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First Five Years since the Outbreak of the Greek Crisis

English Pages, 28. 6. 2015

In the five years that just passed, we have been the witnesses of the Greek debt crisis but it is evident that its symptoms were growing well before May 2010. This country has experienced financial crises and serious budgetary problems many times in the past. Its new problem started in the moment when this country, along with the euro, “accepted” economic parameters quite inadequate for its economy: especially an exchange rate that was too high for its economy. It also got an entirely undeserved perfect credit ranking and as a result, low interest rates.

All this augmented its old problems. Everyone started lending to Greece, and Greece started happily borrowing at this low interest rate. What happened between January 1st, 2001 (entering the Eurozone) and the beginning of May 2010 (the outbreak of the debt crisis) was therefore predictable. And inevitable.

During the last five years we have been hearing strong statements from Greek politicians about drastic spending cuts but the data do not support it. Foreign observers keep stressing the high pensions, the absurd amount of teachers per student, the excessive number of employees in the public sector, the generous social benefits, the dysfunctional tax collection system, the high propensity to avoid paying taxes, etc., even five years after the start of the so called austerity measures.

Recently, I noticed interesting data about defense expenditures in various countries around the world (Ekonom, no. 17, 2015). Excluding the United States, where these expenditures approach 3.8% of its GDP (and Russia, where they actually reach 4.2%), Greece, in spite of its debt crisis, spends more on military than any other NATO country – 2.5% of its GDP. Czech Republic only 1.1%, rich Germany just 1.3% and the NATO average is 1.5%![1] One cannot say Greece is saving money wherever it is possible.

The result is Greek debt surpassing 175% of its GDP, the highest debt ratio in the world behind Japan. Its rate of unemployment is 26%, the highest percentage among the “normal” countries in the world. (It is almost four times the Czech rate of unemployment.) The youth unemployment rate is reaching 55%. Since 2008, the Greek economy has diminished by almost thirty percent. This is comparable perhaps only to the drop in Ukraine’s GDP, although in Greece there is not a civil war happening.

Visible and invisible, explicit and non-explicit loans (through the European Central Bank’s TARGET system), together with debt relief (in excess of 100 billion Euros) prove that helping Greece has reached untenable levels. A well-known German economist, Prof. Hans-Werner Sinn (of Munich’s IFO Institute) in the last edition of The International Economy (Winter, 2015), made an interesting comparison: since May 2010, Greece has gotten 29 times the aid Germany received after World War II in the Marshall Plan.[2] Even the present day´s run on Greek banks – tolerated both by the Greek government and the ECB – becomes a sort of hidden additional crediting of Greece.

There is no way to get rid of Greece’s debt other than declaring bankruptcy, which in Greece’s case would be far from the first time. A mere return to normal economic development will not take care of old debts. Not creating new debts – and Greece is still far from this – is not the same as paying off the old debts.[3]

It is trivial to say that Greece made a bad judgement when it decided to enter the Eurozone, which has become a “straight jacket” that has been suffocating it for 15 years now. Coincidentally, I was in Athens at an economic conference on the exact day in the summer of 1999 when its entry was unexpectedly announced. I think back to the Greek conference participants’ euphoria and to the way the foreign participants just shrugged their shoulders. The Greeks thought (and many of them continue to think) that the Eurozone provides them mostly with benefits, which is not true. It costs them much more. Their easily achieved high credit ranking did not help, but instead backfired.

The European Union equally made a huge mistake. It was not done unknowingly. Nobody believed Greek data already at that time. Statisticians and economists have been telling all those who wanted to listen unbelievable stories about Greece’s “innovative” accounting methods. However, the naively pro-integration stance of Brussels (and of pro-Brussels politicians) prevailed, as did their efforts to bring the euro into as many European countries as quickly as possible. The single European currency was regarded as the most effective way to speed up the political unification of the continent. That was (and is) all they cared about. They were not concerned with the inevitable tragic economic consequences for this vulnerable country.

For Greece (and especially for its citizens) the price they pay is immensely high. For the EU it is not as lethally high since Greek economy represents only between 1.5 and 2 % of the EU’s GDP. The first loan Greece took (in May 2010), of around 110 billion Euros, is and is not a lot of money. For a normal human it represents an unimaginable amount, but for the entire EU? I repeatedly told Chancellor Merkel that this is exactly as large (or small?) a sum as Germany has sent yearly for the past 25 years to Germany’s “Eastern countries”, the former GDR, as aid, as internal transfers, as the cost of German reunification (which meant the creation of a German monetary union between two non-homogenous economic entities that had for almost half century been economically separated).

The level of German solidarity makes this possible, but European solidarity of this type does not exist and I do not believe that it ever will. I do not wish anything bad upon, for example, the Finnish, Irish, Portuguese, or the Greeks, but I do not feel the solidarity towards people in these – for me distant – European countries that I feel towards my fellow citizens in Moravia. And I am not ashamed of it.

