which might still have been open.

The German Chancellor Helmut Kohl once made the following statement regarding Greek war reparations claims: "Look, we claim that we cannot pay reparations because if we open this Pandora's box, then given the viciousness and brutality of Nazi warfare, the genocides - there were several genocides that the Nazis carried out - given these absolutely horrific facts and the unbelievable scale of these horrific crimes, any attempt to quantify this and translate it into claims against Germany will either come up with ridiculously low compensation or it is basically going to eat up all of Germany's national wealth."

Leaving legalities on the side, Kohl's explanation seems to be the most honest one.

Thursday, October 18, 2018

Growth Objectives And Plans Of The Greek Government

The Greek Public Debt Management Agency ("PDMA") published a 32-page PowerPoint presentation for use in foreign investor road shows. On pages 10-11, the presentation outlines the key growth objectives and the plans for accomplishing them. Since the slides below are difficult to read, it is best to refer to the original document.

FIVE KEY OBJECTIVES




GROWTH PLANS


These are beautiful headlines and bullet points! If these objectives and plans are backed by substance, Greece is headed towards a prosperous future! Here are some of the questions I have:

1. Have these objectives and plans between communicated to the Greek public? Have they been communicated to the Greek parliament? Does the Greek ruling class unequivocally support them?
2. Are there action plans behind the objectives and plans? Do they have time frames like when they were started, what the status is today and what the time frame is for their completion?
3. Are there truly projects like: A National Strategic Transportation Plan? A National Energy and Climate Plan? A National Digital Strategy? A National Public Investment Program? A 2017-2023 Action Plan for the Development of a Cohesive and Equitable Economy? A Strategic Plan of the National Central Authority for Health Procurements? A Youth "17-27" Strategy to Promote Youth Autonomy and Independence, Wealth and Well-Being?

When SYRIZA first appeared as an important force on the political stage, it offered, back in June 2012, a Manifesto which was full of beautiful soundbites. That Manifesto has long since then been forgotten. If the above objectives and plans are no more than beautiful headlines and bullet points, they will be forgotten just as quickly.

Wednesday, August 22, 2018

"The Rescue Is Over" - Reviewing 7 Years Of Blogging

"Greece - The Rescue is Over" titled the online portal of Austria's national broadcaster on August 20. The European media were full of self-congratulatory statements by EU elites. Yes, the Greek people had to go through severe hardships in the last 8 years but now that chapter is closed and the stage is set for a prosperous future. Provided, of course, that Greece continues successfully on the reform path of the last years. Etc., etc. This blog has accompanied the Greek crisis since June 2011. In this elaborate essay I will reflect on the observations I have made and the opinions I have expressed over the years.

In early 2009, and in preparation for my upcoming retirement, my Greek wife and I started looking for an apartment in the Thessaloniki area where we planned to spend a good portion of our retired life. We had lived in Munich at the time, one of Germany's most expensive cities, and we expected a life in a less expensive environment. We quickly found an optimal apartment in Kalamaria and in April of 2009, we flew to Thessaloniki with the purpose of getting the apartment in shape, i. e. furniture, etc.

Germany at that time had been hit hard by the financial crisis. At one point, Chancellor Angela Merkel and her Finance Minister had to go on TV to assure the public that all German bank deposits were guaranteed by the state. This against the background that a bankrun was feared. In my banking job, I was responsible for corporate banking in Southern Germany, the home of the German Mittelstand. Every day we received new panic reports from our customers.

As the taxi drove us from the Thessaloniki airport to our hotel (there was no furniture in the apartment yet), we passed an impressive looking furniture store. That, I said to my wife, would be our first stop the next day. I was looking forward to the opportunity of buying top quality furniture at low prices. The first living room arrangement which they showed us (2 sofas and a chair) went for 10.000 Euros. I expressed shock at the price. The sales lady looked at us with the expression on her face: "If you can't afford our furniture, don't waste my time." We decided not to waste her time.

From then on, one surprise was followed by the next. There was an unbelievable number of large furniture stores. At IKEA it was difficult to find a place in their huge parking lot. Downtown Thessaloniki was exploding with economic activity. In short, wherever I looked, I saw shops, people shopping and the prices were high. In several instances (like supermarkets) higher than in Munich.

Through my wife's cousin, a very well connected man around 50, we made our first friends. They were either rentiers or retirees even though none of them was over 60. The cousin had sold his small business (a t-shirt manufacture) when he was 45 and he was looking at about 5.000 Euros in monthly rental income and real estate properties which he valued at 1,5 MEUR. His best friend told us that he had collected a severance package from OTE in his early fifties and was now receiving a monthly pension of almost 3.000 Euros net per month. I asked him what he had done at OTE and he proudly said 'nothing'. He would come to the office in the morning, leave his jacket on his chair and go out to the beaches. Another friend had taken early retirement from a public sector company where he had been a big shot in the union. He was just completing a new mansion which I thought would be worth at least 2 MEUR. On the side, he was pursuing projects with EU subsidies and we learned through the grapevine that a good portion of those subsidies found their way into his private pocket. A neighbor told us that he was collecting 12.000 Euros net per month in the form of pensions from 3 management positions in the public sector. Our real estate agent, a former policewoman in her mid-fifties, told us that she had retired at 48, collected a pension of 1.800 Euros net per month and now earned substantial income as a broker.

