Friday, August 15, 2014

Olympic Errors Since Greece Joined the Eurozone

"In a sense the 2004 Olympics mirrored Greece’s Euro membership: A progressive vision that was undone by a lack of foresight and poor, bordering on criminal, management. Greek taxpayers, who were largely the victims rather than perpetrators, are the ones footing the bill 10 years later. Nobody else has accepted any responsibility for what went wrong. For Greek taxpayers there are no gold medals, juicy public contracts, fat salaries or fame. As a result of others’ failings, they cannot even see a finishing line in sight. This more than anything else tarnishes the legacy of the Athens Games".

This is the conclusion of a brilliant article by Nick Malkoutzis in Macropolis. Contrary to most commentaries, it does not make the 2004 Olympics the prototype of Greek failings (except for the event itself). Instead, it puts the Olympics into the context of time; the symptom of something rather than the cause of it. "The Athens Games epitomised the structural problems - such as poor political management, lack of transparency, inadequate planning and fiscal irresponsibility - that bedevilled the country for many years before it finally buckled in 2009. They arrived after Euro entry, when austerity was set aside and purse strings were loosened, backed by cheaper but unsustainable debt".

There are times when individuals seem to lose their senses and there are times when entire societies seem to lose their senses. How they lose their senses seems to be a cultural thing. When the Germans lost their senses in the 20th century, they tended to become violent and evil. When American financial players began to lose their senses by the late 1990s, they fired up the bubble only to be followed by the sub-prime bubble. When the Greeks began losing their senses with the arrival of cheap money after Euro entry, they focused on what they do best --- enjoy life to the fullest. 

If I had to pick a society where I could not imagine that they would ever lose their senses, I would have to pick the Swiss. The Swiss just don't seem to be capable of ever getting carried away with something. Whereas an Islamic terrorist might lose his mind when he arrives in heaven and sees the 71 virgins, a Swiss arriving in heaven might first of all count the virgins to make sure that they number 71. Perhaps that is their Protestant culture; perhaps it is something else. 

I wonder what Greek leadership would have said if, back in 2000, someone had told them that, over the next 10 years, a total of 300 BEUR of cheap foreign money would be showered upon the country. While they would presumably have been very happy about that, I would think that at least the serious people among them would have been concerned what such a tsunami of cheap money could do if its application is not steered in the right direction.

The trouble with capital flows during the build-up of a bubble is that they do not come all at once. They come in stages with increasing amounts at each stage. And every time a new stage is successfully ignited, it reassures the players that everything is fine and dandy. The 2004 Olympics were a huge such stage; a stage so huge that some people might have thought that this would be the end of the line in Greece's ability to attract more cheap money for undefined purposes. Instead, it only accelerated the process: "The Athens Games fitted into a broader pattern of the time, when the magnificence of the “grand projects” of the period obscured the finer, but crucial, detail".

On one hand, the entire Greek society benefitted from that tsunami of cheap money. When 300 BEUR are showered upon an economy the size of Greece's in the 2000s, the trickle-down effect makes sure that at least some of it lands in the most remote corners of society. On the other hand, even if wage/salary earners doubled or tripled their wages/salaries and even if pensioners doubled or tripled their pensions, they won't become multi-millionaires because of it, certainly not within 10 years. That's not the big money.

If one could look at all Greeks who have a net worth of, say, one million Euro or more today and if one could compare their combined net worth of today to the combined net worth they had 10 years ago, one would probably find that the increase in net worth accounts for a very large portion of the debt which Greece built up during these years. That's a guess of mine but I would bet money on it!

What Greece has seen since the Euro is a huge transfer of wealth to the country from abroad. Why is sovereign debt a transfer of wealth? Because all the money which the state borrows the state spends and to the extent that the state spends its money domestically, it generates income for private economic agents within the country. That might still have been ok if the private income triggered by the state's spending had been evenly distributed. The truth is that the bulk of that income went to a minority of the population.

When all is said and done about Greece's current misery, one could paraphrase Churchill and say: "Never in history have so many paid for the wealth of so few!"
In a sense the Olympics mirrored Greece’s euro membership: A progressive vision that was undone by a lack of foresight and poor, bordering on criminal, management. - See more at:


  1. The fact that the middle class cannot become multi-millionaires when their salaries are doubled or tripled does not mean that the money did not go there. They (middle class) spent the money on vacations, shopping, private schools for the kids, Universities for the kids and on and on. They had no chance of becoming millionaires because they were not very frugal (to put it mildly).

    An extra 200 Euros per household means:
    3 mill homes * 10 years * 12 months * 200 Euros = 72 Bill;

    Not exactly cheap change. My guess is that it was way more than 200 Euros/Household. Pagalos was right after all.

    PS: Any reference on the 300 BEUR?

