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CONFIDENTIAL ©Justin Jenk Unauthorised reproduction and use prohibited

The Greek Euro crisis as seen through Greek myths Reflections on a tragedy Thought Paper series 15 June 2015

Justin Jenk Raktas justinjenk.com OR www.raktas.ee

Summary- Greece Euro tragedy explained through its own myths This document, like all good myths, draws from many sources*; it seeks to bring clarity to the “why” by seeing the Greek Euro-crisis through the lens of Greek mythology. As with any Greek tragedy, the Greek Euro crisis was pre-ordained and based off a mix of: hubris; a lie; ongoing deception and intrigue. Sadly there are no heroes – except the long suffering citizens of Greece and EU. Yet the Greeks must be held to account as, in a society with such a democratic and much trumpeted claim, their (in)actions and votes matter. The ongoing destruction of the Greek economy, through conscious and even fraudulent means - by government institutions, enterprises and citizens - is truly a tragedy of tangible, global and far reaching proportions.

An incredible amount of energy, effort and treasure have been spent to resolve the situation as well as understand it – much like the saga associated with Argentina’s rise in 1880 to its inexorable decline since the 1920s. In the end the Greek government and people must decide their fate – responsibly.

This document acknowledges all the forces & factors but does not dwell on them • Greece history and context has precluded successes of the Euro adoption: Its economy is suited to it. • Membership (Maastricht) conditions of the Euro (which it lied to secure) are difficult to abide by. • Learnings from past IMF rescues and concerns raised by minority opinions. • Greece shares with Argentina many characteristics of a failed economies (ie Institutional weakness, Poor governance, Arcane property rights, Import-led economy) • The Troika’s (IMF, ECB, EU) Austerity Plan is based on: Fiscal tightening, Reduced budget deficit, Liberalization/Privatization, Tax and Structural reforms. Some of the targets have been achieved by Greece • Other EU and Euro economies have managed aspects of “austerity” to improve (eg; Latvia, Ireland, Spain, Portugal, Iceland). Why not Greece? • Conscious decision to ignore unfolding developments n the ground • Other approaches such as government deficit, Fisher Economics or the proposed “Moderate approach” have not been tried • A society’s future its based on its economic strength • In the end the conclusion will be a political decision, that represents another echo of the Treaty of Westphalia (1648) 1

* See Page 9 (Athena and her wise owl)

Copyrighted: Justin Jenk. Unauthorised reproduction and use prohibited

“Rage”* – a good beginning for a Greek tragedy • • • • •

Some Troika Austerity measures met – but insufficient. €317 billion of public debt = 180% of GDP Only 10% of debt is going to the Government. Repayment = 1/3 government income 40% unemployment rates (over 50% for under 30-year olds) Tax compliance is less than 35% (due in part to: endemic practice, rates and complexities) . Top 10 wealthiest Greeks could, with half their wealth ($56 bn), reduced the government debt by 8% ($23 bn). • 69th most corrupt nation (behind Brazil and above Serbia) and 96 th most competitive. €120 bn lost due to corruption (in the period 2000-2010) • Average life span of 80 years and 98% literacy • Successive Greek governments have exhausted credibility with the electorate, supranationals (ie IMF) and rests of EU • Syriza Government’s “red lines “ are too domestic and too late. • Syriza foreign policy statements and actions are only set to inflame and seen as blackmail • Maastricht Treaty condemned an inappropriate Greek, agricultural economy to strict limits. (Germany itself has broken these conditions but is in position to remedy matters). • Greek Politicians and Society’s misused the value creation opportunities of the cheap Euro rates. • Austerity terms may (or may not be appropriate) • Other Deficit/Surplus approaches might have been better (eg Fisher, Moderate Plan) • Yet other distressed economies have managed (eg Latvia, Ireland, Portugal, Iceland). Argentina is an interesting proxy • Prospect of losing he Euro hits hard at Greece’s sense of being at the heart of Europe and weakens itself vis a vis its emotional and imperial nemesis - Turkey 2

*: The opening word of “The Illiad”


Greece – a Pyrrhic victory to date? Some considerations Sovereign debt – some examples

The Greek state lacks integrity

• The credit history of Greece is “truly awful”.