In a relatively short time, we had built up a circle of friends of over a dozen people. Only one of them was over 60 (the former public sector manager) but none of them was in a working relationship, either employed or self-employed. There were either rentiers and/or early retirees.

Around that time, I read an analysis of Greece's economic situation by a reputable international institution. Regrettably, I did not keep it and I don't remember the name of the institution. The gist of the analysis was that Greece would probably remain unharmed by the financial crisis because its banks were not involved in international speculation. If anything, Greece had a good chance of coming out of it as a winner.

Upon returning to Munich later in the spring of 2009, I happened to attend a presentation by the well-known economist Michael Huether. He was talking about the financial crisis in Eastern Europe and how the banks had to put together a rescue package. And then he said: "Mind you, before the crisis is over, we will also have to put together a rescue package for Southern Europe." I thought the man was dreaming. A rescue package for Greece? Didn't he know that Greece was a booming place and that analysts predicted a glorious future for the economy?

Around that time, I happened to read "The Battle of Bretton Woods" by Benn Steil. It was the battle between the British John Maynard Keynes and the American Harry White. Keynes had one predominant objective: to assure that the new monetary order would control imbalances in the current accounts. He proposed a new reference currency ("Bancor") in which surpluses/deficits would be settled. Over a certain level, a surplus country would have to pay into the Bancor and the deficit countries would receive them. A perfect recycling mechanism. Keynes' counterpart White also had a predominant objective and it was diametrically opposed to that of Keynes: to establish the predominance of the USD in the new monetary order. The dollar would be fixed against gold and the other currencies would be kept in a trading range versus the USD. Responsible conduct of the US would assure that world-wide imbalances would he held in check. White prevailed.

In 1971, Keynes was posthumously proved correct. The US had not displayed responsible conduct, had accumulated large external deficits and there was no longer enough gold to cover the USD in circulation. In a short TV speech, President Nixon surprised the world with the news that the USD would no longer be convertible into gold at a fixed price. In practice, it was a haircut of all USD claims held by the rest of the world. The age of fiat money had begun.

I came away from reading that book with the conviction that the most important factor in international financial stability was a country's current account, that it was a country's balance of payments that had to be checked, and that conviction shaped almost everything which I would write about Greece's financial crisis later.

When the Greek financial crisis erupted in late 2009 and until the first rescue package of May 2010, it felt to me like a déjà-vu. I had witnessed, as local country manager of a large American bank, the economic turn-around in Chile in the late 1970s/early 1980s. Since then, Chile has become the prototype for me as regards how to overcome an economic crisis. When I arrived in Chile in 1980, the economy was booming. Only 7 years earlier, Chile had been in total economic chaos caused by the policies of Salvatore Allende: Chile in 1973 was what Venezuela is today. How could a totally bankrupt economy be turned around into a booming economy in only a few years?

Two very simple factors: a very competent economic management team (the "Chicago Boys" in Chile) and a political leadership which could give that management team air cover to implement their policies. In Chile, that political leadership was the dictatorship of Augusto Pinochet, rightly blamed for atrocious human rights violations. However, without such air cover it would have been unlikely for the economic management team to succeed owing to the enormous adjustment pains which came along with the new policies. It was a shock treatment like changing traffic from left to right overnight. I often wondered whether a democracy could survive such a shock treatment. In Greece, I thought the shock treatment could work IF there were a competent economic management team and IF there were a strong, unified government supporting it.

The most important factor for the success of the Chicago Boys was that they had a plan and consistently and unwaveringly pursued it. It was nothing but applied common sense: increase exports, reduce imports, apply efficiency criteria to the huge public sector, create market conditions for the private sector and create an economic framework which would attract foreign capital. The Chicago Boys committed one major mistake which eventually caused their downfall and the external payments crisis of the early 1980s: they fixed the exchange rate to the USD 'forever'. With Chilean interest rates much higher than USD interest rates and with no perceived foreign exchange risk, foreign capital flowed into Chile like there was no tomorrow. When the bubble exploded, the Chileans eliminated the fixed exchange rate and the economy stabilized relatively quickly. Chile's luck was that they had only fixed the exchange rate instead of joining a currency union with the USD. The rest of the model of the Chicago Boys remained in place, resulting in Chile's becoming one of the most successful economies in Latin America to this day.

