A Greek exit could not be more costly than the current path

It appears the Germans (with their Finish and Slovak cronies) have lost all sense of reason, if they ever had any. Germany has the socio-pathological excuse of having suffered from an irrational ‘inflation angst’ since the 1930s and has forgotten its disastrous conduct during the 1930s and 1940s and also the generosity shown it by allied nations who had destroyed its demonic martial ambitions. Finland and Slovakia have no such excuse. They are just behaving as jumped-up, vindictive show ponies who are not that far from being in Greece’s situation themselves. Sure the Finns have a national guilt about their own notorious complicity with the Nazis in the 1940s but what makes them such a nasty conservative allies to the Germans is an interesting question. It also seems to be hard keeping track with the latest ‘negotiating offer’ from either side. But the trend seems obvious. The Greeks offer to bend over further and are met by a barrage of “it is going to be hard to accept this”, followed by a Troika offer (now generalised as the Eurogroup minus Greece which is harsher than the last. And so it goes – from ridiculous to absurd or to quote a headline over the weekend – From the Absurd to the Tragic, which I thought was an understatement. There are also a plethora of ‘plans’ for Greece being circulated by all and sundry – most of which hang on to the need for the nation to run ‘primary fiscal surpluses’, with no reference to the scale of the disaster before us (or rather the Greek people). It is surreal that this daily farce and public humiliation (like the medieval parading of recalitrants in stocks) is being clothed as ‘governence’. Only in Europe really.

We now know that the Eurogroup is not content to destroy the credibility of the Greek government and have the Greek prime minister come cap in hand begging for money and agreeing to turn his back on the sentiments of his own people, expressed so strongly last Sunday.

The latest document from the Recession Cult “has demanded even deeper measures from Athens, which Euclid Tsakalotos has apparently acceded to” (Source).

They now want a “primary surplus target of 3.5 percent of GDP by 2018″, much deeper pension cuts, widespread product market deregulation, a more comprehensive privatisation program (so that the northern capital owners can get their hands on Greek assets for cheap), massive deregulation of the labour market, wind-back legislation since the beginning of 2015 “which have not been agreed with the institutions and run counter to the program commitments” and put all of that on top the harsh austerity that has already been pushed leading into the referendum.

The sentiment is that Germany is not going for an exit for Greece but “total … submission and probably a new government by … end of the week”.

Well that document was then overtaken by the public release (via leak) of the “four-page document that … [proposed] … Greece leaving the euro temporarily by taking a “time-out” from the currency bloc” and sequestering more than “€50bn worth of assets as collateral for new loans and for eventual privatisation.”

But the ‘climax’ of the public ‘caning’ (torture, whatever you want to call it), came late yesterday, when the German Chancellor proposed that Greece:

… surrender of fiscal sovereignty as the price of avoiding financial collapse and being ejected from the single currency bloc. (Source)

The process yesterday whereby Tsipras and his Finance Minister were subject to threats, moral lectures and ultimate humiliation was described by a “senior EU official” as an “exercise in extensive mental waterboarding”.

The same senior EU official said the increased harshness of the measures was “payback for the emphatic no to the creditors’ terms delivered by the snap referendum that Tsipras staged a week ago.”

Vengeance by the powerful elite. A most venal strategy to destroy the weak.

So finally, the Troika will “occupy” Greece, the first time that a foreign power has occupied an advanced European nation since you know when.

The Troika’s creepy, mindless, neo-liberal Groupthink-besotted economists and officials will parade around Athens in their expensive suits lording it over a suffering nation as part of the occupation and take-over.

Apparently, this is to “monitor the proposed bailout programme”.

The Troika would edit “legislation before it is presented to parliament” and force timetables of policy change through the Greek legislature.

But soon the Greek government will be no more – Tsipras’s stupidity has engineered a massive split in his ranks and the Guardian is now reporting that the rejection of the bailout by many of his MPs has stripped “his government of a working majority”.

The Troika chalks up success number X – they wanted regime change all along. There were photos of the New Democracy leader from Greece swanning around Brussels during the weekend’s torture, presumably telling the Troika that he would deliver whatever they wanted with relish. Appalling.

Tsipras, seemingly on another planet, is still talking about all this as a “compromise”. He obviously is not up to it.

What led them into all this, way back then, was the Franco-German rivalry, that is a long-standing thorn in the side of European prosperity and cooperation. Its permeated into the Eurozone design once the US Monetarists took over the brains of the French economists in the 1970s.

