Greece is dying a slow death, says Jens Bastian, 50, economist, born in Germany and living in Greece since 13 years . Despite a courageous program from the PASOK government that inherited a near-default country from previous Kostas Karamanlis New Democracy government (from March 2004 till October 2009).
The present program inspired in IMF core ingredients will cost 1.5 to 2 points in the growth rate. But the financial markets – particularly the sovereign credit default swaps market – and the political fights inside the European Union core countries didn’t give a hand to Prime Minister George Papandreou.
In the domestic front, the socialist government has a complex political problem: “Greek society is not yet prepared for nor convinced about the merits of this odyssey. The government must establish new alliances, hold its ground and above all explain towards an unconvinced population why it is necessary to urgently change course.”
Jens Bastian is senior research fellow at ELIAMEP- Helenic Foundation for European and Foreign Policy, based in Athens, Greece. Born in Germany, he is living in Greece since 13 years. Previously he worked at the European Agency for Reconstruction (EAR) from July 2005 to end-2008. He was responsible for economic research and policy analysis, assisting in program coordination and the management of the Agency’s projects in the field of economic development and institution building in South Eastern Europe. Prior to his engagement with the EAR he was a Senior Investment Analyst for Southeastern Europe at the private sector financial institution Alpha Bank in Athens Greece between 1998 and mid-2005. Before moving to Greece he was DAAD lecturer in the Political Economy of Transition for Central and Eastern Europe at the London School of Economics in London, U.K. He holds a Ph.D. in Social and Political Science from the European University Institute in Florence, Italy. Jens is Managing Editor of the Journal of Southeast European and Black Sea Studies (Taylor & Francis, London). ELIAMEP’s mission is to provide a forum for public debate on issues of European integration and international relations and to conduct scientific research that contributes to a better informed and documented knowledge of the European and international environment
INTERVIEW by Jorge Nascimento Rodrigues, (c) 2010
Q: Greece was not in the worst situation regarding total external debt if we compare with Ireland (1050 percent of GDP) or even Great Britain (more than 400 pc of GDP), Portugal (220pc/GDP) or Spain (168pc/GDP). Why Greece surges as the critical point in the Eurozone regarding the risk of sovereign default?
A: The macro and microeconomic indicators for 2009 speak volumes. The budget deficit reached 12.7 percent of GDP. Registered unemployment was above nine percent, and youth unemployment surpassed 20 percent. GDP contracted 2 percent in 2009. Foreign Direct Investment declined 21 percent. Public sector debt corresponded to more than 114 percent of annual GDP. International credit rating agencies downgraded Greece’s sovereign credit rating and added a negative outlook. More than 10.000 shops closed during the past year. Tourism declined 13 percent and shipbuilding suffered heavily from the global economic crisis, declining 7.8%. In a word, the Greek economy is ‘dying a slow death’ as the credit rating agency Moody’s observed. The depth of the current crisis has revealed how paper-thin the image of the robust, growth-driven Greek economy was during the past decade. It is now becoming increasingly clear that Greece’s ‘economic miracle’ – as it was repeatedly termed by its political advocates – was based on a ballooning public deficit and a mentality of ‘buy now – pay later’.
Q: But what have the previous government of Kostas Karamanlis done with all that money?
A: Indeed many citizens and observers are now asking themselves, where has all the money gone. To illustrate, in 2006 public expenditure reached 42.9 percent of annual GDP. In 2009, only three years later, public expenditure had risen to 52 percent of annual GDP, while tax revenue remained at the same level as in 2006. In other words, the difference in expenditure levels relative to annual GDP corresponds to a 9.1 percent increase within three years! In absolute monetary terms this increase totals approximately €23 billion. This amount corresponds to the budget deficit in 2009 and constitutes roughly 45 percent of the government’s borrowing needs in 2010, which are said to be around €53 billion. Put otherwise, if public expenditure had remained at the level of 2006 today’s governing authorities would not have to confront the dire economic problems and budgetary challenges of 2010.
Q: The reaction from the new government leaded by the socialists was adequate?
A: Prime Minister George Papandreou addressed the nation on February 2nd 2010 and announced a sweeping package of austerity measures that were adopted by Parliament in early March. These measures deserve credit for their courage. For once during the past six years a Greek prime minister delivered the bitter medicine without any attempt to sugarcoat the magnitude of the problem and the common effort required. It is essential for Papandreou that the economic and fiscal crises do not deteriorate into a wider political crisis the country cannot afford. The effect of the proposed austerity measures is clear: there is absolutely no room for new domestic spending initiatives. The state’s coffers are empty. At a time of economic crisis, when deficit spending would be needed to stimulate growth, the Greek government has its hands tied behind the back. Moreover, the European Commission, the European Central Bank and the IMF are now looking over its shoulders.