Later in the 1980s, I was transferred to Argentina where my bank was one of the largest foreign creditors of the country. In 1983, Argentina hit the then largest external financing crisis ever with American banks being by far the largest creditors. It was the American Citibank which headed up the crisis management. Its principal negotiator, Bill Rhodes, literally personally developed the model for handling Argentina's external financing crisis, a model which became the standard for handling the dozens of external financing crises throughout the world since then. Its components, again, were quite simple: negotiations had to be carried out directly between Argentina and its private creditors; official institutions (the Fed, the US government) only quarterbacked behind the scenes; private creditors had to maintain their Argentine exposures, i. e. loans and trade credit ("risk takers must remain risk carriers"); and the IMF assumed responsibility for providing fresh money and negotiating economic measures ("memorandum") with the Argentine government. The banks agreed subject to the involvement of the IMF, the IMF committed subject to the agreement of the banks. The mutual dependency between private creditors and the IMF was born. No bank was bailed out. Instead, their benefit was that they could keep their existing exposures on performing status instead of having to write them down.

Given the above experiences, I thought by late 2009 that Greece's problems would be solved rather quickly. As regards reforming the economy, I thought they would copy the Chileans: put in place a competent economic management team and have a unified government provide it with air cover. And as regards the external financing crisis, I thought the EU would consult with Citibank, by then the world's premier expert in how to handle external financing crises. The EU refused to consult the experts. Bill Rhodes later said in interviews that he had offered his advice to the EU as well as to the then Prime Minister George Papandreou. He was told by all parties that the experience with emerging countries would serve no purpose because the EU and, particularly, the Eurozone were completely different animals. The trouble was that the EU had zero experience with the handling of external financing crises of a country.

By early 2010, I was baffled with the events unfolding in the Eurozone. Instead of consulting experts, Angela Merkel consulted with the CEO of one of Greece's largest creditors, Joseph Ackermann of Deutsche Bank! Ackermann, as his job required, defended the interests of his institution and argued with Merkel that not only the Euro and the Eurozone but the entire world-wide financial system would fall into chaos if Greece were not bailed out. At the peak of those dramatic developments, Merkel coined a phrase which may go down into history as the most expensive phrase ever: "If Greece falls, the Euro falls and if the Euro falls, the EU will fall!" That misinterpretation was the source of every other problem which followed subsequently.

What should Merkel & Co. have said to the bankers pleading for a bail-out of Greece? Something like this: "We realize that you have a problem with Greece but, truly, this is a problem between you the creditors and Greece as your borrower. You will have to negotiate a restructuring of your claims directly with your borrower. We are on standby when it comes to financing Greece's new financial needs going forward and for negotiating economic measures with Greece but first you have to restructure your claims. Should you fail to do so, you correctly say that your institutions may fail. You need not worry about that because we already have protective measures in place. We have already put in place successor vehicles for each of your institutions. If you declare bankruptcy in the morning, our successor companies will take over your operations in the afternoon and your shareholders will be wiped out. At some point in the future, your successor companies will again be privatized and we will hopefully recover much if not most our our investment. The tax payers will not lose everything, which is what would happen if we bailed you out via Greece. Mind you, if you do not follow our advice and if your shareholders are wiped out, you may become personally liable for any damage suffered by your shareholders because you had the opportunity to avoid that damage and you chose not to use it."

The utter misinterpretation of EU elites was that, in a major financial crisis, it was the banks which had the power and the governments which were 'alternativlos'. The opposite is the case. In any major financial crisis, it is the creditworthy governments which have the power and the banks are dependent on them for the simple reason that governments have time and the capacity to raise money. If a bank falls below equity requirements, it needs to file for bankruptcy immediately, as Lehmen had shown. A creditworthy government can provide the time for an orderly bank restructuring and/or liquidation and the liquidity required. The US government had demonstrated how this is done. When the world's largest insurance company, the giant AIG, faced bankruptcy because a couple of hundred employees in London had engaged in reckless credit default swaps, the US government stepped in and it demanded its pound of flesh: 90% of shareholdings were wiped out. Only a few years later, the US government successfully exited the restructured AIG and took a huge profit on the exercise. AIG's largest former shareholder sued the government for damages to the tune of 30 BUSD. The law suit failed on the grounds that not only profits are for private shareholders but losses as well.

As I explained above, a first memorandum could not have been avoided even if the EU had handled the Greek crisis correctly: no creditor would have agreed to keep his exposures if there was no commitment for reform measures. What puzzled me during visits to Greece throughout 2010 was that life had hardly changed: Greeks were still buying imported goods like there was no tomorrow. Under normal situations, when a country loses access to foreign financing, its current account needs to be balanced literally overnight. Imports are drastically reduced. The entire population feels that there is a problem. Greece, however, continued to run very high current account deficits. In the spring of 2011, Prof. Hans-Werner Sinn provided the explanation when he introduced the world to the marvels of Target2, the ECB's cash management system. By then, the Bundesbank had accumulated Target2 claims of 324 BEUR and Sinn prophesized the demise of Germany (today they are close to 1 trillion Euros).

