Seven Bad Years for Greece and No Good Ones on the Horizon

The country’s economic crisis has gone on for so long because Greeks refuse to give up on the illusion that nothing has to change except their creditors’ demands.

David Rosenberg
David Rosenberg
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A Greek flag flutters as tourists visit the Acropolis hill in Athens on July 5, 2015.
A Greek flag flutters as tourists visit the Acropolis hill in Athens on July 5, 2015. Credit: AFP
David Rosenberg
David Rosenberg

Dr. Evil, the archvillain in the “Austin Powers” series, struggles through much of the first film trying to bring his wicked schemes up to date. He’s been cryogenically frozen for 30 years, making him unaware that in 1997 destroying the ozone layer or wrecking Prince Charles’ marriage no longer make it as viable threats. Unaware of inflation, he’s greeted with laughter by world leaders after demanding a mere $1 million in exchange for not destroying the world.

Funny thing is, if Dr. Evil had been frozen in the spring of 2010 and awoken today, he would find Greece, its debt and economy unchanged at near death. The spring of 2016 looks pretty much like the spring of 2010, 2011, 2012 and certainly 2015. Greece is on the financial precipice, people are in the streets striking if not rioting, the European Union, European Central Bank and International Monetary Fund are demanding austerity and reforms, and Athens is playing coy, if not resisting outright.

Thawing out this week in downtown Athens, our chronologically challenged villain might scheme about engineering the election of a big-mouthed, failed casino entrepreneur and reality-show star into the White House and destroying America from within only to discover that this work is almost complete. But Dr. Evil would be as correct in 2016 as in 2010 that nary a dime could be squeezed out of a bankrupt Greece.

Economic crises come, but they usually go within a few years. The global economic crisis that exposed the overspending, cheap-credit-addicted Southern European economies goes back to 2009, but if Spain, Portugal and Italy aren’t exactly thriving, they have their finances under control.

By contrast, Greece’s economy is still shrinking and its unemployment is over 25%. Big cuts in labor costs haven’t translated into rebounding exports as has happened in other crisis economies. Athens is seeking 5 billion euros ($5.7 billion), the first protests have begun in Athens against the EU’s conditions, and Alexis Tsipras’ government is engaging in another round of anti-IMF demagoguery and foot-dragging on reforms.

At 180% of gross domestic product, Greece’s debt problem is far worse than that of the other indebted EU countries, but back in 2009 it wasn’t. The government let the problem fester and the EU – and until recently the IMF – made the problem worse by insisting that no matter how big the debt, Greece would have to pay it in full. Outside help consisted largely of more loans to help pay the ones coming due. Having the euro as its currency deprives Greece of the option of a devaluation that would help make its economy more competitive around the world.

Two men dressed as German World War II soldiers with Nazi swastika armbands in front of a banner reading 'Merkel out, undesirable' during a protest in Athens, October 9, 2012. Credit: AP

Homegrown problems

But there’s a big difference between Greece and other countries that have had to recover with a credit-fueled hangover. The Greek economy is sick and the Greeks – whether it’s the politicians, the business community or the voters – are determined to avoid the medicine of deep structural reform, despite all the suffering the sickness has inflicted on them.

Athens has cut spending and raised taxes as it was ordered to do by its creditors, but no one thinks that austerity alone can turn an economy around. Still, to this day more than half of Greek households are exempt from filing a tax statement. Pension costs are skyrocketing, even if Greece has put a little order into a Byzantine system.

Even today, pension costs eat up an estimated 15% of the state budget, and Greece has just 1.7 workers for every retiree, an impossible ratio. The labyrinth of rules and regulations that stifle the private sector remain in place. Powerful business groups and monopolies have barely been touched, even though the ostensibly left-wing Syriza party has been in power nearly 18 months. Privatization is dead in the water; cronyism and corruption are still going strong.

So what can we learn from the Greek suffering?

The first is that when a country’s economy is going down the drain that country is on its own. The EU may be a union, but each member and its leaders looks out first for their own country’s interests. Germany is willing to foot the bill for Greece’s bailout because it wants to preserve the EU and the euro, not because it feels Greece’s pain.

Israel's Prime Minister Benjamin Netanyahu, right, and Greece's Prime Minister Alexis Tsipras, hold joint a press conference, in Jerusalem. November 25, 2015. Credit: AP

The second is that reform has to be bottom up. At the very bottom, the public must understand that change, even painful change, is unavoidable. Then the bureaucracy and the politicians have to be on board; that never happened in Greece. Reform is still what officials parachuting in from Brussels or Washington demand; the Greeks, for their part, resist.

The third is that good economics isn’t always just and often isn’t very pretty. Crises have costs, like growing unemployment and poverty and fewer opportunities, and those costs are never fairly distributed. But they’re really the only way in an imperfect world to solve problems.

Pesky populists

This isn’t about schoolmarm morals. Yes, countries that play fast and loose with their finances should pay the consequences, not because the wicked must be punished but because in economics, sticks are usually more effective tools than carrots. Greece won’t be capable of bearing the cost of a generous pension system unless its workers are more productive and competitive in the global markets. A debt bailout won’t do that, but falling wages and unemployment could get them there.

Finally, beware of the populists. In the Greek worldview, it was bankers, Germans, EU bureaucrats, the IMF and just about anyone but the Greeks who were responsible for the troubles. To a degree they have a point; for instance, banks happily lent Greece money without inspecting the country’s loopy finances before the crisis hit.

But it was the Greeks who created those loopy finances, and the old pre-crisis economy that Greeks now look back at nostalgically relied on the creditors they now scorn. There would have been no good old days without the money the Greeks now say they were tricked into taking.

Sneer at the hapless Greeks as much as you like, but all these takeaways apply to Israel, too. Even if right now we’re sitting pretty as far as our national finances are concerned, we have our fair share of populists telling us that if we’re not living like princes it’s because of tycoons or Bibi.

They tell us we can have our cake of low inflation, low unemployment and sound government finances and eat it, too, by spending lavishly on reducing poverty and improving schools, hospitals and infrastructure. In their world, there are no trade-offs to decide between, just enemies to defeat.

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