So here we are on the eve of yet another of the perpetual Greek D-Days. It would be funny if it wasn’t so sad. If it hadn’t been going on for so long with the outcome so obvious. Readers who followed me over from my old blog would know I have been talking about the inevitably of the situation for nearly 2 years. What is interesting is to go back to some old reports on the situation in order to realise just how much economic delusion there was about the situation, for example May 29 2010 Reuters:
Greece will not restructure its debt and will not need more cuts to achieve fiscal targets set in the emergency funding programme it agreed with the European Union and the IMF, its finance minister told a Sunday paper.
The debt-laden country has been offered a 110 billion euro ($134 billion) bailout to avoid defaulting on its debt and in return promised to cut the deficit by 11 percentage points of GDP and bring it below the EU’s cap of 3 percent by 2013.
“Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.
The Bank of Greece projects the economic downturn will deepen, with GDP seen contracting by 4 percent this year, as tax increases and cuts in wages and pensions take a toll.
“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”
After reading that article back in 2010 I made a fairly simple macroeconomic observation of Greece’s situation which turned out to be fairly good approximation of the outcome that awaited the country:
If Greece cannot improve its current account balance ( which is nearly impossible given that it threw away control of its exchange rate when it joined the EU), then simple maths states that Greeces’ private entities need to reduce their current net saving position by 11% of GDP over the next three years. Realistically this means , far more unemployment and probably debt deflation.
The reason I made that statement at the time was because Europe was stuck inside a bizarre economic policy void in which there seemed to be a belief that simply cutting government expenditure would somehow turn an economy that was structured around credit driven consumption into an export driven economic powerhouse which would suddenly be able to service its debts. This was, as I pointed out numerous times over proceeding 20 months, a dangerous ideology based on a flawed understanding of macroeconomics. Even a glancing analysis of the Greece economy would have told you that the government sector was supplementing the private sector by running deficits due to the absence of a trade surplus, but even with that occurring the private sector was becoming increasingly indebted.
Under these circumstances what was required for Greece to become sustainable was 1) a write-off of a significant proportion of its debts; 2) a restructure of the economy in order to improve productivity. However ‘austerity’ based policy would provide neither of these things because the debts would continue to exist which meant the only possible way to improve productivity would have been through investment without some form of default. Under ‘austerity’ focussed policy there was never going to be a new surge in productivity focussed investment so the actual outcome of this policy was most likely to be a slow squeezing of Greek private sector towards default and associated falling government incomes.
Back in 2010 my assessment of Greece’s problems were all theory, but it has become quite apparent that this is exactly what ended up happening to the country. More evidence of that private sector squeeze appears daily:
Local banks are expecting a further decline in deposits by 10 percent or 17 billion euros within 2012, according to sources, as clients withdraw savings in order to cover their increased tax obligations.
The same sources estimate that some 70 to 80 percent of the outflow from the banking system, which in 2011 amounted to 35.4 billion euros, was channeled into the state coffers through the various tax burdens imposed last year. By contrast, no more than 1 percent of deposits headed abroad.
At the end of 2011 the deposits balance of corporations and households came down to 174.2 billion euros from 209.6 billion at end-2010, posting a 16.8 percent drop on an annual basis. Out of the 174.2 billion euros, 145.4 billion comprised household savings, which had slipped 28.1 billion euros compared to 2010, while corporate deposits amounted to 28.8 billion, down 7.2 billion euros from end-2010. Savings accounts posted a notable 19.9 percent decline on an annual basis.
Bank data point to a fresh outflow of some 2 billion euros in January, as the monthly rise of 1.3 billion in the December balance was deemed temporary and attributed to money gong into accounts due to the Christmas bonus. This quickly evaporated last month, as households paid off their December expenditure conducted through credit cards.
What I don’t understand is how it was possible that there was no one within the Greek and/or European establishment with the basic economic skills to take a look at the 3 sectors of the Greek economy and very quickly come to the same conclusion. Why was there no one within the European leadership willing and/or able to realise that the outcome that Greece faces today was completely inevitable and that being the case, how can we have faith in Europe’s on-going response for countries like Portugal or Ireland?
In a recent interview Angela Merkel stated:
We want a rational solution, meaning we need a second program, but that can only happen when, in the opinion of the troika, the long-term sustainability of Greece’s finances is secured […] we need the cooperation of private creditors.
One wonders why Europe needed an additional 18 months, to waste 130 billion euros and wait for the crisis to become far worse before coming to the same obvious conclusion.
Given this outcome , and what I suspect is some heavy influence from Mario Monti, we have seen a change in rhetoric from Europe about ‘austerity’ focussed policies over the last 6 weeks. The new focus is on ‘Jobs and Growth’, both of which sound horribly ironic given the last 2 years of periphery Europe’s economic history. As I mentioned on Monday, tomorrow we will see the first Alert Mechanism Report (AMR) under the new surveillance procedure on the prevention and correction of macro-economic imbalances in the Eurozone. I hope that this report is the measurable beginning of some positive policy changes across Europe, but at this stage I am concerned that the response mechanisms built into the framework are yet again far too one sided. Asking a periphery country to provide a plan about what it will do to solve its imbalance without asking its major intra-European finance and trading partners to do the same just sounds like austerity under a different banner to me:
The 5 European priorities of 2012 are listed as:
- Pursuing growth-friendly fiscal consolidation
- Restoring normal lending to the economy
- Promoting growth and competitiveness
- Tackling unemployment and the social consequences of the crisis
- Modernising public administration
Supposedly Greece will get all of these things soon …. right after it has agreed to the latest round of nation-destroying ‘austerity’.