One can make intellectual arguments whether Target2 is the key component of a currency union or whether it is an unlimited credit card. In practice, Target2 allows a domestic banking sector to pay for imports, for deposit flight and for capital flight even if it has lost access to foreign funding. Without Target2, the Greek banking sector would have become illiquid in 2010. In June 2011, I started this blog and one of my first articles was about Target2. My argument was that Target2 was the principal reason why there was no crisis awareness among the Greek population. As long as one can buy imported goods, withdraw savings from banks and transfer capital abroad, it is hard to convince the general public that there is a crisis.

As I studied the first memorandum, I couldn't help to think that it was a bookkeeper's approach to solving financial problems: increase tax revenues and cut costs. What I was looking for was a long-term economic development plan à la Chile which would aim to drastically restructure the Greek economy so that it could stand on its own without funding/subsidies from abroad. A plan which would have a 10-20 years time frame. In the first month of this blog I proposed such a plan. To summarize the content: "If Greece cannot make it with the Euro but if a Grexit is the worst of all evils, Greece should hold on to the Euro but temporarily simulate a situation as though it had returned to the Drachma: import controls and substitution with the focus on 'infant industry protection and development'; export promotion; attraction of foreign investment AND, finally, a shock treatment for the public sector. Instead of attempting to change the entire economy at once, Special Economic Zones should be established where the new economic framework could be gradually spread through the country." I later referred to it as the "4 obsessions" which would have to be fostered throughout the Greek economy and population: an obsession with import substitution, with exports, with attracting foreign investment and with making the public sector efficient. To this date, I have not seen such a plan.

Soon after I started this blog, I became aware of Yanis Varoufakis and his blog and other publications. His 'Modest Proposal' had caught my attention because it was a most ingenius proposal to solve the Eurozone's problems. It was certainly better than everything I had heard from EU elites on the subject. The only problem I had with it was that it was a solution for the Eurozone's problems and not a solution for Greece's problems. My dialogue with Varoufakis began at that time. It continued throughout the years and became extremely intensive in the weeks prior to the election of January 2015. Only a few weeks after his appointment as Finance Minister and after observing his conduct on the international scene, I discontinued the contact.

My early critique of Varoufakis was as follows: "Why do you use all your intellectual brilliance, your competency, your eloquence and your charisma to solve other people's problems (i. e. the Eurozone's problems) and don't focus at all on solutions for the problems which Greece could provide on its own?" Varoufakis' standard reply was that, during the American depression in the 1930s, there was nothing which the state of Ohio could have done on its own because it was a systemic crisis. My standard answer was: as long as Greece ranked as the least attractive country for doing business in the entire EU (World Bank) and as the most corrupt country (Transparency International), there is no one other than Greeks who can solve these two problems.

Still, I remained optimistic throughout 2011 that, eventually, the Greek government would take its fate into it own hands (instead of focusing on the victim's role), that it would come up with a long-term economic development plan and implement it. I saw enormous potential in the Greek economy given that its problems were so obvious, could quickly be identified and attacked as long as there was the political will to do it and I also thought that the economy not only had great catch-up potential but also new opportunities as a regional economic hub. At one point, I even dreamed that Greece could become the economic power center of the Eastern Mediterranean.

Two things happened in the fall of 2011 which enormously encouraged my optimistic thinking: the EU Task Force for Greece (TFGR) was established and the Athens office of McKinsey published its economic plan titled "Greece 10 Years Ahead". McKinsey proposed how 500.000 new jobs could be created over a period of 10 years and 50 BEUR added to Greece's GDP and the TFGR proposed "to be at the disposal of the Greek authorities as they seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

All of this seemed so easy: a unified government would take the McKinsey plan and implement it and it would mandate the TFGR to implement the modernization of Greece in a hurry. Animal spirits would start flowing and foreign investors would take note. Instead of rescue funding from the EU, Greece would receive voluntary funding from private investors. After all, that's how it had happened in Chile.

I had initially been quite enthusiastic about Prime Minister Papandreou. He struck me like a polished individual who seemed competent, was saying the right things and seemed to have a will. By the fall of 2011, I had developed serious doubts. There simply did not seem to be much of a backbone. More of a diplomat than an executive. In early November 2011, I knew that there would be a moment of truth: would Papandreou prove himself as a Margaret Thatcher ("I want my money back!") or only as the son of his father. Regrettably, he showed himself only as the son of his father.

When Papandreou surprised the EU by announcing a referendum, I thought that this was an ingenius plot. Obviously, not to really hold a referendum but only to use it as a negotiating instrument versus the EU. I expected the Nice conference to become a showdown: when the French President lost his nerve, exploded and pounded the table, I expected Papandreou to remain quite relaxed and say to the President: "Look, there is no reason to get so excited; there is an easy way out. All I ask is that you do this and that for Greece and I will call off the referendum. Otherwise, the will of the Greek population will count and I am afraid you may not like the result." Given that discussions had already been in the 3-digit billion Euro sphere, a demand for, say, 10-20 BEUR in the form of additional investments in Greece's private sector would have been like the icing on the cake, a satisfactory 'this and that'.