Nonetheless, Greece, in exchange for the fact that it entered the European Monetary Union willingly, “pleasing” all Euroactivists and Eurofanatics, does need non-negligible yearly aid. It needs it as long as it is in the Eurozone. If it were not, it would not need aid. Slovakia, within the Czechoslovak federation (and Czechoslovak monetary union), also needed this sort of aid; independent Slovakia quickly stopped needing it. Do they not understand this in Greece? Do they not understand this in Brussels? It seems not. Within the Eurozone – in the foreseeable and imaginable future – there is no solution for Greece. Only a continuation of today’s permanent crisis. The Greeks will continue waiting for new aid, loans, gifts, debt reliefs, etc.

The solution would be to abandon the euro, however, in an organized way. Many people are, however, extremely afraid of this even though there is no rational reason to be. A short discomfort and some market turbulences in the short term will happen (the divorce of Czechoslovakia and the dissolution of its monetary union showed that this does not necessarily last long) and then, a quick return to normal economic development should be expected. “Normal” development based on parameters that would suit Greece.[4]

Still, Greece is advised not to leave the euro and devalue but rather to stay in the Eurozone, implement “reforms” and carry out an internal devaluation. The relevant question is: are these reforms and especially the internal devaluation, easily carried out? And do they have fast and significant effects?

It is evident that the reforms recommended to Greece have many political, technical and administrative problems. First, they shouldn´t be reforms imposed from the outside. They should be truly domestic ones (which they are not). Secondly, they can only be effective after a non-negligible delay. Preparing any reform measure – from the conversion of a loose concept into law and from approval of this law in Parliament to its implementation – takes more than a little while. Greece’s competitiveness will fall further and servicing foreign debt will remain extremely expensive. Creditors will remain discontent and the operational freedom of the Greek government will continue to be nonexistent.

Another complication will be caused by the inevitable implementation lag of any policy changes. If the rigidity of the labour code were to change (a commonly known Greek problem), when will that begin to affect the Greeks’ behavior? And when will it begin to affect the Greeks’ behavior enough that it will have a macroeconomic impact? An impact measurable in macroeconomic data?

On top of that, history suggests that all deep reforms begin with sufficiently large devaluations. We know this very well from our own experience. The devaluation of the Czechoslovak crown in the last days of December 1990 was a key step in the post-communist transformation process. It became an important signal and a prerequisite for all following steps. Searching for the correct size of the devaluation was a difficult task intellectually. For me, as the Minister of Finance, it was the most risky step. But we succeeded. For six long years, the exchange rate remained stable.

This much needed maneuver cannot be done by the Greeks these days. Recommended is internal devaluation, the decrease of domestic prices, wages, and all other nominal variables. Though this has been going on in Greece for several years already, it is evident that its tempo is not sufficient. No surprise. The preceding rise of these variables – from Greece’s entry into the Eurozone to the outbreak of the crisis – was enormous. The modern, democratic, and thus excessively socially oriented world has a characteristic that is known as downward price and wage rigidity. Can Greece – with its SYRIZA – avoid this? Data show that prices in Greece started falling too late. Wages and salaries have been falling longer, with the average wage falling nearly 20% from its apex in 2009, but even that is not enough. Greek productivity and exports have not been sufficiently improved by these price movements.[5]

A current trend in the economic profession is demonizing deflation, or a decline in prices, which is just another mistake of central bankers who are obsessed with inflation targeting and defend the targets they themselves created. How is it possible to force upon the Greeks internal devaluation, a fall in prices, and at the same time scare the whole Western world with concerns about deflation and falling prices? Won’t the Greek deflation (or rather does it not already) have all the consequences against which we have been so vehemently warned when discussing deflation?

Greece needs a serious and deep systemic reform, but more importantly it needs an external rather than internal devaluation. Economists must insist – and our communist experience taught us quite clearly – that it is crucial that prices are right. This relates to all prices, but it especially relates to the most important of all the prices: the exchange rate. For Greece today, this price is not right. That is why the country needs to get rid of the euro. That is why Greece should regain its own currency and its own flexible exchange rate (which would not be tied to the euro).

I unfortunately do not believe that this will happen. The European Union – respectively politicians such as Schulz, Juncker, and Tusk – will never allow it.  These people pretend to believe in the possibility of a successful Greek internal devaluation (in the necessary size) and in the immediacy of the effects of all the recommended reforms. They do not care about Greece. They are afraid that the exit of Greece from the Eurozone would hurt the European Union to such an extent, that it would essentially cause the EU to be questioned. That´s all they care about. But the EU problems have not been caused by Greece. Greece is the victim of the EU arrangements. (It doesn´t mean that Greece is an innocent and passive participant in current negotiations only. It is in Greece´s interest to prolong the negotiations as much as possible, they can only win.)