•

Modern Greece, since its creation from the Ottoman Empire, has shown a consistent inability to formulate and retain wealth.

• Since its founding in 1829 Greece has: – officially defaulted 5 times (1829, 1843, 1860, 1894, 1932) and – also allowed hyper-inflation pressures to erode its debt obligations (1963).

•

Despite infusion of European institutions and frameworks since 1821 these have not taken root, nor been accepted by the Greek populace. (Britain and France helped establish modern Greece; it had a constitutional monarchy installed – with a Bavarian king - from its inception).

•

Development of a modern state has been further hampered due to: weak democratic governments, World War 1 and World War 2, several civil wars; territorial changes; proclamation of a republic and subsequent the imposition of martial law (1967-74). It acceded to the EU in 1989.

•

Greece lied to the EU authorities with regard to its preparedness to joining the Euro (2001).

•

The rule of law, governance and property rights remain confused to this day.

•

A ‘middle class’ has not emerged nor prospered over the decades.

•

The Agricultural sector has never been fully harnessed. The basis for industrialization was set in the late 1880s but not vigorously developed. Greek economic interest have benefited from shipping , where activities could leverage international standards with national largesse.

•

Other European states have made their transitions under harsher conditions over the decades (eg Ireland, Latvia, unification of Germany, Spain, Portugal, Belgium, France, Ital ). Why not Greece?

•

The current Syriza-led government has adopted a particular domestic and confrontational stance to manage the ongoing crisis

• Modern Greece has spent over 50% of its existence in a “perpetual state of default”. It is the worst offender in European terms (followed by Russia). • In modern times, such debt levels are only exceed by certain Latin American and African countries.

• Only Ecuador and Venezuela are worse than Greece on a consistent basis. • Throughout history, while other European states have undergone sovereign defaults, they are usually associated with the prelude/aftermath of war (eg Germany, France) as well as transitions from imperial states (eg Spain, Portugal, Austria). • Only a handful of countries have never defaulted (eg Britain, Sweden, US, amongst others). • Academic research is extensive and unified in its opinion (eg Reinhart &Rogoff, etc).

• Sovereign debt crises do occur – it is how they are managed which reflects the quality of the debtor state and the values of its society.

3


Paris’ choices started the Trojan war • Paris was asked to choose: Greece chose EU membership over continued independence. Sought ERM convergence.

Greece’s level of Government Debt/GDP has always exceeded the Maastricht Treaty requirements for Euro membership

• Paris abducted Helene

200

Debt/GDP

100 Maastricht 60% GDP

50

• Cassandra warned all of the impeding disaster, but was ignored

Annual change Maastricht 3% change

0

Godley in 1992. IMF minority opinions. On the ground facts. There is ongoing debate whether the imposed austerity programme is appropriate. 4

150

Percent

Greece chose to join the Euro on false pretences as a “right” and mark of pride (using Goldman Sachs bonds to mask its high level of debt and give the appearance of convergence).

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-50


Epimetheus’ unrealistic and naïve Pandora opened a box of woes • Epimetheus accepted gifts form the gods without thinking – Pandora and her box

Greece’s false Euro borrowing parity led to an explosion of easy credit, it spent; yet could not afford

National pride negated common sense with Greece’s197 year history and 5 major economic failures with regard to the challenges of Euro membership.

35 30

Greece 10 yr Bond rate

15 10

5

Greece has survived past crises.

^ Greece’s Euro membership

Source:

5


^ Crisis

^ Austerity

2014

2013

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

• The Box contained Woes of the World at last and Hope

German 10yr Bond rate

2012

The domestic economy of Greece has never been appropriately structured nor well managed; throughout its 197 year history.

20

2011

• Pandora lacked discipline

Percent

25

Hercules pursued a host of tasks to correct an error • Slay the Nemean Lion of debt Government debt is now 183% of GDP; and growing; despite very generous interest rates.