Papandreou caved in, the political opposition behaved irresponsibly and all my hope for ever seeing a solid solution for Greece evaporated. With the benefit of hindsight, I would say that the period of 2010-12 was the crucial period where Greece 's future was determined: would Greece become the country which the TFGR envisioned or would it remain an underdeveloped economy with totally unequal distribution of wealth, income and burdens? Too geopolitically important to be allowed to fail completely but a far cry from utilizing its potential?

The cynical celebrations about 'Greece's success story' are offset by more balanced critiques of what really happened in Greece since 2010. The celebrators claim that they saved Greece, the more balanced commentators say that Greece saved the banks and the Eurozone but not itself. Very little in-depth analysis is being made as to why Greece really ended up in 2010 where it ended up. Was it unavoidable that the Euro-dominos would fall and Greece was simply the first one to fall? Was the rescue program satisfactory or were mistakes made? If mistakes were made, who is to blame? Greece or the creditors?

I have always maintained that there were 2 crises in Greece: an economic crisis and a financial one. The economic crisis, I argued consistently, began with the assumption of power by Prime Minister Andreas Papandreou and his PASOK in 1981 and the nearly simultaneous admission of Greece to the EU. The financial crisis began when 30 years of reckless mismanagement culminated in a 'sudden stop' of external financing in early 2010.

In his book "The 13th Labor of Hercules", Yiannis Palaiologos gives an account of the reckless mismanagement referred to above. In essence, PASOK managed to change Greece's political and economic climate in only a few years: a bloated welfare state with stifling interventions and overregulation; welfare populism, cronyism, statism, nepotism, protectionism and paternalism. And worst of all, the opposition, Nea Demokratia, when in power, did its best to copy PASOK instead of correcting their policies. There no longer were checks and balances. Aristides Hatzis described this as follows: "Today's result is the outcome of a disastrous competition between the parties to offer patronage, welfare populism and predatory statism to their constituencies." The responsibility can be assigned equally to both parties: if it was PASOK who initially embarked Greece on this disastrous path, the last chapter in the story "how to ruin a country" was provided by ND when, during their term from 2004-09, they drove the public sector out of control.

Was it the Euro which caused the demise of the Greek economy? Not really. When one visits Greek industrial parks today, many are more reminiscent of industrial cemeteries. Most of those industrial failures date back to the 1980s and 1990s when Greek competitiveness was essentially blown out of the water. In 1993, a young Greek professor teaching at an Australian university was asked, in a TV interview, his opinion of the state of the Greek economy. The professor stated that the Greek economy was in a state of terminal decline. His name was Yanis Varoufakis. In 1997, the so-called Spraos Report about Greece's pension system recommended urgent reforms lest the system fail. The President of all unions criticized the report for suggesting that the pension system would collapse by 2010 if corrective measures were not taken. That, the President prophetically ridiculed the authors, would assume that the Greek state would go bankrupt by 2010 (his assumption being that the Greek state could never go bankrupt).

No, the Euro did not cause the demise of the Greek economy. The stage for that was set during the 1980s and 1990s, facilitated by the wave of foreign capital flows after EU membership. The Euro only added a turbo to that process, a giant turbo to be sure, and the wave of foreign capital flows turned into a tsunami during the 2000s.

The economic crisis turned into a financial crisis during 2008. The sub-prime crisis had made lenders very risk-aware and cautious and many of Greece's lenders, previously unanimously enthusiastic, had begun looking more carefully at Greece's numbers. New lending to the Greek banking sector dried out and some existing loans were called back. This is evidenced by the rise in Greece's Target2 liabilities which began during 2008 (before then, Greece's Target2 was rather balanced). In 2009, the outflow of capital accelerated and once the new PASOK government revealed the true dimensions of Greece's deficits, 'sudden stop' was only a natural consequence. I once read an analysis which pointed out that there have been about 70 'sudden stops' world-wide since 1945. As a result, there was nothing new or unusual about Greece's 'sudden stop'. What was new about Greece's 'sudden stop' was the inadequate, if not irresponsible, EU's handling of it. Any 'sudden stop' triggers a major domestic crisis, particularly when an economy has become totally dependent on foreign capital. Thus, the question is not whether the suffering of the Greek population could have been avoided. Instead, the questions are: Could the suffering have been less? Could it have been for a shorter period of time? And, above all, did the suffering serve any constructive long-term purpose?

