Wednesday, March 25, 2015

Greece: Solidarity and Adjustment In Times Of Crisis

This is a 140-page study made by Tassos Giannitsis and Stavros Zografakis for the Macroeconomic Policy Institute of the Hans-Boeckler Foundation. Below is the abstract: 

"This report attempts to examine the impact of the crisis and crisis policies on incomes, inequality and poverty in Greece. Based on extensive income and tax data, it investigates changes in incomes, direct, indirect and property taxation and their incidence between 2008 and 2012-13, their impact on pre- and post-tax inequality and the resulting social reclassifications within the Greek society. The report is distinguishing income by sources at the deciles level, including the top 1% and 0.1%, household and individual income while focusing also on the sub-groups of the ‘same households’ and the ‘same individuals’. Furthermore, the analysis combines unemployment and income data and uses an ‘index of despair’ reflecting the pressure felt by households hit from salary drop and unemployment. The findings suggest that pauperisation hit large parts of the society, that policies had very differentiated effects on different groups and that, therefore, average values obscure contrasting changes in inequality regarding particular sub-groups, that during the crisis all income classes comprise winners and losers and last, but not least, that many macro-variables and social indicators were the result of a deficient crisis management approach and ideological inflexibility coupled to established political interests, making the exit from the crisis more complicated and painful. The findings of this analysis should be assessed in the light of the severe economic depression caused by the Troika‘s policies".

As interesting as the study is, the last sentence of the abstract sets the wrong tone because it is biased (and wrong, too!). One always has to remember what really caused the economic depression. The Greek economy, from 2001-2009, had become an engine whose performance was a direct function of the amount of gasoline which was put into it. That gasoline was the capital inflows from abroad which averaged over 30 BEUR annually during the period. The depression was caused by the fact that the capital inflows no longer came voluntarily and the involuntary capital inflows ('rescue loans') were reduced to about 20 BEUR in 2011 and about 10 BEUR in 2012. Thereafter, Greece needed capital inflows only for the payment of interest. Put differently, the depression was caused by the unwillingness of the Troika to lend more than the roughly 40 BEUR which were put at Greece's disposal from 2010-12. The conditions of the 'rescue loans' (i. e. primary surplus, etc.) had to be set in order to achieve the Troika's objective of not having to provide Fresh Money for Greece's operational needs after 2012.

The extreme depression could only have been softened if the Troika had been prepared to put more than the roughly 40 BEUR at Greece's disposal. And yes, more intelligent Troika measures could also have ameliorated the situation but this would not have had a major impact on the objective fact, namely: if one is addicted to alcohol but the alcohol supply disappears, there are enormous deprivation pains.


  1. It is of an utterly high importance to inform, and to check what is "told", or written. Because of too much wrong information in Greece, and from there exported as "true", at least not labeled as "untrue" to other countries, a lie gets the space to influence minds, and opinions.
    That is dangerous.

    Therefore I thank you for this post, and for offering your time to study the subject to be able to reflect on it, to correct, so that the train named EU does not get an accident because of a wrong railroad switch, caused by not professional railroad workers, or by professional railroad saboteurs.

  2. Hmm. What caused the Greek depression. Structurally, one could say it was the unwise decision to join the eurozone (heavily promoted by France and Germany), followed by years of incompetent economic management by both Pasok and ND. However, all that this did was create the macroeconomic conditions (such as massive budget deficits and trade imbalances) that when there was the global banking crisis (caused by the extreme greed and incompetence of banks across the world), Greece was the first to be hit.

    The eurozone chose to priorities northern banks over the Greek people. That is the clear start of the depression.

    Placing the blame on Greeks for this is far from painting a balanced picture. The most culpable are perhaps the national politicians, but let us not forget the banks who are the main cause of developed capitalism's ongoing crisis. If there are any "alcoholics" in this story, they reside in banking and financial instutions across the world: their addiction to easy money and quick profits is far more threatening to the world than the traditional incompetence of Greek politicians.

    1. I focused on the 'what'. You now talk about why the 'what' occurred. The 'what' is not at all unique to Greece. On the contrary, it has happened to many, many developing (or rather: emerging) countries in the last decades. In essence: periods of real or perceived stability take place and foreign capital races into the country; then first economic clouds show up on the horizon and foreign capital literally flees the country. Sudden stop occurs.

      Please forget this silly theory that Greece was a victim of the global financial crisis. The financial crisis began in July 2007 with the involvency of the German IKB and it exploded after Lehman in September 2008. Greece and its banks were moving along swimmingly for another year after that while countries and banks in Northern Europe were in deep trouble and only a stand-still agreement saved Eastern Europe from going under. No one at that time worried about the South, not even about Greece. I remember reading an analysis in early 2009, the gist of which was that Greece would remain virtually unaffected by the global financial crisis because its banks had not gotten involved in sub-prime and similar stuff.

