The Greek Syndrome

How much is enough, or how much is not enough? This is the question…

The Greek drama evolves before our eyes like a slow motion train crash. On the one hand, there are the irrational expectations of the foreigners – be it the Eurozone finance ministers or the IMF, the private banks, driven by reckless greed in the past while borrowing too much and too easy, or certain opinion-influential media – which would like the Greek austerity measures to go yet further. On the other hand, there is a brave and responsibly acting new government of Greece, which seems to be pushing its society to the limits. How far can one go to this end?

I’m afraid there is no more room for further cuts of public expenditures. Enough is enough. Imposing the budgetary cuts the government is cutting the branch upon which it is sitting. The fifth consecutive year of recession has eroded the tax basis significantly and the fiscal revenue, instead of growing, can only shrink further, even taking the tax increase into account. Austerity is recessionary, which is now acknowledged even by the IMF. Three years of Greek austerity raised the debt over GDP ratio from 113 to 163 percent. The Greeks are spending less and their debt is higher by a half of their GDP! Such policy doesn’t make much of sense.

As a consequence the rate of unemployment is one of the highest in the world among industrialized countries and stands at 21 percent, with a staggering 48 percent of young people out of work. Expecting that they will be watching TV, and not demonstrating and fighting in the streets is extremely naïve. The homelessness has jumped over the last three years by 25 percent. Furthermore, close to 28 percent of the population is on the brink of social exclusion…

Thus, expecting that the Greeks will tighten their belts more and more is unrealistic. One should not push the people beyond the limit of their tolerance. Such pressure is not a policy. This is stupidity. If one wants to have “the Greek Spring” – and, later, “the European Spring”, why not? – one can continue an illusion that people of a great nation are so unwise that they will starve to pay an exorbitant debt to the foreign creditors forever. It must be stressed that a lion share of public debt results not from the fact that indeed the Greeks were living beyond their own means for quite long, but from speculatively high interest rates imposed on refinancing credits. Therefore a plan – or rather a fiction – that the Greek debt from a current 160 percent of GDP will be brought down to 120 percent by 2020 is another sign of a lack of pragmatism. Even if it would happen (and it won’t), such financial burden would remain unmanageable.

It’s true that Greek macroeconomic policy prior to the crisis was unaccountable. And the Greek people must pay for it dearly. They are already doing so. But is also true that the foreign bankers didn’t show a great deal of intelligence and responsibility when they were lending too much money to Greece. And they must pay for it dearly too. So far they haven’t. It is also true that the Western leaders – especially Chancellor Angela Merkel and President Nicholas Sarkozy – have made a series of policy mistakes by postponing the decision to cut down nonperforming Greek debt and by trying to protect the interests of private investors. As for the debt reduction too little has been done too late. Some politicians and policymakers must pay for their mistakes too, and the forthcoming elections in France and Germany make a good occasion to draw proper conclusions…

So, where do we stand now? We are certainly at a crossroads. But I think it is indeed the time to face the truth: the Greece syndrome is like a slow motion train crash. Is there still a chance to avoid it? Definitely not by believing in completely unrealistic scenarios that the Greeks will fast as much as it needs to pay the mounting debt, with completely unacceptable high private debt interest rates that would make a rich man poor. And not by lying and sweeping part of the challenge under the carpet, as the Eurozone finance ministers and certain leaders of the European Union are tempted to do again and again.

The only chance for a working solution is an escape forward. That implies a comprehensive – and executed very fast, in a matter of weeks, not months – reduction of 80 percent of foreign debt, and significant loan, provided by the EU, with zero interest rate. The easiest solution would be for the European Central Bank to buy new issues of Greek government bonds, but its hyper-liberal statutes and German establishment will not allow it to do so. The ECB has off-balance-sheet resources of 3.3 trillion Euros, an equivalent of the current value of its seigniorage (or times Greece’s GDP). If it is only used properly the issue of sovereign debt can be resolved for the whole Eurozone.