Anyone who argues that the post-2010 rescue programs intended 'to save Greece' is disavowing reality. As long as the mantra was "If Greece falls, the Euro falls and if the Euro falls, the EU will fall!", the obvious conclusion is that the purpose of the post-2010 rescue was to save the Euro and the EU. The only thing that Greece was saved from was a default on its external liabilities, something which doomsayers dramatically referred to as 'the bankruptcy of Greece'. The Chief Economist of Citibank reacted to this as follows: "What the Europeans did not know was that sovereign defaults have been the most ordinary thing in the world of finance in recent decades." When the threat of a default appears on the horizon (or when it has already occurred), countries - like private or corporate borrowers - need to sit down with their creditors to discuss a restructuring of the debt. Never before in the history of finance have private lenders been let so easily off the hook as in the case of Greece!

Only self-centered dreamers can have the nerve to call a rescue program which still leaves the country in shambles after 8 years a success. "Never let a serious crisis go to waste", the saying goes. The Greek crisis went to waste. No Greek parent can tell his children that "yes, we really had to suffer for a long time but we did it for you because you now live in a better country!" What went wrong?

It is much easier to identify responsibility for the failure on the Greek side instead of elsewhere. Yes, 'ALL Greeks had eaten the lunch', as a Greek politician once said, and, therefore, all Greeks should now pay for it. Yes, the Greek side never left the impression that it assumed ownership of the problem but always left the impression that reforms were undertaken only unwillingly, only under severe pressure from the Troika and then only haphazardly. Yes, the Greek side always focused on the victim's role and sought to put blame elsewhere. Etc., etc.

But the most important point is missing! What if a country is not yet quite ready for the framework of a highly developed EU, particularly for a complicated currency union? What if a country is not yet quite ready for the free movement of products, services and capital? What if a country had joined the EU and the Eurozone in the expectation that it would find help in its development?

Looking back, I would argue that the resource allocation over the last 8 years was at best 10% for assisting Greece "to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos" and at least 90% for debt issues. What if it had been the other way around? A debt problem, however large, can be solved by a group of people in a conference room as long as they agree. To 'build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos' is a project for a generation and it requires the best brains not only of Greece but of the EU in general.

As Greece exits the program, its debt is now more or less regularized: much of the interest burden has been deferred, most of the debt maturities have been extended way into the future and a cash reserve has been built up. Here is the million-dollar-question: Why could that not have been accomplished within the first year of the rescue, thereby allowing resources to be allocated to more constructive purposes?

In 2009, Greece had a primary deficit of 24 BEUR: before paying enormous amounts of interest, the Greek state spent 24 BEUR more than it had revenues. A staggering figure by all accounts. Naturally, that can be viewed as an example of extreme profligacy and, naturally, that can quickly be turned into an emotional issue: the profligacy of the Greeks must be stopped; the primary balance must be brought to zero as quickly as possible! So far, so good.

But anyone who has attended Economics 101 in college knows that national income is the sum of private sector and public sector income. If one of the two is cut drastically, the other one must increase if a destruction of national income is to be avoided. The problem is much greater than the 24 BEUR because when the state, as by far the largest economic agent in any country, cuts dramatically, there will be a multiplier effect throughout the economy. With the benefit of hindsight, one can debate whether the multiplier effect was calculated correctly or not. My point is that one doesn't really need a calculator. When one takes 24 BEUR out of an economy the size of about 220 BEUR, one knows that there will be shockwaves. Unless...

Unless one accompanies the (necessary) austerity with growth measures elsewhere to ameliorate the damage. Granted, no one could reasonably have been expected to give the Greek state a fresh 24 BEUR for growth measures given the Greek state's history of misspending funds. But it should not have been too difficult for EU experts to design ways to steer 24 BEUR into the private sector for growth projects. After all, the Chinese company Cosco steered millions of investments into their Greek subsidiary in the midst of the crisis and they are today very happy about that. Why could the EU not have accomplished with the country what a Chinese company accomplished with its subsidiary?

Many have argued that Greece should have been given a major haircut back in 2010 to get back on its feet. That is an illusion! Greece did not achieve a primary surplus until 2016. In other words, debt service (interest) did not burden the budget until 2016. Instead, all interest which was paid until then had first to be lent to Greece (and increased the debt). What would have mattered much more is if Greece had been given the interest terms back in 2010 which it has now (or better yet: an immediate interest moratorium for, say, 10 years). The example of Germany, half of whose debt had been haircut back in 1953, was often cited. With the benefit of hindsight, one can question whether that was a good decision. What if the debt which Germany was forgiven had been replaced with a 50-year bond including deferred interest? Would Germany in 2003 have been able to service that debt? Of course it would have and it would have been fairer to those parties who had to finance Germany's haircut back in 1953.

In short, true help for Greece would have looked something like this back in 2010: extending all loan maturities out into the future, say 25-50 years; an interest moratorium for at least 10 years; fresh money to finance the primary deficit with the proviso of achieving a surplus within 5 years; a commitment to maintain the stability of Greece's banking sector; and fresh money of at least 20 BEUR for growth measures in the private sector. All except the last point would have been quite easy to do as long as reasonable people came to an agreement in a conference room. The last point would have required true brainpower.

