Friday, July 20, 2012

Structural reforms - a buzzword invented by the Troika?

One of my readers recently reminded me of the Lisbon Agenda of 2000. I then remembered this outburst of European forward-thinking. When it was announced in 2000, I thought "I believe it when I see it!" In retrospect one has to say that one never saw all that much of it (with the possible exception of Germany). 

The aim of the Lisbon Agenda was to make the EU, by 2010, "the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion". The year 2010 was two years ago. Has anyone noticed recently that the EU is now the most competitive and dynamic knowledge-based economy in the world capable of economic growth with more and better jobs and greater social cohesion?

It would have been better not to be reminded of this farce because it only brings back to memory that, when it comes to forward-looking behavior, Europeans (not only the Greeks!) are great with words but very short on action and actual results. I remember a conversation I once had with a Mid-Western American about the differences between Americans and Europeans (he had broad business experiences in Europe). His assessment was: "Europeans are so brainy. They analyze things down to the smallest detail but in the process they tend to forget the action. We Americans are more action-oriented, perhaps sometimes the wrong action but, nevertheless, at least some action". 

Perhaps one could have phrased the objective of the Lisbon Agenda a bit differently, for example:

"We plan to build a modern and prosperous Europe: a Europe characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos!"

Replace the word "Europe" with "Greece" and you have the mission statement of the EU Task Force for Greece.

My reader, Bandolero, listed a selection of points of the Lisbon Agenda: 

* better regulation with compulsory business assessment for new legislative proposals;
reforms of social security systems;
* increased investment in R&D and innovation by Member States, universities and industry;
* reductions of company tax levels;
* better education on entrepreneurship;
* more flexible regulation of labour markets;
* implementation of internal market legislation.

In the Lisbon Agenda, they referred to such points as "policy initiatives". The Greeks now refer to them as "memorandum".

The fallacy is to consider efforts like "policy initiatives" or "memoranda" as something one does for others, like private creditors or other governments. If I had to make a policy statement, it would be that "there will always be a better tomorrow as long as a society has its basic values in the right place and the better tomorrow is not for private creditors or other governments; it is for our next generations!"

I can fully understand that Greeks presently no longer share the belief that there will be a better tomorrow. They have good reasons for feeling that way. One can analyze down the the smallest detail why it has come this far. Perhaps one will collect praise for good analyses.

What is required, however, are "policy initiatives" for a better tomorrow. I have expressed my opinion before that Alexis Tsipras has a wonderful way of putting credible policy initiatives into wonderful words. Personally, I think his policy initiatives would fail because they rely on an even greater role of the state in the economy. Others favor his policy initiatives on the grounds that they would really "run Greece into the ground" and then Greeks would be forever cured of romantic leftist dreams. And yet others, very prominent "others" I should add, believe that his policy initiatives are actually good ones.

We are not at that point just yet. The new government has laid out policy initiatives which remind me a bit of the Lisbon Agenda. If those policy initiatives take the course of the Lisbon Agenda, you might as well get the red carpet ready for Alexis Tsipras. If, however, good words are converted into excellent actions, there is still a chance that the better tomorrow will come about the "normal" way (rather than via the Alexis-Tsipras-cure).


  1. P.S.: Greece even if tomorrow was to drop salaries to bulgarian levels, drop corporate tax to 10%, drop VAT to 5%, cut bureaucratic hurdles, will still not become world's "hot spot", as long as it's not clear whether will stay in euro or not. This is plain simple and explains why investments dropped 40% in 2011 and greek companies keep fleeing, despite the lowered work cost and, well, some improvements in bureaucracy.

    You don't need a PhD to see that. It's like these futile plans of the goverment to "give amnesty to return capital from abroads to greek banks". Who will do it? Bring back euros in order to take back drachmas maybe??? Only a fool would do that. Or the hilarious attempts of Mr. Venizelos to convince greeks to keep their money in the bank account saying things like "now after the PSI there is no default risk anymore and we are already seeing large influx of deposits coming back".

    Maybe an elder lady living in the mountain would believe that. I 'd rather have my money sitting on a german or dutch state title giving me nothing, than trust my money on Mr. Venizelos and the greek bankers who try to lure morons with 7% interest bait.