      Greece was hit virtually the day after the Papandreou government announced the revised/corrected budget figures. That was Greece's sudden stop. One could actually ask the question whether so much panic would have broken out about the rest of Southern Europe if Greece hadn't been such a spectacular example of incompetent governance and failure.

      If it makes you feel better, please continue to believe that the Eurozone chose to prioritize Northern banks over the Greek people and don't let yourself be confused by facts. From 2010-12, those were the critical first years because Greece had a primary deficit, the Eurozone provided 41 BEUR to the 'Greek people'. That, por favor, is not chickenfeed. Offhand, I cannot think of any country where, proportionally, so much money was provided to 'the people' to make ends meet.

      Yes, the Eurozone chose to spend another 206 BEUR during this period to enable Greece to service its debt so that the lenders could survive (as well as Greece). I have often called this the 'prodigal sin' of EU elites because it ripped off the tax payers of the lending countries. Had the Eurozone used those 206 BEUR to bail-out the banks directly and not via Greece, those tax payers would have gotten bank equity in exchange. So the ripped-off'ers were the tax payers of the lending countries AND NOT Greece!

      All that meant for Greece was a change of obligors. In fact, it meant a significant improvement for Greece because the new lenders (Troika) offered tenors and rates which were FAR below market conditions. GREECE'S DEBT WAS UNAFFFECTED BY THIS CHANGE OF OBLIGORS!!!

      Greece's 'alcohol' was the tsunami of foreign capital inflows. I don't remember how often I have cited the below analogy.

      If a poor man hits a 10 MEUR jackpot and decides to spend it all on consumption and a good life, may spend 1 MEUR every year. All the while, not only he will live well but the community where he spends his money will also enjoy a boom (i. e. 'GDP growth'). After 10 years, when the money is gone, the man has to return to the standard of living of 10 years before and the boom in his community will also cave in dramatically. Unless, of course, the man hits another jackpot...

      Greece's problem was dramatically augmented by the fact that the source of its money was not a jackpot but interest-bearing debt capital instead.

      I will make a prediction: as long as Greeks convince themselves of the victim's narrative you describe above, there will not be any material change and improvement to Greece's development.

    2. @kleingutMarch 26, 2015 at 10:45 AM

      Klaus, I can not resist asking why you can come to _predictions_?? ;)

      And do you have any funded doubts that the majority of the Greek population will for a very long time prefer this narrative to any other (even more funded) reasoning?


    3. Just to clarify my own position. I am not saying at all that Greece should do nothing to escape its predicament, by invoking a victimology argument of sorts. I am pointing out that there are several major structural factors that have led to the Greek economic depression. The major one is the very negative impact of euro membership on the economy, largely caused by the failure of successive governments to manage access to cheap capital in a healthy way. It is not necessary to adopt the moralising Germanic tone in order to criticise lack of policy direction in the 2000s. Nor is it acceptable to blame ordinary Greeks for behaving quite predictably as ordinary Greeks. (We have had this argument before, where I do not concur with your support of the Pangalos idea that "we ate it all together".)

      But the basic issue is what Greece can do now, tied into onerous conditions that are not permissive of reform and economic development, and certainly not creating a stable environment where FDI could be promoted. I do not see many options domestically, with the situation being heavily reliant on external funding at this time. I am still waiting to read any sensible ideas of what could be done by the Syriza government, which has its own pressing political priority of social protection of the most vulnerable. It would be political suicide for them to abandon that principle, which means that a default is looking increasingly likely (especially as the Germans are being rather nasty about returning overpayments and allowing any flexibility in the short term).

    4. @ Xenos at 6.40
      What could pre-SYRIZA Greece have done since 2010? It could have said: "We know the Doing Business Report which ranks Greece as the least attractive country in the EU to do business. We will urgently go through each category and implement - with the help of the EU Task Force - measures to make Greece a far more attractive place to do business in order to attract foreign investment".

      What could SYRIZA have done since January 25? Quite frankly, they could have done solid hard work instead of only giving speeches and offending all sorts of people, particularly foreign investors. The OECD reforms which Varoufakis says he agrees with 70% of them have been known for ages. Before going to any meeting with EU leaders, I would have done my homework. I would have put together a compromise between OECD reforms, SYRIZA plans and Troika desires. No one ever gets 100% satisfied in a negotiation. So I would have put together a llist which makes everyone equally unhappy about not reaching the 100%. Perhaps 80% overall completion. And with that 'homework', I would have gone to the meetings to impress my audience with 'our' program of which we would profess to be the 'owners'.

      Obviously, this is just a short synopsis but I could write at length what SYRIZA could have done so far and what they could still do. As far as I know, they haven't even presented a cash position as yet.