With that kind of an offer of 'help for Greece', the EU would have acquired a legitimate claim to put 'demands' to Greece in exchange. Those 'demands' would have consisted of the standard measures of a memorandum, albeit it in a more intelligent way than it was done. But most importantly, the 'demands' would have had to address the 'hot potatoes' of the Greek public and private sector, all those structural weaknesses that everyone knows of but no one dares to touch. Above all, the 'demands' would have had to assure that the 20 BEUR for growth measures would not go to waste.

What if the Greek side had not accepted this? What if the Greek side had interpreted this as an interference with national sovereignty? What if there could not have been accomplished consensus in the Greek government?

Well, it's like the above mentioned conversation with Joseph Ackermann: "We offer you help but it's up to you to accept it. If you don't accept it, you have to live with the consequences!"

Having written all that, it begs the question: Where are we today? Can there still be prosperity for Greeks in the foreseeable future?

At this point, there is no prosperity for the Greek population in toto in sight. Of course, the upper third of the Greek population (or so) will continue to do well to very well, as they have done in the past, even during the crisis, and they may even profit from the current situation. The middle-third (the former middle-class) will struggle to survive. And the lower-third will continue to suffer. All those Greek friends who are telling me that 'Greece will never change' are really saying that it will be this way for a very long time.

However, when I put myself back into the idealistically optimistic mode which I was in back in 2010-12, I envisage the formation of a competent economic management team and a unified government which provides it with air cover. If that were ever to happen, one could realistically hope that the day will come when Greece is 'a modern and prosperous country: a country characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos."

PS: reviewing what I have written above at great length, the thought comes to mind that I have said everything there is to say and that, perhaps, this is a good time to close this blog. I will ponder this.

Friday, August 17, 2018

Long-Run GDP Growth Prospects Are Poor

Last month, the IMF pubslished its 2018 Article IV Report on Greece and it was widely commented in the media. I have now read the full 80+ pages and can only recommend others to read the full report. It can be found under this link (under the caption Electronic Access, click on Free Full Text).

I focus here on Annex VI about Greece’s Long-Term Growth Potential and I reproduce it below. A summery statement would be: "Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades. Labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output). Long-run GDP growth prospects are thus poor, absent a major change in policies. Structural reforms to raise TFP growth and employment are therefore the only option to achieve higher long-term output growth."

Below is the Annex VI about Greece's Long-Term Growth Potential.


1. Greece is set to experience dramatic population aging over the next several decades. In its 2018 Aging Report, the EC projects Greece’s working age population to fall by about 35 percent between 2020 and 2060 due to a shrinking and rapidly aging population. This is among the largest such declines in the Euro Area, and three times the average fall for the Euro Area. Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades.

2. Greece’s productivity growth has historically been poor. Greece’s underperformance relative to peers is often associated with relatively low openness of the economy and a high share of labor allocated to non-tradable sectors. Total factor productivity (TFP) growth over the last 47 years averaged just ¼ percent annually, by far the lowest in the Euro Area. Assuming this historical average TFP growth rate going forward, labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output).

3. A pickup in investment could provide a short-run boost to growth, but productivity and demographics will dominate in the longer run. Investment is bound to recover from its highly depressed level once Greece emerges from the crisis, but the growth effect of this will wane once the capital stock returns to its long-run level. Staff’s medium-term projections already assume a temporary boost to GDP growth from higher investment (with real GDP growth rates averaging close to 2 percent during the investment recovery). Once the transition to the new, higher capital ratio is completed, however, the impact of increased investment will fade and growth dynamics will be determined by the evolution of output per worker and of the number of workers.

4. Long-run GDP growth prospects are thus poor, absent a major change in policies. As a starting point, combining the historical growth in output per worker of 0.4 percent with expected growth in the number of workers of -1.1 percent would imply long-term annual growth of -0.7 percent. This simple result is broadly similar to other recent findings in the literature, which estimate Greece’s baseline growth rate (before the effect of reforms) at -0.4 percent during 2024–2043.

5. Structural reforms to raise TFP growth and employment are therefore the only option to achieve higher long-term output growth. Estimating the gains from structural reforms is technically difficult, and results are necessarily imprecise. The empirical evidence suggests that the GDP growth gains from reforms are somewhat modest and transitory: while studies have documented an impact on output levels of 3 to 13 percent over the initial decade, the impact of reforms on growth tends to fizzle out afterwards.