    1. Such an easy solution! One simply asks the EU to cover the political risk of investing in Greece, including the risk of a Grexit. That would cost the EU the giant effort of one signature; no more.

    2. Easy solution here maybe. Have you heard Mr. Schauble's solution? I am an investor. Who should i pay attention to? You or Mr. Schauble?

      The other day i was amazed with Mr. Schauble saying the PSI was a marvellous success... I can't understand how he thinks. Success for WHO? For the german banks that had the time to unload their bonds to the ECB or the secondary market in the meantime? For Greece that had net debt reduction of 27 bln and stayed at 165% debt? For the other troubled southern countries, that now have scared investors fearing to buy their bonds? If it was such a success, whey did they abbandon the idea of doing it for anyone else (it will be "only one case only" as they said... and the markets surely believe them :)).

      Political risk, is one thing. Economic risk is another. Suppose Mr. Tsipras goes wild and starts hammering foreign investors (they 've said much worse during the elections) or suppose i want to buy a piece of land to build a hotel, but if Greece goes to the drachma, land property loses half of its present value. Should i buy now, while i can wait to buy at 50% lower later? How is a political guarantee saving me from that? And how much can the EU guarantee? EU can't even guarantee that they euro will still be there after 1 year. They can guarantee an investment in a country which can go anywhich way? KKE is in favour of leaving the EU. And they dream of revolution. Golden Dawn the same. SYRIZA, is a mad house. You have a little bit of everything. People that want the EU, others that don't, others want EU with euro, others EU without euro, others want NATO, others don't want NATO, at the end if chaos reigns, you may even end up with dictatorship. On what authority can the EU guarantee anything in such an enviroment?

      The Hellinikon case is the most blatant. It's a "filet". It can become a goldmine. PASOK was trying to give it to the Qataris since 2009. A minister was working just on that and on bringing other investments. Hellenikon in still there waiting...


    3. Ah, a yet another long post of mine "was eaten" (my browser does that unfortunately).

      To make a very small summary. To an investor, there is a political and an economic risk. Current EU official position is: "Greece reforms, runs primary surpluses, gains markets in 2017, lowers debt to 2020-120%"

      Here are both politican and economic risks that nobody can give warranties. EU can't even make people believe that the euro will be 100% here after 1 year.

      In Greece, anything can happen. From SYRIZA going Chavez to KKE obtaining it's October revolution, to dictatorship. Nobody can give any warranties against that. To give you an idea. SYRIZA asked KKE to collaborate for the elections. KKE replied "no", because SYRIZA "isn't trully revolutionary" and that KKE "would only accept to take govermental position after popular revolution".

      So, you have, an EU plan , which the 98% of investors sees no good for his plans (why not wait for after the drachma and take piece of land 50% cheaper to build a hotel) because of economic risk and you also have a political risk, against which nobody can guarantee either (assuming they are willing).

      Hellenikon alone is blatant example. Qataris were almost certain to buy it. PASOK had a minister working on Hellenikon full time. Qataris once saw the situation thought "better wait". Do you blame them? If Greece goes to the drachma, they will buy it at half the price. So why not wait and see what happens.


  2. Dear Mr. Kastner,

    Greece must make reforms, be it with euro, drachma or any other way you call a currency.

    Simply,as economy stands today, they are not sufficient to do what they are supposed. Reforms won't give access to the markets to Greece by 2017 as troika and Mr. Schauble claim.

    Reforms will bring only little foreign investments, as long as the fiscal situation of Greece isn't clear. Which includes debt too. If the EU has some secret plan to say, restructure the greek debt spectacularly in the near future, is something that will change perception for both foreign and greek investments, but as it is now, Greece can roll on the floor, offer an investor also a pound of flesh, but only very select investments will come, with low profit for Greece.

    That's the hole point. And reforms, combined with internal devaluation to no end and results, brings popular resistance to the "whole package" grow.

    This is why i accuse above all Mr. Papandreou (and also the troika), which had big political capital to spend in the first years, where the people were accepting many things without protest (because they believed that the plan was the light in the tunnel), but Mr. Papandreou wasted it on horizontal slashes, easy reforms, some decent reforms, but little reform of the public sector.