Greece’s economic growth was fueled by cheap Euro credit and has subsequently collapsed, never able to meet the challenges of “austerity-led growth” 10

• Clean the Augean Stables of corruption (and inefficiencies)

8 6

Greece has taken some steps towards liberalization and taxrevenue but based on a dysfunctional and corrupt system

Greece has squandered limited credibility and mismanaged supranational support from the (formerly labelled) “Troika” (IMF, ECB and EU). Yet Latvia, Ireland, Portugal and Spain have managed “austerity. 6

2 Percent

• Tame the 3-headed Cerberus of supranationals

4

0

-2 -4 -6 -8 -10 ^ Greece’s Euro membership


^ Crisis

^ Austerity

Greece’s task has been futile: Sisyphus-Achilles-Damocles • “Sisyphean trap” - for being deceitful As Yanis Varoufakis described: the Greek economy is unable to function within the agreed Austerity programme. The supranationals have little faith in Greece’s ability to pursue his “Modest Proposal”

Greece’s inability to grow nor increase public spending has caused private deleveraging and related unemployment

• “Achilles”- pride leading to misfortune At 3 levels (i) Private debt deleveraging at 35% of GDP (ii) Boxed itself into austerity (yet US Govt deficit at 15% vs Maastricht 3%) (iii) Alienated the supranationals as well as international and domestic support

• A “Sword of Damocles” hangs over Greece The current stalemate has seen Greece be the first OECD country to miss an IMF payment. Default is a possibility; but a political solution is likely, yet eroding the credibility of the Euro and Greece. 7


Odysseus was condemned to a long journey back home; is Greece? • Odysseus The etymology of the name is derived form the word ”to hate” (odyssomai). The man of “twists & turns”. Viewed as a cunning individual yet one, despite his gifts, needs suffers to develop.

• The journey Odysseus’ 10 year journey of atonement returns him to his starting place. For Greece is that a return to the Drachma and economic independence?

• Penelope and her suitors Syriza’s “red lines” and seeming division of the Troika and EU is a start. Russia and China make for unusual partners for Modern Greece. Turkey would be amore sensible choice. It can only be hoped that Greek Society will not be thrown into a period of domestic chaos and violence (the 6th in its modern 197 year history). 8

The implications of a “GrExit” are unknown but will have many ramifications: at an economic, political and social level – domestically and beyond its borders • • • • • • • • • •

New Drachma and devaluation 20-50% 5% growth Inflation risk offset by Unemployment Returning flight capital €60 bn Eurozone contagion (Portugal, Spain, Italy) Euro financial pressure released but pushed politically forwards Foreign Bank debt only €48 bn Civil unrest Forces Greece to rethink its place in the world (EU, NATO, etc) Resilience of the EU? BrExit? Effect on Federal Europe? etc

There are numerous options to resolve the debt crisis: • Honour the current Troika austerity programme. The debt maturity is already long (with maturity at 2054). The interest level is already very generous, at 2.6% of GDP (lower than all other Eurozone countries except for Germany and France). • Renegotiate the debt (through a mix of growth-linked and perpetual bonds). Capital controls. • Budgetary relief could stimulate the economy, but to what medium term purpose? It will mean a reneging of the current Troika austerity programme. • Tap new sources of capital and income from (eg, raiding state funds; accelerated privatization; geopolitical commodity deals - oil& gas from Russia; war reparations etc). But these are one-shot palliatives, insufficient in scale and do not address the problem. • Default and “GrExit”; extreme but may be forced on Greece due to its: internal politics and/or missed payments and/or; breakdown in sovereign negotiations. • Forgive a large portion of the debt and start with a stimulus (Fisher or Modest) based programme.

* The solution rests with the Greek government and people; accountable as other societies and citizens for their collective and individual actions. There are no obvious mitigating/extenuating factors to excuse Greece.


Sadly the wisdom of Athena’s owl has not rubbed off on Greece Sources • “Telegraph” • “Independent” • “Forbes” • “France24” • “Economist” • “Wall St Journal” • www.debtdeflation.com

• • • • •

IMF EU ECB Bank of Greece Oxford Economics

• • • • • • •

Reinhart & Rogoff P. Krugman I. Fisher, W. Godley S. Keen Y. Varoufakis, S. P. Holland and J. K. Galbraith. R. Graves

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