Saturday, July 18, 2015

The Aisles of Grease; the Aisles of Grease

That title will have Lord Byron will be spinning in his grave but at least he is now lubricated.

The last month or more my new feeds have been filled with articles on the Greek Crisis.  Actually ever since the election of the avowedly left-wing, anti-austerity Syriza Party led by Alexis Tsipras.  After five years of crippling austerity, Tsipras intended to negotiate a better deal for Greece. As you know, he failed miserably, being forced into a worse deal than if he had settled earlier.

Articles tend to fall into two main categories.  Greeks deserve everything they get; they are lazy, corrupt, incompetent spendthrifts while Germans are hard working, honest, and good managers so why should German taxpayers have to pay for lazy Greeks? These articles are found on pages of the usual suspects. The other side says Greece is certainly not blameless but they had a great deal of help, while Germany is not so righteous as they like to make out.  These articles are also found on the pages of the usual suspects.

Having done some consulting work in Greece a couple years ago and now having friends there has increased my interest in the country about which I knew virtually nothing before. This attempt to walk through the mess is as much for my own edification as anyone else's. So please bear with me.

Some history, first. Churchill and Stalin allegedly worked out the 80:20 sphere of influence agreement to keep the Communists out of Greece.  The Communists and several moderate social democrat type organizations  had become strong in Greece, pushing for a Republic, prior to the war to counter the extreme right which was also strong and I believe running the place at the time with a very unpopular king.  (See Anthony Beevor's Crete: the Battle and the Resistance). The inevitable civil war began even before the war ended with the Communists, as always, destroying the moderate left. At war's end, the British found themselves aiding and arming the very extreme right they had been battling against the Communists (See Andre Gerolymatos' Red Acropolis, Black Terror: The Greek Civil War and the Origins of the Soviet-American Rivalry 1943-1949)

Democracy was restored to Greece under a constitutional monarchy.  It lasted until 1967 when the government of George Papandreou was overthrown by The Colonels junta under former Nazi collaborator George Papadopolous, aided and abetted by the Johnson administration and the CIA.  The problem was George Papandreou's son Andreas, American educated and active in the Greek government as Economics Minister. His mortal sin was to pursue a Greece independent of American foreign policy. In 1973 Col. Demitrios Ioannidis overthrew Papadopolous.  In 1974, Turkey invaded Cyprus and the military government was forced by the Greeks to give way to a civilian government.  Details are  HERE, including Johnson's famous quote regarding Greek democracy and constitution.

Having recently emerged from dictatorships, and desiring to consolidate their democracies, Greece (1981, followed by Spain and Portugal in  986) joined the EU. Greece entered the Schengen Area in 2000 and qualified to join the Euro Zone and qualified to join and was admitted in 2001 to the Euro Zone which came into effect in 2002. This brings us to the beginning of our tale.

The euro was one of those things which seemed like a good idea at the time. Europe is a mess of little countries.  The EU aka Brussels created a common set of regulations to allow easier trading among its members but they each had their own currency and their own central banks.  Tanya and I traveled from Ukraine to Bulgaria via Moldova and Romania in June.  Each has its own currency so needless to say, we did not stop nor spend anything in Moldova or Romania.  So a common currency made sense in that regard.

The EU in 2014 had a population of 500 million and a GDP of $18.45 trillion USD or 13.9 trillion Euros.  The Euro Zone had a population of 330 million and GDP of $13.67 USD or 10.3 trillion Euros all with a single currency. One of the strengths of America has been a huge economy with 330 million people and a single currency.  This creates a strong currency as it is backed by all the economies of the Euro zone, ESPECIALLY Germany.

But America also had the benefit of a single government, a single monetary and fiscal policy (if they are different - I have no idea).  The EU does not.  Yes, the European Central Bank aka Brussels tries to set some common standards and exert some control but each country still has enough sovereignty to do things on their own.  Like borrow money. And banks would loan money to a country with a weak economy on the strength of the Euro zone Economy.

There was another "side-effect" to the single currency.  Countries with independent fiscal and monetary policies can to a certain extent increase or decrease the value of their currency relative to other currencies.  A country with a weak economy can devalue its currency, reduce the amount of imports which become more expensive and increase the amount of exports which become less expensive.  At the time of the introduction of the Euro, the German Deutschmark was the strongest currency in the world which meant Germany had a very difficult time exporting as German goods were so expensive. See this article.

So the introduction of the Euro had the effect of diluting the Deutschmark with the weaker currencies of the weaker economies such as Portugal, Italy Ireland Greece and Spain, the PIIGS.  Germany has been living high off the backs of the weaker economies.  The PIIGS all had meltdowns after 2008 and had to be bailed out.  Meaning the private banks that loaned them money were bailed out by the IMF and ECB with German money aka The Troika.  PIIS are supposedly recovered after instituting austerity programs and are now paying back the bail out.  TANSTAAFL.  Greece was/is the major exception. This WaPo article explains why.

When exactly Greece got into bad governance habits, I do not know.  There are likely books or articles somewhere but I have not found nor read them.  Greeks are NOT lazy.  Those that have jobs work longer hours than the rest of the EU.  Greece does have an early retirement and supposedly very generous pension program.  I know in agriculture, Greece took the EU payments and used them mainly for subsidies rather than overhauling the entire inefficient industry.  There are allegedly too many bureaucrats and allegedly bureaucrats and politicians are notoriously corrupt.  Tax slippage is extremely high with the rich paying little or no tax and not much effort expended to correct it.

Greek statistics according to EU standards are totally untrustworthy.  A couple of years ago the EU sent in an expert to help improve Greek statistics and he was threatened with arrest for disclosing government secrets.  So it should be no surprise that the Greek government fudged the books in order to get into the Euro Zone.  Why did they want in?  So they could borrow more money.  Way more money.

Robert Reich explains quite nicely in his column yesterday how Goldman Sachs conspired with the Greek Government to hide sufficient debt to come in under the debt to GDP ration necessary to get into the Euro. And how in the process they doubled the amount of debt and made themselves several hundreds of millions of dollars in the process.  William D Cohan, writing in the NYT tries to rebut Reich by explaining that Goldman Sachs was innocent of all wrong doing as they just did what banks do, all perfectly legal.  To which Reich replied that was his point exactly.

Of course, when a country gets in trouble and needs bailing out, the private banks get the bail out and are free and clear, the country gets the restructured debt and its citizens are forced to pay it off.  And austerity simply makes the country's economy perform even worse, lowering its ability to pay.  Which is why the IMF have concluded that Greece's debt which now equals about 200% of GDP can never be paid off.  But Brussels and Germany are determines to destroy the country as an example to PIIS.

The anarchist in me, and many others seem to agree judging by articles and comments, says that Greece should pull out of the Euro, revert to the Drachma and tell the Troika to GFT.  Tsipras wanted the  best of both worlds.  He wanted the Troika to take a haircut and still stay in the Euro. In the last desperate round of bargaining, after last Sunday's referendum, he didn't even have a plan to pull out of the Euro which is why they could stick it to him.

All I can say is the fat lady has not yet sung.



http://reverbpress.com/finance/goldman-sachs-fingerprints-current-financial-crisis/

http://www.thenation.com/article/goldmans-greek-gambit/


4 comments:

  1. People get mad at me when I say Amerida could be next...

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    Replies
    1. Possible, but when it happens, we all go down the tube.

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  2. Thanks for a very enlightening post - I haven't been following the Greek Crisis closely so it's nice to get a concise explanation.

    ReplyDelete