Greek Tragedy: A Prelude to a New Euro Zone

As EU leaders seek new ways to take more debt to resolve the Eurozone’s debt burden, the fragile political consensus in Greece is unraveling. In May 2010, Brussels bought time. After a year of economic failures, it is time to resolve the crisis – and that cannot be done without debt restructurings.

 

“I am confident that next Sunday, the Eurogroup will be able to decide on the disbursement of the fifth tranche of loans for Greece in early July. And I trust that we will be able to conclude the pending review in agreement with the IMF,” said EU economic affairs commissioner Olli Rehn. He added that he hoped Eurozone finance ministers would agree final details on the top-up package at a meeting on July 11.

Today, however, Brussels lives in a world of its own, in a world of yesterday and make-believe.

As Prime Minister George Papandreou offered to resign to simplify the creation of a unity government, demonstrators were attacking the Finance Ministry using Molotov cocktails and fights broke out between masked left-wing anarchists and right-wing extremists in the center of Athens, the Greek capital.

The PM’s resignation offer came on a day of massive protests on the streets in front of the Greek parliament building, where his car was hit by a storm of oranges as it passed. As some 20,000 demonstrators protested the extreme austerity measures imposed by the government in an effort to get the country’s budget under control, protesters threw rocks and bottles, with the police responding with tear gas. On Wednesday, a general strike in Greece effectively ended all train, ferry and bus connections, while ministries, banks and several companies remained closed for the day.

By Thursday, the markets woke up – after more than a year of wish-fulfilling fantasies over the effectiveness of the austerity measures. The simple reality, however, is that the Greek austerity programs were doomed, from the very beginning.

Why privatization was doomed?

In the postwar era, Greece developed rapidly. In 1967, however, the Greek military seized power in a coup d’état, overthrew the center-right government of Panagiotis Kanellopoulos and established the Greek military junta of 1967-1974, with the support of the CIA. In 1975, following a referendum to confirm the deposition of King Constantine II, a democratic republican constitution came into force. Concurrently, the previously exiled Andreas Papandreou (current PM George Papandreou is his son) returned and founded the socialist PASOK party, which won the elections in 1981 and dominated the country’s political course for almost two decades.

As Greece joined the NATO and the EU, the ensuing stability and economic prosperity brought Greeks an unprecedented standard of living. At the same time, the massive expenditures of the government, especially in the 1980s, led to increases in budget deficits and the public debt. After Greece replaced the drachma with the euro in 2001, stability and an unprecedented standard of living was sustained – until the 2008 riots and the 2010-2011 waves of protests.

Since spring 2010, the Greek government’s political commitment to economic privatizations has been fragile; and, for most practical purposes, unsustainable. Yes, during the past few months, Athens has gained reductions in interest rate margins and extended repayment schedules for bilateral loans, among other things. In return, Greece offered to complete a €50bn privatization and real estate development program.

Theoretically, of course, such a commitment could conceivably provide substantial reduction in public debt, while boosting investment and growth. In practice, the objective had little basis in reality.

Initially, the Greek target was to raise €7 billion over the next three years (3% of GDP). This target, however, has been revised to €15 billion until the end of the IMF/EU program (2013), and tentatively to €50 billion by 2015.

Certainly, EU leaders and IMF bankers hoped to make the most of the Greek government’s largest asset: the real estate holdings. However, since Greece does not have a full inventory of its real estate assets, it has been difficult to offer an accurate estimate of its portfolio. As the government is currently having commercially viable properties valued, IMF has estimated these assets at about €200-300 billion.

In Brussels, the large size of the Greek public sector alone has been taken as good news because it has been seen as a cash cow for the impending privatization efforts. After all, the Greek government owns or participates in almost 100 companies in transportation, utilities, gaming, banking and tourism. Last year, the OECD estimated their value at €44 billion (19% of GDP). More recently, the optimistic IMF estimated the total public capital stock along with financial assets close to 85 percent of GDP in 2010.

 

Economic Reforms, Political Implications

As EU leaders in Brussels and IMF bankers in Washington, D.C., have been raising the privatization targets and crunching the numbers of the Greek assets, the political implications of these economic efforts were ignored. That was a fatal mistake – one that has been repeated, again and again, through the Eurozone crisis.

As a result, the social turmoil, which has been the direct result of these economic goals, now threatens to unravel not only political consensus in Greece, but in other crisis economies – as well as in those fiscally conservative Euro economies, whose funding decisions will make or break the budgets of the indebted southern European economies.

In public, the Greek targets have often been characterized as “ambitious.” By 2015 Greece has been aiming to accumulate receipts amounting to 20 percent of its GDP – substantially more than in other European countries with sizable privatization revenues during the last 15 years.

Food for thought: In the U.S., the White House would like to cut the deficits by 27 percent of the GDP over 12 years, and the Republicans by 30 percent over 10 years. In Greece, the target has been to accumulate privatization receipts equal to 20 percent of GDP in less than four years.

It is thus hardly surprising that the Greeks feel betrayed by their government, by their financiers, and by the Eurozone itself.

 

Animal Farm déjà vu

About a quarter of a year ago, most projections had Greek debt peaking below 160 percent of GDP in 2013. Even with large primary surpluses thereafter at 6 percent of GDP, the debt would only be reduced to 130 percent by 2020. With full implementation of the proposed privatization, the debt ratio was projected at 130 percent by 2015.

That was the theory.

According to current projections, Greek borrowings are expected to rise to 170 percent of GDP by June 2013 when the original three-year 110 billion euros bailout package from the EU and IMF was meant to come to an end. Initially, this was designed to be sufficient to cover the country’s funding needs over that period.

Greece was also expected to return to the market and issue bonds to cover 60 billion euros of redemptions during the second half of that period from next January.

Yet, the simple reality is that some Greek five year bonds are now offering a yield to maturity of over 28%, or more than four times the rate at which the country is borrowing money from its official creditors.

How do the EU and IMF propose to resolve the situation? Well, the two have signaled that they will put more funds on the table, in return for more austerity measures by Greece, a more detailed privatization program, and possible participation by private sector creditors.

Given the difficult choices and the overwhelming challenges, Greeks are able and willing to work hard, in order to pay for the unsustainable policies of their political elites. Debt slavery, however, is a different story. In hard times, people need hope; if, instead, they are offered a glue factory, they will fight back – and so they should.

The moral of the story is not Eurozone or disintegration. Euro economies reflect different legacies of history, and different levels of economic development and prosperity. A highly homogeneous Union cannot emulate the needs of its highly heterogeneous members. The Eurozone was designed to serve the needs of its people; not to crush their dreams.

It is time to reassess what is worth retaining in the Union and what is not. The restructuring of Greek debt, or the restructurings and reforms in other Euro crisis economies, does not have to be the end of European unity. It can and must pave way for a Europe that is more solid – and more human.