7.
 • The 2016 WEO estimates the GDP level gain from past episodes of product market deregulation in 26 advanced economies over 1970–2013 at about 3 percent on average, with gains accruing over a period of eight years, suggesting a GDP growth gain of about 0.4 percentage points per year during the eight-year period.
• Adhikari et al. (2016) looks at case studies of major past reformers in both labor and product markets—Australia, Denmark, Ireland, Netherlands, and New Zealand in the 1990s, Germany in the 2000s—and finds that the GDP effect of reforms ranged between 0 and 34 percent over a period of 5 years. Excluding Ireland, which is a clear outlier, the average impact was 0.6 percentage points per year over the five-year period, and in two out of six cases, there were no significant gains. Permanently raising growth would require a period of reform implementation that exceeds in both ambition and duration what Greece has achieved so far. While Greece has initiated numerous structural reforms in the context of its adjustment programs—from labor markets to energy, judicial reforms, closed professions, and others—implementation has sometimes lagged. The country’s key accomplishment has been a cornerstone labor market reform adopted in 2011, but this is set to be partially reversed after the current program. Other legislated reforms have faltered at the implementation stage. For example, numerous attempts at privatizing state monopolies in the energy sector are yet to reduce significantly the state’s share in this sector; judicial reforms have been slow moving, with continued high court backlogs; reforms to liberalize close professions have fall short from expectations in terms of both pace and scope; and; the investment licensing reform, which started in 2011, is still not fully completed. Given demographics, the impact of structural reforms will need to be substantial to achieve an overall long-term GDP growth rate of 1 percent over the next half century. Lifting long-term growth from its baseline of –0.7 percent to 1 percent requires reforms to add 1.7 percentage points to growth per year for the next decades. The OECD (2016) estimates that full implementation of a broad menu of structural reforms could raise Greece’s output by about 7.8 percent over a 10-year horizon, which translates into an increase in annual growth of some 0.8 percentage points for about a decade. Bourles et al. (2013) estimate this gain to be slightly higher, at about 0.9 percentage points per year, while Daude (2016) finds that reforms focused on product markets and improving the business environment in Greece could boost growth by about 1.3 percentage points per year for a decade.

9. In conclusion, achieving staff’s assumption of 1 percent growth in the face of adverse demographics and historically weak productivity growth will require that the Greek authorities and people commit to an extended period of profound structural reform. Implicitly, the 1 percent growth projection presumes that Greece would manage to increase labor force participation to levels that exceed the Euro Area average (to offset the significant projected decline in Greece’s working age population) and that would generate TFP growth rates permanently far above Greece’s historical average. This underscores the importance of rapid and decisive action on the part of the authorities to tackle the many bottlenecks that constrain growth and limit the country’s ability to prosper in the Euro Area. 

Tuesday, July 31, 2018

Pierre Moscovici Interviewed About Greece

A short article in the Ekathimerini referred to an interview which EU Commissioner Pierre Moscovici had given to the Austrian magazine Profil. Here is the original interview.

Right in his first response, Moscovici made the bold prophecy that "the Greeks will now see that their sacrifices mattered." His argument seemed to be that Greece now has more flexibility to provide for more social justice but he gave no specifics. In that same response, Moscovici described pre-crisis Greece as follows: the country's economy had been very weak, taxes were not paid, public administration was inefficient as evidenced by the fact that there was not even a nationwide real estate cadastre. A superficial reader could interpret this to mean that now, after 8 years of reforms, the economy is strong, taxes are being paid, public administration is efficient as evidenced by a nationwide real estate cadastre. Well, Moscovici didn't say that, of course. Instead, he reverted to the common phrase that "much progress has been made but there are still steps to be taken."

"The market now have confidence in Greece again. Greece has recovered the freedom to pursue its own policies. We have stopped the growth of debt" - bold statements by Moscovici.

Moscovici blames the German Finance Minister Schäuble for having been too aggressive in 2015, for having brought the idea of Grexit into play. At the same time, Moscovici believes that Schäuble's aggressiveness was in response to the unfortunate conduct of the Greek Finance Minister Yanis Varoufakis. And that brought the conversation to the subject of Varoufakis.

"Varoufakis is a brilliant and eloquent person, but he is a fake. He was the wrong person at the wrong time in the wrong place. I have had many meetings with him. At least in the beginning we had a good relationship. But he was never interested in a true compromise. He always lectured all the others. His methods were not those of a statesman but, instead, of a spy. He secretly recorded conversations and negotiations. That may perhaps help the sale of his books but one doesn't generate trust that way. Furthermore, all his talk about Plan B increased the danger of a Grexit. It's alright if you have disagreements with some of your friends but if one disagrees with everyone, then one is a lone wolf."

Moscovici praised the recent debt relief agreement, emphasizing that Greece will not have to pay any interest until 2032. Presumably, he only referred to the ESM debt here. Moscovici also mentioned that the subject of debt relief might be revisited in 2032.

Moscovici was quizzed about the figure of 50 BEUR which, at one time, was used as the target for privatizations and which now is obviously unrealistic. Moscovici sidestepped this question by saying that the EU Commission had never mentioned this figure.

Finally, Moscovici was quizzed about Greece's military expenses. The interviewer tried hard but he/she could not get Moscovici to say that Greece's military expenses were too high.

Bottom line: an uninformed reader could well come to the conclusion that Greece had been in deep trouble 8 years ago, that 8 years of EU-guided reforms had delivered positive results and that a bright future was ahead for Greece.