    In 1922, the Greeks came out of the tents they were living, because they knew that after hitting the bottom, you can only go up and the direction was clear. They didn't just start builing their own new houses, after finishing, they were also going to help the neighbour to build theirs, becuase they could see the result and could see where this was leading. Today they can't see where this is leading.

    Mr. Tsipras didn't go from 4% to 27% in 2 years, because suddently more than 1 million Greeks became extreme leftists overnight. They simply don't believe that the internal devaluation is any better than even the Grexit. They think it's worse.


  3. Few points Klaus

    1) My perception for the previous article "Don't overplay the soft point of Germans!" was to track the principles under which the euro was introduced and the issues of specific period and how -differently-everybody perceived them.
    I think that euro highlighted also the need to write down and geo-political issues not only strictly financial.
    However not with right order and with practical(German) determination.
    2)The Lisbon Treaty agenda i believe should start after structural reforms, never started in Gr (Lisbon Treaty mean to build web sites with 1 mil €!!! with free software)
    3)All reforms made in Ger was able to implement more easily because recession was affordable, always able to choose good timing the Ger and almost the only to take practical actions.
    4)Althought Greek i agree with most of your articles(minus Target2 and few other). The point here in Gr is that we haven't people (like you eg but Varoufakis to talk about world imbalances)to explain practically with zest and real interest why many things should have to change.
    Troika should understand first the psyhosinthesis of Greeks and with a parallel public dialogue to underline the reforms necessary for the good of country. They should speak to the heart and to average people not cold and professionally from distance but with spirit of understanding, they should explain practically.
    Different people different approach.

    5)Ellinikon and others to come

    6)There is an efford althought people and economy not with German Austrian Holland reflexes, potential, experience structure and disipline.


    1. When I started writing about the Greek problem, my mindset was that of a large family where one member got into trouble. Now the whole family would get together and figure out ways how to help that member to help himself to get out of his problems.

      All the EU-elites said to that family member was "we cut your allowance" and that disappointed me very much.

      Then I expected the troubled family member to suggest to the family what they could do for him so that he could help himself, assuring that he would do everything he could do on his own.

      All the Greeks said was "we are in trouble because of you and not because of us, so you have to help us". That, too, disappointed me very much.

      Where does that leave me now? Well, quite disappointed with that family!

    2. Dear Mr. Kastner,

      When the EU was about to meet, the politicians of the time, had the good sense, to try to inspire something to the people (the Europe of the people and values etc). Now, that may have been a political rhetoric, but if, cultivated in the subsequent years towards not just a bankers' playground but also in a project to boost a european common identity, MAYBE, a more "family-like" climate would have been present now and would make things easier.

      But, all the rhetoric was abbandoned and everyone was looking only at the shiny new euros. Ask a small child to tell you how many members are in the EU or the euro and most probably will make mistake. I have had several occasions of Italians which didn't know that Greece was in the eurozone and Greece is next door, not in Scandinavia.

      At that point, expecting anything else, is futile. The struggle between the creditor and the debtor is old as man's history and this doesn't change. There is always conflict of interest between the two and each part is supposed to play his role. Some play it well, others (mr. Papandreou), didn't... And you live with the conseguences.

      An Italian friend of mine, of the left, is also disillusioned, especially after the Irish case. He told me "Spain is A series member, Ireland was B series member". And it's true... If Spain hadn't asked ESM recap for banks, Ireland would never dream to get this kind of treatment.

      So, families don't make distinctions between children. EU is not a family, so why shed a tear for a utopia?


  4. Everybody wants "structural reforms". However they mean different things. If structural reforms means that the state decides which contracts are to be respected and which are just a piece of paper or labelling outright fraud 'in the public interest', then we might as well call it as it is and dispense with that orwellian situation. Especially when all this leads to an always worsening economic(and not only) situation

  5. " Personally, I think his policy initiatives would fail because they rely on an even greater role of the state in the economy."

    Ah, this is only because you 've heard ONE DAY's of Mr. Tsipras' policies (they change according to the weather) and you don't know the DETAILS of his programs as explained in contradictory statements from his aspiring ministers.

