Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

The Alchemy Of The Greek Economy

Posted by hkarner - 31. Oktober 2016

Monday, October 31, 2016, Observing Greece Kastner

The former Governor of the Bank of England, Mervyn King, wrote a book titled „The End of Alchemy: Money, Banking, and the Future of the Global Economy„. In it, he discusses the future of the Eurozone and makes the following comments about Greece:

„It is evident, as it has been for a very long while, that the only way forward for Greece is to default on (or be forgiven) a substantial proportion of its debt burden and to devalue its currency so that exports and the substitution of domestic products for imports can compensate for the depressing effects of the fiscal contraction imposed to date. Structural reforms would help ease the transition, but such reforms will be effective only if they are adopted by decisions of the Greek people rather than being imposed as external conditions by the IMF of the European Commission. The lack of trust between Greece and its creditors means that public recognition of the underlying reality is some way off“. 

While King does not use the term „Grexit“, he obviously says that Greece should leave the Eurozone. At the same time, he suggests that Greece could consider re-joining the Eurozone a few years later after a new equilibrium has been reached, if it so wished.
Until about mid-2013, I was an adamant supporter of Greece’s holding on to the Euro. My simple logic: it was the lesser of 2 evils (i. e. less social cost) and it had more longer-term promise than a return to the Drachma. This was followed by a period of about 2 years during which I began to doubt my earlier convictions. And for quite some time now have I felt the way Mervyn King describes above. With the benefit of hindsight I think that the social cost of a return to the Drachma could not have been much higher than it turned out to be with the Euro in the last 5-6 years and the economy would have found a new equilibrium much more quickly. Perhaps a worse one, but still.

What had been the objective of the exercise of the last 5-6 years in the first place? The official version read: „To build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos“.

If reforms were meant to reduce the budget deficit from over 15% to under 3% of GDP (on top of a declining GDP!), then Greece is now completely reformed. But is Greece really different today? Has Greece really changed? Did a jolt run through all corners of Greek society raising animal spirits to bring about change?

The EU Task Force for Greece (TFGR) was formed in July of 2011 and it included the above quote in its mission statement. One would have thought that a society desperately wanting change and improvement would have jumped at the opportunity of utilizing the help of its European partners to bring about such change and improvement. Regrettably, most attempts at change were treated with suspicion by Greek society for the simple reason that they were perceived – rightly or wrongly – as being imposed by the outside. Thus, they were not really adopted by the Greek people.

By the end of 2012, I made a last effort to pluck up my spirits and wrote an essay titled „Make the year 2013 the Year of the Task Force for Greece!“ Exactly one year later, I re-published this essay and then I gave up pursuing the subject. By June 30, 2015, the TFGR’s mandate expired and it was not renewed. Dismantling and institutional death had occurred.

Yet, neither the EU nor Greece wanted to throw the towel entirely. A new Structural Reform Support Service (SRSS) was set up in July. Its mission? „The SRSS will offer technical assistance to the Member States in order to facilitate their administrative and structural reforms“. No more lofty talk about building a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos. Now the specific goals were administrative and structural reforms.

As though this were not enough, French President Hollande personally came to Greece 3 months later to witness as the Finance Ministers of both countries signed a protocol by which, essentially, France committed to modernize Greece.

Every reader should now judge for him-/herself: how much have we heard about progress in these matters since then?

In 2010, Greece ranked #109 out of 183 countries analyzed by the World Bank for its Doing Business Report. In Transparency International’s Corruption Perception Index, Greece ranked #78 out of 178 countries. In the former, Greece was the lowest European country; in the latter it the second lowest (before Bulgaria).

By 2016, Greece had moved up to #60 out of 189 countries in the Doing Business Report. A similar improvement was shown in the Corruption Perception Index where Greece ranked #58 out of 167 countries (2015).

And yet, all these statistical improvements notwithstanding, Greece’s attractiveness for foreign investors is no better than that of Afghanistan of Mali.

In contract compliance, which is essentially considered the ability of a State to guarantee compliance with business agreements and to protect investors, Greece occupies the 133rd position, second worst among developed nations.

A key problem is the enormous amount of time required for legal resolution of appeals for compliance with contracts. On average, Greek courts need 1,580 days to issue a decision, that is almost four and a half years.

A similar picture appears in property registration, with Greece ranking in the 141st position, faring worse than Venezuela, Grenada, Tanzania, Mali and Guinea.

The German Finance Minister Schäuble is said to have said that Greece is allergic to reform. What seems as certain as it is understandable is that Greeks are allergic to reforms imposed from the outside, particularly when under the heading of ‚help for Greece‘.

Alchemy is the ancient practice of trying to turn lead into gold. Mervyn King describes the alchemy of banking as the process whereby safe short-term deposits are turned into long-term risky loans. The alchemy of the Greek economy is that the efforts to implement reforms seem to turn into even greater resistance to make reforms.

And what better way to eliminate any interest in reforms than by calling the brutal reduction of the budget deficit from over 15% to under 3% of GDP (on top of a declining GDP!) the prototype of what is meant by reforms?

 

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