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Sorry for the massive post, but--if I may be so bold as to suggest--the small size of Greece's economy as well as its lack of diversification is actually a good thing in the middle of this crisis. And indeed, the structure of its economy may make workers less willing to bear the brunt of the cuts. Greece is not a failed state, economically, as much as it is a state hurt by its own profligacy and a global market system it was not prepared to compete in. In this respect, Greece is more like Argentina than, say, Haiti.

Over 50% of the Greek economy relies on tourism and shipping, external industries both very susceptible to recessions. But it does mean that Greece does have a natural means to bring money into the country OTHER than foreign investment or local industries competing against the world (Greece has an abysmal lack of foreign investment and its industries hardly compete ESPECIALLY after entering the Eurozone).

Greeks got a stable currency, great rates for borrowing, and lots of infrastructure (bridges, airports and subways) since joining the Eurozone. Lots of money went into these projects and all three of them were undertaken by German contractors. That's the bonus of joining. The problem has of course been currency swaps that racked up prices and forced normally non-indebted Greeks to go into debt. And still, the rate of private debt in Greece is at 50% which is much lower than the rate in the UK and Spain. The recession should presumably hurt banks a lot more in those countries since Greece's decline is not as bad and the private sector owns less. Greece fails, however, because of its massive gov't deficit which exceeds all but one country in the zone, and this deficit coupled with the second highest gap in the current year (which of course drove up the interest on the bonds needed to service that debt).

Without a doubt, Greece has created many of its own problems (statistical reporting, inability to align federal bureaucracy with budget reality, corruption and failing tax system) but one wonders if the system itself would have inevitably produced the same problem for Greece. In the midst of a recession, tourism and shipping went south. Because of the Euro and the EU's rather loose monetary policy (I'm referring to a lack of integration between economies), Greece is not able to devalue currency nor is it able receive EU handouts as per the Maastricht Treaty. This produces negative effects for the economy.

As I see it, the options for the EU are to integrate the poorer countries more with a strong eurozone (meaning more German and French taxpayer money to the poorer areas) or else to cut the poorer areas loose.

Check out this story on who owns most Greek debt:

http://www.guardian.co.uk/business/2010/feb/11/greece-debt-france-switzerland

This could be another Lehman-like scenario.

I found this article to be among the best to describe the situation from a Greek perspective:

http://www.independent.co.uk/news/world/europe/sick-man-of-europe-seeks-remedy-from-wary-neighbours- 1895831.html

As for my own cynical perspective, I just see more neo-liberal economics at work.

First, it should be noted that the EU invoked new powers under Article 121 of the Lisbon Treaty, allowing it to reshape the structure of pensions, healthcare, labor markets and private commerce in Greece (the first time this power was invoked).

Note the broad new powers the EU is assuming in this case, the power to take over Greece's economy and install austere fiscal measures. The new powers make me wonder about the set of economic circumstances that brought this about, what percentage of it is Greece's fault for corruption, fudging statistics, tax evasion, etc., and how much of it is an attack on social welfare systems in general. Rich countries can afford them, poor countries cannot. Is there a political will in Germany to pay for Greek social welfare? In a closed system such as that in the USA, we see richer states such as New York (itself highly taxed, itself heavily in debt, itself with many problems) shelling out $2 to the Feds for every $1 it gets back, and its the reverse in poorer states. A lack of such support would be problematic. From my understanding of the EU, this is not happening because the political will isn't there. There are structural funds of course moving from net-donor states to the poorer states, and Greece has been a huge recipient of structural funds in the past. No longer since 2004 of course, since Greece now has a higher standard of living than Baltic and Balkan states.

To reiterate, Greece's economy was always susceptible to recessions because of the lack of diversification. Its biggest industry shipping  accounts for almost a third of Greek GDP, and last year it saw day rates for Cape and Panamax vessels (Greek companies own the largest fleets in the world) drop from $135k a day to less than $10k a day, which forced the shipping companies to keep their ships in drydock (because not shipping was cheaper than shipping when you consider the costs of fuel and repairs) while still paying their unionized sailors and longshoremen. Next for Greek GDP is tourism at about 20%, and that too has fallen off the cliff (mainly due to the recession), followed by agriculture (cotton, dairy, citrus, olive oil, etc.) and banking. With this lack of diversification, a recession can make a budget look painful.