      PS: as a footnote, Yanis Varoufakis prepared for over 4 years for his job as FinMin. It's all in his blog. Apparently, he spent so much time on theories that he found no time to work on practical matters. I can't believe how unprepared he and Tsipras have come across so far.

    5. Klaus: I agree that Varoufakis is a theoretician. But surely that is his principal role, to carve out a better position for Greece within the eurozone instead of the suicidal austerity policies imposed by Germany and others? I would never recommend him for modernisation of the Greek economy, because that is not his area of expertise.

      As far as actual economic reforms are concerned, the primary issue is how to make the Greek economy function as a productive and exporting economy. That will clearly require some FDI, along with domestic access to capital and maybe some technical support from other countries. But in order to make Greece a competitive and attractive market economy rather a lot of things have to change. Those things reside in the Greek political elites, most especially Syriza at this time, and also in the minds of Greek businesses and banks and potential investors. Varoufakis cannot implement such ideological changes -- they have to be socially derived. Admittedly he could start to campaign for them, but I doubt that he is allowed to do so. As always, political constraints are shaping Greece -- economic issues take second place. This is the legacy of a country that was never part of capitalism, and has difficulty in envisioning any role in the global system. Greece needs a renaissance, but the EurGroup and others are not helping it to achieve one, with their formulaic market liberalisations, privatisations and other neoliberal dogmas.

  3. >"And yes, more intelligent Troika measures could also have ameliorated the situation..."

    I always wonder what part of the measures have been specified (in detail?) by the Troika and what part was invented and implemented by the Greek government itself?


  4. Your comments seem very convincing to me.
    As for the report itself, it should be noted that the Hans Boeckler Foundation is a trade union, leftist outfit, and that is likely to have some impact on the content of the report (as is also suggested by the last sentence, which you justly criticize).

    "The objective of this research is to explore the distributional impact of the adjustment policies implemented in Greece". I see this as measuring the domestic Greek solidarity. The Troika did not make Greek policies, they agreed the overall goals and the timelines with the Greek government(s). When Greek government(s) indicated that they would not make adjustments, the Troika gave them a list to pick from. The result of their choices is described in this report.
    The present Greek government is doing the same as the previous ones, this time with "a strong democratic mandate" from the Greek voters. The Greek voters have voted "no to adjustments, Europe must adjust". Or as one commentator remarked "they have voted themselves rich". That suggests to me a strong sense of entitlement and/or a weak sense of justice and fairness.

  6. The well-known journalist Joanna Kakissis asked whether Greece is currently in a true 'humanitarian crisis' and received interesting replies:

  7. The governments feet dragging and victim role is part of the same logic, and it goes like this: If we don't do anything we cannot make mistakes. if, in spite of that, things go belly-up, we are victims of the others. So, don't expect ownership, which implies responsibility. I miss the acceptance of the fact that mistakes are unavoidable and acceptable, in private, business and political life. In Greece mistakes are denied, lied about or blamed on others.
    Q: How can you adjust to a changing world if you don't admit mistakes?
    A: You can't.
    I have had American bosses at projects, most good, and the first one outstanding. Like Klaus I got exposed to American business culture when I was young, at that time it was very different from the European one. My first American boss took me out for lunch after the project kick-off meeting. Among other things he told me that he expected 10% of my decisions to be wrong, if not, I was wasting too much time on details. When we departed he said that he would be pleased if the 10% wrong decisions were the least expensive. USA taught me a lot, if I should boil it down it's this: It's OK to fail in a project or business venture, if you are honest about it and admit it USA will always give you another chance. If you whine, lie about it or blame others, you are out. Avoid working with victims, if you do so you nominate your own role. This sentiment (and good institutions) provides an incubator for innovation and entrepreneurship.

    1. I guess everyone who has had exposure to Americans in his younger years (and much time ago) can totally associate with your story. Except in my case the ratio was lower. The Head of Europe in Chicago made it a point to have lunch with all 'young Europeans' who had come to head office for the 1-year program. As we found after we checked with each other, he had a similar speech for each one of us: "You are here to establish your personal credibility. Without personal credibility you won't be able to get anything done. Mind you: it takes a lot of time to build up personal credibility and you can destroy it very quickly. And, by the way, if only 60% of my decisions are good ones, I am already on the winning side. So keep in mind: you won't become a good banker until you have made your first bad loan and worked it out".

      At age 24, and having been raised in a small, conservative Austrian town, that was quite somthing to chew on for me...

  8. @Klaus.
    For a middle aged banker with a good track record, 60:40 odds are very respectable.
    For a bookie doing thousands of bets a day, 51:49 can be very profitable.
    For a young engineer doing his first major project, 90:10 is heady stuff that makes him work very hard.