    It would be too long to write down all the hilarious statements made by prominent SYRIZA MPs before the election, but i will reveal to you Mr. Tsipras' secret weapon. The secret 165 bln euros that will allow Mr. Tsipras to make his huge public investment program.

    Courtesy of Mr. Stratoulis (prominent SYRIZA MP):

    "The banks contain already 165 bln in deposits of greek citizens. These belong to us, not the banks. With immediate public control over the banks, we guarantee the deposits and use this money for growth the restructuring of the production basis of the country".

    With 165 bln, you can do miracles in Greece! Ahahaha!


    1. Frankly, if this is what Mr. Stratoulis said, it is not totally off the mark.

      The issue is "forced loans" whereby in times of absolute crisis when the state urgently needs money, the government forces depositors to buy its bonds with some of their deposits. Happened in Germany several times, I believe, during the Nazis. Wars have been financed with "forced loans". In fact, I believe the Nazis used this instrument to have countries which they invaded pay for the invasion (and more). Actually, there is still the issue of a "forced loan" which Greece had to make to the Nazis during WW2.

      A major - and very reputable - German institute has recently come up with the idea of implementing "forced loans" on rich people to reduce bank debt, whereby "rich" was defined as properties over 250 TEUR! The institute meant it for ALL countries beginning with Germany. First, one would have thought that there would be outrage against the institute for having lost its marbles but, instead, the proposal was commented seriously by several places. Then Schäuble came up to give his opinion which was "forced loans" are a good idea but only for the problem countries which need money. And so forth...

      The way you quote Mr. Stratoulis it obviously doesn't make sense because the state cannot use depositors' monies as though they were his. But if he had said "we will work with 'forced loans'" (i. e. force depositors to buy new bonds for, say, 25% of their deposits), then it would not be an instrument which is totally unheard of. As I said, it has been done many times before.

    2. Yes, forced loans have occured in Greece too in emergency situations. Forced loans were proposed by another SYRIZA MP, for those with income over 20.000 euros. He proposed that they give 100 euros monthly as forced loan to lower income Greeks (like night club owners,lawyers,doctors, etc, i suppose, since they all appear poor). But this was quickly covered up by other MPs. Mr. Stratoulis is of another theory. I translated Mr. Stratoylis literally. You can google translate it yourself:

      "Οι τράπεζες έχουν, ήδη, 165 δισ. σε καταθέσεις των Ελλήνων πολιτών. Αυτές είναι δικές μας, όχι των τραπεζών", είπε ο κ. Στρατούλης και αποκάλυψε ότι: "Με άμεσο δημόσιο έλεγχο των τραπεζών, εγγυόμαστε τις καταθέσεις των πολιτών και χρησιμοποιούμε αυτά τα χρήματα για ανάπτυξη και παραγωγική ανασυγκρότηση της χώρας".

      Mr. Stratoulis implies exactly that they take control of the banks, which really have 165bln inside and give them for investments (they are already given, but...), while guaranteing them.

      Mr. Kastner, the theoretical figure of 165 bln of available deposits exists only in Mr. Stratoulis' mind. The greek banks have already used their liquidity in investments with dubious results.Daily there are mortgages that can't be paid and confiscated houses aren't sold, while companies go belly up. They currently still await to be recapitalized. Mr. Stratoulis ignores "leverage".He thinks that there are 165 bln inside the banks, sitting idle, waiting for him to "put them to good use", without "ceasing" them.

      Or to clear more:

      Σε καμία περίπτωση δεν θα δεσμεύσουμε τις καταθέσεις των πολιτών. Αντίθετα θα τις αξιοποιήσουμε, μαζί με τα χρήματα των τραπεζών για την ανάπτυξη και την παραγωγική ανασυγκρότηση της χώρας μας.

      "In no way will we cease the deposits of the people. On the contrary we will put them to good use, together with the money of the banks, for growth and productive restructuring of the country".

      Not so clear? I thought so.

      The whole situation reminds me a bit of the greek state "insurance" on bank deposits, up to 100.000 euros per person. The greek state is in no position to guarantee for these sums.(in a serious manner).