Sunday, May 6, 2012

Painless adjustment not possible!

One can argue about the way EU-elites have handled the debt crisis in the last 2 years (and this blog has done so). One can argue about the Memorandum (and this blog has done so). One can argue about the way the Greek political establishment has handled the crisis so far (and this blog has done so). However, there is one point on which there cannot be an argument.

One cannot argue that there is such a thing as a painless adjustment! When things get out of whack financially, be that a company or a country, an adjustment is necessary and that causes pain. Steve Jobs is the genius who created Apple and thousands of jobs with it. However, when he started with Apple's turn-around, he first had to fire thousands of people. A country cannot fire its citizens; a country must adjust otherwise.

A cause-and-effect approach can make the pain more acceptable. In other words, if pain is required to clean out a mess, one should inflict the pain primarily upon those who caused the mess. If there were beneficiaries of the mess, it is wise to have them give up some of their benefits to clean out the mess.

I can only guess that the Greek political leadership opted for the opposite approach (i. e. pain was inflicted upon those where were least responsible for the mess) because that was politically the more comfortable approach: anonymous masses remain anonymous regardless how much they pain. Cronies and other clienteles, on the other hand, are not anonymous (and they can even endanger party leaders).

Only at election time do anonymous masses have their say and they have now spoken loudly and clearly in Greece. I fear, however, that they have been misled. My sense is that the so-called anti-Memorandum voters were led to believe that the Memorandum is the cause of all pains and that, without it, all pains will cease. Nothing is further from the truth!

Pain can only be mitigated if the recession is brought to a halt and relief will only occur when growth returns. When an inefficient and corrupt public sector has eroded a country's wealth over the years, it must be shrunk (be that direct government expenses or indirect public sector waste). However, when a public sector shrinks, there must be an offsetting growth in the private sector to maintain some form of equilibrium. Growth in the private sector requires private investment. Private investment requires business conditions which make the risk/return-ratio interesting for the investor.

So far, the Greek political establishment has enormously focused on shrinking government expenses but I am not aware of any significant measures which would improve private sector business conditions such that the risk/return-ratio becomes more interesting for the investor. A country which is so far behind as Greece is in many respects today has enormous future potential. It doesn't need to come up with a new revolution like Apple. It suffices to straighten out the public administration and to establish a level playing field which encourages private investment and fair and competitive economic activity.

The anti-Memorandum voters and their elected representatives are well advised to devote their energies less to the details of a Memorandum and much more to the question how Greece's public administration can be modernized and how a level playing field for value-creating economic activity can be established. That will get them re-elected the next time around and not the tearing up of a Memorandum!


  1. The magnitude of the disparity between reality and what the European mass media and people think is happening in Greece, is mind-boggling. You speak of adjustment. I don't see any.

    When the first memorandum was signed in 2010, the Greek people overwhelmingly supported the reforms (as was evident in the support for the ruling party in the municipal elections of late 2009) since especially the "young" (bellow 50) wanted to change the status-quo of corruption in the oversized public sector and make the country more competitive, but were concerned over the new bail-out loans. Not because of the reform measures, but because we didn't want any new loans (many would prefer an immediate haircut) and didn't want to use public property (such as the coal mines etc) as collateral.

    But then we watched a continuous drama unfold: every few months, the so called Troika would negotiate each installment, and would insist on one and only one measure, Taxes Taxes Taxes. By which I don't mean the lame attempts to curb tax evasion, I mean a VAT of 24% on everything, A tax of 24% on heating oil, lower taxable income limits (everything above 5000 euros per year is taxed) special new retro-active unemployment taxes of 3% on top of the other taxes, a new tax of 25% on profits on all profitable enterprises(on top of other taxes) and worst of all a huge retro-active tax on home property (appartments etc) from 3 to 20 euros per square meter irrespective of income, based on the house age (retro-active meaning they asked taxes for 2009, 2010 and 2011 at the same time). All other reform measures were continuously postponed or downgraded.

    It didn't make any sense, since we accepted wage cuts on the basis of the Greek prices falling and the country's businesses becoming more competitive, but the taxes kept the prices up, and at the same time enterprises were going out of business. Greek inflation was still above the German one which didn't make any sense. At first we thought that the taxes policy was our government's fault, that there was reform resistance. Then we heard from Tomsen's lips, about the Troika's plan to raise VAT on the Greek islands to 24% (Tourism services on the islands had a VAT of 13%). Interviews and papers began to leak, showing that the IMF not so much, but Germany especially, insisted more on taxes than cutting government spending, and insisted on increasing tax revenues by 30% in two years. People lost their faith in the program completely. It didn't make any sense, it seemed as if Germany was sure that Greece would default and leave the euro, and just wanted to raise money quickly through taxes to have the smallest possible haircut on PSI+ and and then let Greece default.