I have repeatedly criticized European politicians, intellectuals and business people for not taking the evident European problems seriously enough. Europe continues marching in the same blind alley as before

- regardless the no change indicating economic data;

- regardless the waning respect and position of Europe in the rest of the world;

- regardless the deepening of the democratic deficit the people in Europe are confronted with;

- and regardless the undeniable increase of frustration of those who are objects of this pan-European constructivist experiment.

The economic stagnation Europe is facing is not a historical inevitability, it is a man-made problem. It is an outcome of a deliberately chosen, and for years and decades gradually developed, European economic and social system on the one hand and of the more and more centralistic and undemocratic European Union institutional arrangements on the other. They both, and especially they together, form an unsurmountable obstacle to any positive development in the future. Let me briefly indicate some steps towards a perspective solution.

1. The European overregulated economy, additionally constrained by a heavy load of social and environmental requirements, operating in a paternalistic welfare state atmosphere, cannot grow. This burden is too heavy. If Europe wants to start growing again, it has to undertake a far-reaching transformation of its economic and social system.

2. The excessive and unnatural centralization, bureaucratization, harmonization, standardization and unification of the European continent have led to a deep democratic defect there. Getting rid of it requires changing the whole concept of the European integration, eliminating its post-Maastricht developments. We have to rehabilitate the concept of the nation-state which has proved to be an irreplaceable institution – for nothing less important than democracy. To continue repeating the erroneous view that nation-state inevitably leads to wars must be stopped.

3. The euro evidently did not help practically anyone. It weakened the self-discipline of individual countries. It created a “fuzzy” state of affairs, without clear delimitation of competencies and responsibilities. It produced an exchange rate which is too soft for the countries of the European North and too hard for the European South. It opened the doors to unproductive and involuntary redistribution (this is not an authentic personal solidarity but government-organized fiscal transfers.)

The belief that the very heterogeneous European economy could be – in a relatively short period of time – made homogenous by means of monetary unification belongs to the category of wishful thinking. Europe can be made more homogenous only by evolution, not by revolution, not by means of a political project.

4. Some directly uninvolved observers and critics (mostly from America) keep telling us – as if we didn’t know – that it was a mistake to establish a monetary union whose members enjoy fiscal sovereignty. They are recommending us to accompany it with a genuine, full-fledged fiscal union and don’t want to hear that the people of Europe want to retain fiscal sovereignty of their nations.

5. Europe faces a big immigration problem. We have to reintroduce some sort of borders, to get rid of overgenerous welfare state policies, and to forget the destructive ideology of multiculturalism. The economists should explain to politicians that the massive immigration is not a necessary precondition for restarting economic growth in Europe. European economic stagnation has not been caused by labour shortage.

6. The much needed change must start by acknowledging that the whole system has failed and that the system must be changed. Partial measures are not significant because they cannot change its substance. We need a fundamental transformation of our thinking and of our behaviour. We do need a “Paradigma Wechsel”.

We should return to free-market principles, to a fundamental deregulation, liberalization and desubsidization of the European economy. We shouldn´t count on more regulation. We already have too much of it. Those of us who experienced communism have to say that we did not expect that government interventionism, to the extent we see now, could emerge again. It seemed to us that the masterminding of the economy from above was so discredited by the communist experience that it could never return. We were wrong.

We also wrongly assumed that everyone took for granted that government failure is inevitably much bigger than any imaginable market failure, that the visible hand of the government is always much more dangerous than the invisible hand of the market, that vertical relations in society are less productive (and less democratic) than horizontal relations.  We were also proved wrong.

This is true not only in regards to Europe. America should pay attention as well.

[1] The Czech army has, according to this same source, 30 tanks, Italy 200, Germany 322, but Greece has 1462 (which is 20% of all NATO tanks!). Russia, as a military superpower, has “only” 2550 of them – quite comparable to Greece.

[2] There are German studies, which state that this economic aid has been more or less irrelevant, of which I am also convinced. It has had the same impact as the “gifts” from the European Union have for us today – aimed mainly at bike routes, water parks, and ski resorts (in areas which have neither enough snow or hills). Meaningful projects do not fit the EU criteria well.

[3] Czech Republic’s debt is about 42% of its GDP and I see no immediate way to pay it off. Accelerating our economic growth could serve to slowly “eat away” at this debt, but Greece’s is at 175% of its GDP.

[4] I always tell the laymen that whoever has a size 44 collar on their shirt cannot wear a shirt with a size 41 collar. Let’s not force the Greeks to wear the wrong size shirt, which means to use the wrong exchange and interest rates.

[5] The huge mistake was the development in the years 2001 to 2010 (not to speak about 1980-1993 era): What is happening in Greece today is a smaller mistake.

Václav Klaus, Notes for Le Cercle Washington Meeting, The Fairfax at Embassy Row, Washington, D.C., June 28, 2015.