    1. Greece's foreign debt increased from 121 BEUR at Y/E 2001 to 404 BEUR at Y/E 2010, i. e. plus 283 BEUR. That's only the debt part. Add to that EU subsidies and perhaps a little foreign investment and you get quickly to 300 BEUR, probably even more.

    2. Does this calculation exclude the outflows due to interest paid? That should be about 130 BEUR (assuming linearly increasing debt). A billion here, a billion there and soon we are talking about real money I guess.

    3. You have to look at this the following way: if at the end of 10 years, foreign debt is 283 BEUR higher than it was at the beginning, then a net additional amount of 283 BEUR has come into the country.

      What the country did with that is largely explained through the current account whose deficit absorbed 197 BEUR during the period. Interest expense and EU subsidies are in the current account. Perhaps the following link can explain this better:

  2. I have a few observations.

    1) It wasn't just the cheap capital, but rather the cheap capital combined with the strong exchange-rate. Put simpply, had Greece attempted such a credit binge during the drachma era (with the resulting trade deterioration, a whopping 15% of GDP) the drachma exchange-rate would collapse. With the euro, not only it didn't collapse, but rather it strengthened.

    2) It wasn't just Greece. The same thing happened to a number of Eurozone countries, albeit to a lesser degree, but with no less dire effects.

    3) Monetary union prohibits the usual treatments for such a crisis, namely external devaluation and inflationary debt relief. In the meantime, internal devaluation has proven to be inadequate.

    4) Global wise, we are at a crossroads. Japan has been stagnating for decades now. The recovery in the US and the Great Britain is humble. Core Eurozone countries like Germany, France and Italy are relapsing into recession. Why is that? It's because of record private-debt which hampers demand. It's also because surpluses aren't invested back into deficit regions. The system is broken. My guess is that the global monetary system will change at some point, just like it changed in the mid-70's.

    5) Pan-european deleveraging is the wrong policy. That much should be admitted and changed. If not, then the monetary union should dissolve in an orderly manner. At least then each country would follow the economic policy it desires. It won't be the first time that a European project fails. The ERM famously failed in the early 90's.

    6) You can't have a monetary union without fiscal transfers of some sort. That much should be admitted also. The Eurozone is fighting a battle it can't win.

    7) Let us remember that imbalances in the Eurozone were initially seen as a good thing.

    I quote:

    "Those who created the euro were promoting it on the basis that balance of payments constraints would disappear at the national level and that capital flows would lead to a convergence of income levels within the euro area. Current account deficits, real effective exchange rate appreciations and higher inflation between periphery and core would be healthy by-products, they claimed."

    8) The euro is still overvalued for many Eurozone countries while undervalued for others. The Eurozone imbalances might have receded, but the ones with the rest of the world remain. It's absurd that the currency that Greece uses is stronger than the dollar.

    1. I remember being stunned at the statement which you quote at the time I read the Macropolis article. In fact, I inquired at Macropolis what the basis for that statement was but never got an answer. Today, we know that those 'healthy by-products' were the cause of all the trouble.

      Regarding current accounts: there is nothing wrong with a current account deficit per se unless it becomes huge and structural. Developing economies normally require current account deficits because they need to import so much machinery/equipment and other goods to get their economies developed. Over time, these imports will generate more domestic output and self-achieved growth. The other extreme would be an economy which takes up long-term debt to finance the imports of consumption products. That's like taking up a loan to finance the vacation. When the vacation is over, the loan is still there. A huge and structural current account deficit is normally a sign for big trouble, not only financially, because it means the the domestic economy is far from being able to produce the products/services which the domestic consumers want to have. Actually, when you import products which you could just as well make at home, you are exporting jobs, wage/income taxes and social contributions, all revenues for the state.

      BTW, I recently saw figures about Turkey's current account deficits. Staggering! But I don't know what causes it. Perhaps they are importing so many capital goods. Perhaps they are financing it not with debt but with foreign investment. But if the cause is consumption imports and if they are financing it with longer term debt, they are headed for trouble sooner or later.

      I guess I don't have to talk about the other two, real effective exchange rate appreciations and higher South/North inflation, because whoever said that wasn't playing with a full deck of cards.

      I really would like to know who are 'those who created the Euro and felt that way'!

  3. It was not a shower of money that trickled down, it was a deluge that showered all with money. If a perfunctory check by SDOE reveals 16000 Greek bank account with more than 1 million EURO;s (Greek Reporter, 5 August, 2014) it did not trickle, it poured. Now, we are not talking of the account holder's net worth, we are talking about cash only. We are also not talking about the smarter account holders who have tranferred the money abroad.
    I have never subscribed to the myth about the underprivileged Greek middle class, farmers and wage earners who were the victims of 300 politicians and 10 oligarchs. It was a silent collusion of the majority of voters, "we are onto something good, let's ride this train as long as we can".
    As for how the money was distributed, I see that as a greek internal problem. BTW, it was most likely distributed as fair as in any major bank.

  4. Of cause Pangalos was right "mizi ta fagame".