Stop The Wrecking Of Greece

Grzegorz Kołodko

In the early 1990s, when Poland underwent its infamous “shock-without-therapy” –  which cut national income by nearly 20 percent, pushed unemployment over three million and increased the budget deficit to 6.9 percent of GDP in 1992 – there was some talk about the “Latinization” of my country. One prominent newspaper article carried the eloquent title: “In a moment like in Chile.” Today, in a similar vein, there is the danger of the “Africanization” of Greece.

Since 2010 Greek GDP has fallen by over 25 percent. More than 25 percent of the population lives below the poverty line, unemployment also exceeds 25 percent, and among the younger generation it is over 50 percent. In addition, this year alone more refugees from the Middle East and Africa have arrived in Greece than in Italy (let alone France or the UK). Soon they may feel as though they never left home.

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Greece has now missed a payment to the IMF. Although the amount is modest, just €1.6bn, the matter is very significant. Greece has joined just three other states treated by the IMF as insolvent. These are three African countries: Somalia, Sudan and Zimbabwe. Apart from the former failed country, the others cling to authoritarian regimes, while their economy is still somehow functioning, but only due to the increasing presence of China. I’ve been there, I’ve seen it.

It’s already very bad, and it will get worse. There is the question of who is to blame. In the initial phase of the crisis, when Greece’s public debt approached 100 percent of GDP, essentially the Greeks were to blame, because they had been living beyond their means. As for the subsequent explosion of the crisis and its present culmination, the responsibility lies with the creditors, in the rich European North and West, with their banks and financiers, their  incompetent politicians and their biased technocrats.

On my Facebook profile a surfer asked:

Why do EU leaders, the President of France, the Chancellor of Germany, the Head of the IMF, etc., still indulge in the wishful thinking that Greece will fully repay its debt? They must be aware that the debt is unpayable, and that the policy enforced on Greece calls into question the possibility of repaying even half of the obligations.

Isn’t it bizarre that what a random internet surfer firmly understands, the leaders of the troika and of the creditor governments do not?  Or don’t they want to understand?

Why such irrationality?

The troika politicians behave irrationally because they are fivefold slaves of: (1) their reckless earlier announcements that they would not give up to Greece; (2) caring for their own interests and special interest groups, especially speculative financiers, who are corrupting politics; (3) their media, which are stupefying public opinion and are painting stereotypes of “lazy and profligate” Greeks; (4) technocrats of the European Commission, and in particular the IMF, nominated in a non-democratic manner and thus politically irresponsible; (5) their advisers, supposedly knowledgeable about the technical side of public finance and monetary policy, but not understanding much of the relationship between these policies and the cultural and social spheres.

This does not mean that all major creditor politicians behave identically. The President of France, Francois Hollande, is relatively pragmatic; he says:

Let’s be clear. The solution can be found right now, it does not have to wait.

Contrast his compatriot, the doctrinaire head of the IMF, Christine Lagarde, when she says that

… it is not clear what are the latest proposals [of Greece].

Everybody knows but the IMF does not?

The Italian Prime Minister, Matteo Renzi, is somewhat wiser; he seems to understand that if Greece falls, then his country, with a public debt exceeding 120 percent of GDP and suffering from a stagnant economy, can quickly fall too. Meanwhile, the German Chancellor, Angela Merkel, is sitting on the fence until that moment when it will be clear which side prevails. Such “pragmatism” is quite peculiar, though it must be remembered that Greece owes Germany (indirectly, through the European institutions) over €62bn. I would advise her to recover in a civilized manner €30bn rather than, in any ensuing chaos, no more than €20bn.

A request of Greek Prime Minister Alexis Tsipras for another loan of €29.1bn, from the European Stability Mechanism, to pay the IMF and the ECB is not even considered because the political situation is extremely volatile; more war than peace. The  Syriza government may soon fall. The situation is complicated immeasurably by the ad hoc referendum, after which the controversies over what its outcome implies will only multiply.

Some may repeat that this madness has its method, but does it? Greek society is increasingly divided into the “for” and “against” camps, but the curious nature of the situation lies in the different interpretations of “for” and “against”. Whichever side wins, the politicians will argue, the media will prey, and the Greek people will suffer. Let’s hope there won’t be any tanks under the Acropolis. In the eyes of the world the great idea of European integration is being discredited.

How to cut the Greek debt?

The Greek syndrome is becoming more and more political rather than economic. The cradle of democracy is shattering; in Europe, in the country that  civilization owes so much to historically. As for economic aspects of the case, the matter should be clear for every enlightened economist. Greece is insolvent and hence there is the pragmatic question: how to reduce its still growing debt and reverse the falling output trend. In other words, how to raise output and how to cut debt.

The current state of affairs is down to the failure of the troika’s policies. The IMF assumed unrealistically that their policies would enable debt to be cut to 120 percent of GDP by 2020 and would create a path of economic growth. This was illusory as it soon became obvious, because the policies enforced upon Athens have instead led to a rapid increase in debt arising from the cumulative economic recession.

Thus, Greek debt must be reduced to sustainable levels. Almost 80 percent of it is obligations to troika public institutions, such as the EU’s financial vehicles, ECB and IMF. This is so because the troika’s subsequent “assistance” packets for Greece were mainly provided for the purpose of repaying the debts owed to private banks in the rich West. It is true that, in the meantime, part of Greek obligations to these banks have been reduced but this has been too little, too late.

Now we are faced with the alternative: either reduce Greece’s debt, currently amounting to €323bn, by at least half in an organized manner in return for economically viable and socially acceptable changes to Greek public finances. Or face chaos. In the latter case, the Greeks will pay at the end of the day up to one-third of their obligations, if that. One more bail-out won’t change much because the debt is simply in default and must be cut, provided that the Greeks go a bit further in disciplining their finances and toward pro-growth economic regulation.

What’s next? Russia and China?

The ever-falling national income of the Greeks amounts to just 0.25 percent of global output. In other words, the world produces 400 times more than 10m Greeks. And now this world, already plagued by enormous difficulties, has one more trouble, because the Greek syndrome is not only a local and regional problem; it is a global issue. Thus, it is understandable that President Barack Obama has urged the ineffective politicians-bureaucrats from Brussels and major European capitals to find a solution, because the US has  enough troubles and does not need in any way any greater turmoil in the euro zone, home to the world’s second reserve currency. Chinese Premier Li Keqiang, with whom I met last week in Beijing, also urges prudence:

“Greece remaining in the euro is not a matter which concerns only Europe, but also it concerns China (…) [and] the stability of global finance and economic growth.”

I do not think the Chinese are passively watching the Greek disaster. If there is a chaotic and fatal Grexit, then China has more than enough funds to help Greece, for example by investing tens of billions of dollars in the Greek tourism sector and in significant segments of the logistics infrastructure. At Chinese-owned ports Chinese ships will call – and we will sleep in Chinese hotels.

Either way, the Chinese, with their far-reaching policies, already invest in Greece. But China won’t save the day. If the EU can’t or won’t do it, then there is always Russia. Recently, and not without reason, elements of cultural kinship, in the form of the shared Orthodox faith, has been underlined. But this is really of little or no importance. Politicians devoid of imagination – in Brussels and Berlin, in Paris and Warsaw – ought to realize that if their continuing mistakes force Greece to exit the euro zone, Greece might easily quit the EU too.

So, what’s next? All current scenarios look bleak. One must move forward and avert: far-right fascist government or military dictatorship. The only sensible way forward is substantial debt relief and proper fiscal adjustment along lines that will support economic growth through rising savings, capital formation, and investment. The Greek fiscal system must work to promote a competitive social market economy, not work against it.