Q: Would it be useful a European Monetary Fund (EMF)?
A: Whatever its usefulness, and whenever it may come into existence, it will already have been too late to assist Greece. Given that such EMF would need a change of treaty (Lisbon+Stability Pact) and a new definition of its relationship with the European Central Bank in Frankfurt, I do not see any appetite among EU members to proceed with such a proposal. Furthermore, the question of funding such an EMF has yet to be addressed. What currency unit would be used, according to what parameter of contribution by individual member countries?
Q: What kind of geopolitical consequences, if any, we can expect if the IMF comes officially to Athens?
A: The IMF is already in Athens since January 2010 providing technical expertise to the Greek government in areas such as budgetary planning, tax revenue capacity and statistical reporting requirements. In many ways, the austerity program that the Papandreou government has passed in March 2010 is a program that has all the ingredients of IMF requirements without having the title IMF, nor the resources from the IMF to support these measures.
Q: Do you think the Greek government has political capacity – like the Irish for instance – to implement those hard policies to curb the high public deficit until 2013 and to calm the debt markets?
A: Amid popular discontent and anxiety there appears to be one common thread of reasoning within Greek society, namely that the moral bankruptcy of the country has already arrived. The end of an era or the model of doing things Greek style has no future. Put bluntly, the Greece of yesteryear is bankrupt. What way forward then? And with whom, since many of the political and economic elites in the country are rather discredited? It’s a long shot, and it is going to be painful. Greek society is not yet prepared for nor convinced about the merits of this odyssey. Papandreou cannot be held responsible for the exorbitant fiscal deficit. But like it or not, the prime minister now owns this deficit. He must tailor its solution and cannot be seen as wavering on the deficit reduction objective. A multi-year program, not stop-gap measures, is the order of the day. Greece urgently needs to reform its nearly bankrupt pension system. At the same time, it requires comprehensive tax reform, including new sources of tax revenue and instruments to widen tax compliance among its citizens. Papandreou must show political acumen and leadership. This will require tenacity in the face of mounting social protests and entrenched special interests. Decisive and binding decisions to confront the challenges at hand are necessary. The government must establish new alliances, hold its ground and above all explain towards an unconvinced population why it is necessary to urgently change course.
Q: What do you expect from the European Council next Thursday (March 25) and Friday (March 26)?
A: In light of the degree of contradictory proposals and measures that have been advocated by different countries and institutions during the past weeks inside the EU, it would already be a success if the European Council could at least agree on a common agenda and deliver a joint communiqué at the end. Whatever the final outcome, the issue of helping Greece is not at the heart of the matter anymore. Rather, we are witnessing a situation where deep differences in substantial matters of EU policy coordination, what instruments to use and who should apply these are coming to the surface. The Greek crisis is only a symptom of a much larger and deeper crisis of the EU integration process, and its most important achievement to date, the common currency.
ECHOES FROM THE EUROPEAN COUNCIL
Jens Bastian opinion, from Athens (Updated March 26)
“Moreover, the introduction of more stringent means to avoid in the future similar fiscal and public debt crises opens a window of opportunity towards what will become known as European economic governance.”
“Establishing IMF assistance on the condition of Greece leaving the eurozone is absurd and can’t even be called an ‘analysis’.”
Q: How you evaluate the decisions from the European Council (March 25 and 26) regarding the Greek crisis?
A: The decisions communicated at the European Council meeting in Brussels are a mixed bag, with something to cheer about for everyone. First for Greece, because a combination of EU and IMF assistance has been put on the table, albeit with considerable strings and conditions attached to it. Furthermore, the rather unexpected statement by President Trichet of the European Central Bank to continue using Greek bonds as collateral will have immediate positive effects for international bond markets and Greece’s capacity to refinance itself when it again seeks to sell sovereign bonds, possibly already next week. Furthermore, the EU Commission can claim that the package keeps the Commission in the lead and underlines elements of European Solidarity. Moreover, the introduction of more stringent means to avoid in the future similar fiscal and public debt crises opens a window of opportunity towards what will become known as European economic governance. Finally, the German Chancellor A. Merkel can claim to her domestic audience that the decisions taken in Brussels do not put Germany anymore into the situation of being the ‘paymaster’ of the EU.
Q: Euroceptics forecast that IMF will “convince” Greece to pull out from the euro. This is a wishful thinking or a credible scenario?
A: That scenario is neither credible nor feasible. Establishing IMF assistance on the condition of Greece leaving the eurozone is absurd and can’t even be called an ‘analysis’. The IMF is already cooperating with the Greek authorities since January 2010 on grounds of providing ‘technical expertise’ in areas such as budgetary planning, tax administration and statistical transparency as well as public accounting. It now also has a mandate to provide financial assistance when requested. The Brussels meeting yesterday established a roadmap for such assistance if and when needed and requested by Greece.