But there are additional reasons Greece is hurting that have nothing to do with a recession. In this light, a recession is a great tool of fear for restructuring, and Greece certainly needs that. The gov't is indeed trying to capitalize on the crisis. Greece was always a poor country in the EU, and other than its shipping industry which could bring back hordes of funds, it maintained competitiveness through cheap labor and cheap tourism. Greeks forever complained that they could not see the world because the drachma exchange rate allowed them to travel to Bulgaria or Turkey at best. Then came the Euro, and overnight Greece lost its edge. Budget travelers stopped coming when they could get what they wanted (sun & sand) in Turkey anyway. Labor and materials were no longer cheap. Fledgling industries vanished overnight. An already poor country was losing competitiveness to even poorer countries far afield. On the other hand, the Euro was a blessing for Greeks since money came pouring in from EU coffers for structural improvements (i.e. Greece's infrastructure improved greatly with new roads, a huge bridge spanning the Peloponnese and Mainland, a subway system for Athens, etc.) but along with new infrastructure came high costs for basic needs. As the Greeks were losing competitiveness, they could not adjust so quickly to the higher cost of living, and then something unheard of in Greece occurred: families went into debt, bank debt and especially credit card debt, because the change in the standard of living had been so swift (Greeks passed down homes through families for generations, and home ownership in the country has been at something like 85% for a century now). Essentially, the EU promised Greeks that they would modernize the country and give it the tools to compete in a more skilled economy, but the change happened so quickly that the reactions of everyday people were unforeseen. Previously seen as a quirky backwater, Greece held a sunny disposition before the Euro, but afterwards, without being able to control its own currency, it had to compete against the best of the best. The people were not ready.

The key, however, is that wholesale shifts in the standard of living, and a lack of training (i.e. education) for the global economy, forced a change overnight. Now they have a form of shock therapy on people's psyches and their physical sense of well being (the Greek diet has changed overnight from one of the healthiest diets in the world to one of the unhealthiest, from fresh organic foods to processed foods). The Greek wealthy, like the wealthy everywhere, did well in the last decade. As the citizens took on higher loans to maintain their standard of living, the rich made exponential profits. The problem Greeks face now is that the government is trying to deliver some hard news about the realities of the global markets. The Prime Minister complains that Greece has been attacked by speculators--and he's right. The problem is that, when banks and so-called investors are involved in the greater part of your economy, you cannot give them a reason to attack you and create the kind of psychological doubts (really, warfare) that will make you vulnerable. Greece has given the speculators ample ammunition, by fudging statistics and losing control of their social security system. When you enter this global market run by bankers, you must protect your flank. You must cut the social welfare system, because the race to the bottom is swift. So, austere measures will be taken, at the EU's behest. People will lose jobs, have their pensions cut, salaries cut (and these are the measures the people have already grudgingly agreed to, the EU has a lot more austerity in mind).

But the EU may yet be surprised by the eternal Greek stubbornness, because the Greek people are not stupid and they know very well what has befallen them. They will protest, and the EU will be left to wonder if dictates from Brussels will actually be followed by the people.

One wonders how much convergence with global markets and the world economy is really pre-planned by our banking system. Those who are lucky enough to get a great education may escape this central fact of middle-class life in the EU and the USA: average salaries for workers are dwindling and have been for a decade.

In the USA, the recession will create an ever bigger gap between not only rich and poor, but between an ever smaller middle class and a quasi-permanent underclass competing for work with 3rd world nations. When you see our prison population, our impoverished, our unemployed, and you realize the huge number of people that have been added to those classes, it becomes increasingly obvious that a social safety net in America is harder to maintain. Indeed, my thesis is that global markets practically dictate that our social system is dismantled, that a new division between working classes be created.

The power grabs, the shift of labor and capital, it all seems so darn preplanned that it takes my breath away. Did they need a horrific recession to do this? Probably, after all, listen to all the people going on and on about taxes and spending. I'm not saying it was purposely triggered, but I do think the plans were already in the vault to take advantage of the chaos. Kind of like how the plans for Iraq preceded 9/11.

by Upstate NY on Thu Feb 11th, 2010 at 04:16:12 PM EST
outstanding analysis!

way too pithy for just a comment. utterly diary-worthy...

Thanks indeed.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Feb 11th, 2010 at 04:45:00 PM EST
[ Parent ]
I'd like to comment on this:


France and Switzerland most exposed to Greece's debt crisis, say analysts

The French bank Crédit Agricole was singled out by analysts at the research firm CreditSights as being particularly exposed. "It owns Emporiki Bank in Greece, which has been floundering away, and has about €23bn in loans there," Credit Sights analysts said.

This is a local bank, that mainly lends to local clients, and happens to be owned by Crédit Agricole. This has almost nothing to do with Greek sovereign debt! That banks certainly owns Greek government bonds, so does have a bit of exposure to sovereign debt, but it's unlikely to be a large part of its balance sheet.

So the actual exposure of Crédit Agricole here is unknown (there are risks associated with the recession, but Greece's is not worse than elsewhere), and this article is just stupid scaremongering.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 04:51:28 PM EST
[ Parent ]
Thanks Jerome.

Obviously, it's quite difficult to determine what's going on for someone not in the know.

by Upstate NY on Thu Feb 11th, 2010 at 05:06:26 PM EST
[ Parent ]

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