    With these feelings and the public opinion wanting to punish the two main parties for bankrupting the country, for not negotiating like Ireland (which kept low business taxes and had an agreement that 50% of the privatization profits would be spent in the economy internally, not like Greece were everything goes to bond payments), and with a portion of the population feeling that Greek sovereignty was being waived to unacceptable degrees, we had a disappointing fragmented 2012 election outcome. Wolfgang Schäuble especially, helped the Greek Nazi party get 7% of the vote, by continuously making snide comments and derogatory statements for weeks, even now he seems to give 3 interviews per day about the Greek problem, and "warn" the Greeks of consequences, as if we don't know about them, making many Greeks prefer to starve by their own decision, than have to waive their sovereignty and listen to his "warnings" and morality tales.

    So all in all, the European comission and the IMF seem to want to bail out and reform the country, and Germany seems to want to cut their losses and then make Greece leave the Euro by not renegotiating and insisting on taxes. At least that's what the Troika shows when the time for each installment comes, and that's the sentiment here.

    1. Could it be that before reading my post you had already categorized me as being brainwashed by the European mass media? To set the record straight: I am married to a Greek, since my retirement we spend about half the year in Greece and I gather most of my information from Greek friends, Greek media and blogs, and official websites of places like the Ministry of Finance and the Bank of Greece. BTW, here is one blog by a Greek which I find particularly interesting:

      I have been from the start a forceful critic of the policies of EU-elites. In short, I think they really blew it (because they misdiagnosed the problem: and I consider them responsible for most everything which happened after 2009 or so (on the other hand, what happened in Greece before then goes on the account of Greece). Regarding the famous financial assistance for Greece, I have always said this: “We – the EU-elites – will use Greece’s balance sheet and tax payers’ money to bail out our banks and we will call that ‘help for Greece’”. More here:

      But perhaps you also want to look at the section “critique of Greece’s handling the crisis” in my blog inventory. The Greek government blew it from the start. When in external payment problems, it is the borrowing country which must take the initiative. The moment the leaders of the borrowing country come across like only fulfilling the demands of foreign creditors, they have lost the support of their population. This is what happened in Greece early on. Papandreou could have avoided that if he had asked the right advisors and listened to them (I know that he had at least one meeting with Bill Rhodes).

      Most of what you criticize about Troika-measures I could subscribe to (and have written about in posts). The Troika only comes up with line-item demands when there is no sensible proposal from the other side (or perhaps when the other side is doing nothing other but waiting for line-item demands). The Troika should not be so much interested in the HOW; they should be interested in the WHAT. And the WHAT is that Greece reduces the budget deficit, be that an increase in revenues or a reduction of expenses or a combination of the two.

      What has Greece done? It has taken the easy road. Increasing taxes and cutting salaries/pensions is easy in the sense that you are dealing with anonymous masses that really can’t do anything about it (until the next election…). When you attack some serious reforms, then you are dealing with powerful interest groups and lobbies who may even be close to you and who might even influence your political future. That’s the hard part and Greece has done virtually nothing of that yet.

      Of course, what was “easy” for the government was “brutal” for the people. They say that there is no other country which has ever effected such brutal austerity measures. But austerity per se is not the answer. It has to be the right kind of austerity:

    2. Part 2

      To give you an example. I believe it was Samaras who proposed a lot of new benefits during the recent campaign and when asked how he would pay for it, one major source of cash would have been cutting government waste to the tune of 30 BEUR. Now ponder that! The primary deficit 2010-11 was about 16 BEUR. Cutting “government waste” would have paid for the primary deficits of 2 years! Put differently: a lot of other hardships would not have had to be imposed when simply cutting that waste already 2 years ago!

      I have always referred to the “silly Troika-measures”. Greece’s government expenditures in total were not so much out of whack when comparing them with other countries. According to Eurostat 2010: 49,5% of GDP in Greece compared with 53% in Austria and 56% in France. In such a situation you don’t focus so much on hitting the “usual suspects” on the revenue side with new burdens (recipients of “normal” salaries and pensions) because that cuts into your revenue base. You try to get new revenues which do not cut so much into your revenue base and which increase fairness. Typical items would be taxes on high salaries and high pensions (I know someone who collects about 10.000 Euro per month in state pensions); luxury taxes; fairly steep real estate taxes on properties above a certain size; and so forth. Whoever can afford a yacht can afford to pay more taxes without reducing his consumption expenditures. I am not suggesting that a “tax-the-rich” strategy can solve all problems but it is one important step in the right direction because it also wins popular support (and because there is so much wealth untaxed in this country!).

      On the expense side, you first cut “government waste” (if it is really so easy to cut 30 BEUR). Then, you cut expenses selectively and focus on redistributing them to make them more just and fair (I call that: “Stop paying pensions to the dead so you don’t have to take money from the living”).

      To make a long story shorter: everything could have been done a lot smarter if only the Greek leadership had been a bit more courageous to attack the real problems of Greece. The burden on the people could have been a lot more smoothened BUT: there is no way that an adjustment could have been avoided. Why? Because the Greek living standard had increased way out of proportion and this was financed with debt. When the debt stops flowing, the living standard has to go down. That’s mathematics, not economics.

      Last point: don’t only blame the Troika. Yes, less than 20% of the rescue loans to the government stayed with the government (the bulk went to pay interest and principal). But still: during 2010-11, roughly 100 BEUR of new foreign capital (net) flowed into Greece, mostly from the ECB. Without that, Greece would have been in chaos a long time ago.