Otherwise there will be the misguided policy of restructuring the debt by raising it an amount that is already unsustainable. Hence the alternative is default and chaotic bankruptcy. It will be followed by serious and unpredictable consequences not just for Greece, but for the Eurozone and other partners from the EU and from elsewhere, starting from South East Europe, Turkey, and – due to the contagion, domino effect, and psychological influence upon the market expectations – from a number of other regions and countries. My point is clear: let’s help Greece – and ourselves – now, with the lower price tag attached, or it will cost us much more, in the near future. Cheating the public, and miscalculating and misleading the market, is neither a strategy, nor a policy. It is sheer stupidity.

After the meeting of the Eurozone finance ministers and decisions about releasing the new tranche of Euro 130 billion bailout, we can continue saying that things are on the right track. No, they are not. They are on the track of a catastrophe which we are already witnessing, yet the picture is shown in slow motion…

8 Responses to "The Greek Syndrome"

  1. Aegean1972   February 21, 2012 at 2:44 am

    Nothing more to add to the article. Totally agree with Mr Kolodko.
    Its much cheaper to save Greece and act immediatly with a growth-plan, than let Greece default and open Pandora's box for Europe and then the contagion spreads to the US.

    Yesterdays agreement (130bn) should be followed immediatly with a plan for growth.

    In the decades ahead, the US should lead and Europe must be its stronger allie. They must work together in all areas. Strategically, economically, military, etc. They should also bring more countries under their wing (including India).

  2. diatoo1   February 21, 2012 at 7:07 am

    Brilliant article. The only thing not so very much clear is who is finally to bear the risks and the burden of doing that. I would agree if that is somehow – more or less pro rata within the EZ – distributed on the G20 level including in the first line the EU / EZ and in the second line the US (which plundered the european banking sector with selling worthless papers), unless the non-EU countries feel they are unaffected by the problem. As a German citizen I would under no cicumstances agree to Euro-bonds (with Germany in the role of guarantor of last resort).

  3. Per Kurowski   February 21, 2012 at 6:07 pm

    “foreign bankers didn’t show a great deal of intelligence and responsibility when they were lending too much money to Greece”

    Your bank regulators, those who gave you Basel II and who are now giving you Basel III, allowed all European banks to lend to Greece holding only 1.6 percent in capital, which means authorizing a leverage of bank capital 62.5 to 1. You tell me how intelligent was that?

    In all truth it was the bank regulators who did the eurozone in.

  4. Tobin   February 22, 2012 at 6:26 am

    Εxcellent article!!!
    The implementation of austerity measures and the lending with 3-5% it is not solidarity on behalf of European Union. The preposition of Mr. Kolodko is not only altruistic but also rational since will protect not only Greece but also the European and the Global economy from uncontrollable contagion effects. Was Keynes stupid when proposed that Germany should not pay war reparations after the Second World War. Unfortunately some of the European Politicians are either arrogant or ignorant of history!

  5. alexmedossys   February 22, 2012 at 12:12 pm

    No one should underestimate the huge drag the enormous public service has on the Greek economy.
    The Keynesian model cannot be relied on in the same manner as it was in the past to stimulate spending and boost the economy.
    Greece has to look towards modernizing its infrastructure and work methods.
    The huge amounts of government red tape that private business has to go through is a huge drain and thwarts creativity and efficiency.
    Reaganize the bureaucrats.
    Allow Greeks in Greece to perform and do what expat Greeks have been doing for years.
    They are natural free traders and capitalists at heart.
    Remove their chains in Greece and you remove much of the impediment to Greek prosperity….as long as their security (military and otherwise) is not at risk, Greece can succeed quite handsomely in a globalized market.

  6. ewulf   February 22, 2012 at 6:43 pm

    How can a fat man run the marathon?.Traditional Macro economics policies, do not have a solution for Greece.So, it is pressing for the absurd situation that such a fat man end up winning all of the competitors.Economics Emergencies ,need exceptional (emergencies) policies.

    • Grzegorz W. Kolodko
      Prof. G.W. Kolodko   February 22, 2012 at 7:08 pm

      I'm running marathion form time to time. Recently, 3 weeks ago, the Egyptian Marathon (see!/media/set/?set=… . The most important is commitment. Well, you have to be fit, not fat.
      As for the Greek Syndrome, of course, it's a unique case and calls for unorhodox approach. this is a part of the problem.

  7. Deva Sagayam   February 25, 2012 at 4:23 am

    Greece is finding out its real economic level now.
    It was obscured.
    Where is the growth going to come from?