The French had previously understood that statehood was about advancing the well-being of all citizens and providing jobs and economic security for them. Once they became infested with the Monetarist-neo-liberal Groupthink, it was easy for a wannabee like Jacques Delor to sell out to the Germans and come up with the Maastricht plan.

Well, the Franco-German rivalry is still apparent and that will be an on-going Act in this Tragedy as the supremacy of the Germans (backed by those pitiful Finns and Slovaks) strengthens in the face of the Greek capitulation.

Two weeks ago, Merkel was running around like a headless chook – having had her bluff called by the referendum call. Now she is the boss lady along with Madame Lagarde.

The former boss of the German Social Democratic Party (SDP) – Oskar Lafontaine – who became German Finance Minister for a short period (October 27, 1998 to March 18, 1999) in the first government of Gerhard Schröder after he helped undermine Helmut Kohl’s Chancellership in the 1998 Federal elections, has pronounced (Source):

Der Euro ist gescheitert …

In English, “the euro has failed”.

For those not familiar with the history of the late 1990s, Lafontaine, as German Finance Minister, led the German charge against the British Euroskeptics.

In the current era, the right-wing fanatical Dutch politician Geert Wilders has been labelled “Europe’s most dangerous man”.

According the UK Sun newspaper, he competes for that title with European Commission boss Jean-Claude Juncker, who they labelled a “ruthless opportunistt … who admits lying and backs secret debates on European finances”.

But in 1998, the Sun newspaper had a different public enemy No. 1 – Oskar Lafontaine.

All was explained in this ‘Saturday profile” in the British Independent (November 28, 1998) – The Saturday Profile: Oskar Lafontaine: Europe’s most dangerous man?.

The Murdoch press (the Sun) had been raving on about “Gallic-Teutonic monsters” for some time as the spectre of Europe was seen to be a basic threat to British independence. Lafontaine encapsulated that threat.

Most recently, Lafontaine gave an interview to the Magazine section of Der Spiegel (29/2015), which carried the title noted above – Der Euro ist gescheitert.

He said the the Euro is a step backwards in the path to European integration. The people of Europe are not moving closer together but are, instead, becoming more estranged from each other. He cited the rise of extreme right groups, like the National Front in France as a dangerous trend.

He said the crucial error in the formation of the monetary union was not to have first, created a political union. Without a truly European government with fiscal authority, the common currency could not operate effectively.

He says that is what is now patently obvious. With wages flat and growth in Germany being driven by a mercantlist export mania, the neighbouring nations such as France and Italy are slowly losing their industrial market shares. He also said that the German model cannot be the basis for a European agreement.

It is not the first time he has said this. Back in May 2013, he referred to the monetary union as the “catastrophic euro” (Source).

At that point he called for the EMU to be abandoned. He said that the way the monetary union had unfolded was “leading to disaster” and “unemployment has reached a level that puts democratic structures ever more in doubt”.

He particularly though that “Germany’s strong-handed tactics in carrying out internal devaluations in Spain, Portugal, and Greece” were generating catastrophic effects.

In terms of domestic wage freezes in Germany, he considered these were just a “self-serving” strategy “to improve their own export niche”.

He said:

The Germans have not yet realized that southern Europe, including France, will be forced by their current misery to fight back against German hegemony sooner or later …

Hubris and nemesis!

In his latest Jacobin interview (July 10, 2015) – From the Absurd to the Tragic – Greek Syriza politician and leader of the Left platform Stathis Kouvelakis, invokes the ideas from ancient Athenian mythology – hubris and nemesis.

Hubris was the Greek god of arrogance, excessive self pride and self-confidence who engaged in “the intentional use of violence to humiliate or degrade” (Source).

And you know what happened to those who became so full of themselves that they disregarded (according to the Athenians) “the divinely fixed limits on human action in an ordered cosmos”?

In the so-called “shame culture” of Classical Greece, people saw hubris as a guide to avoid “shame” and seek “honour”.

But just in case, there was – Nemesis – the goddess of “distribution”, who brought “divine retribution against those who succumb to hubris”.

Nemesis distributed fortunes according to “what was deserved” – she dished out justice in other words.

There is some role for Nemesis now in this modern Greek tragedy. And one suspects that those up North in Europe are the ones that will ultimately suffer in all of this, but perhaps not to the scale of the suffering they are inflicting on the South.

Humiliation! At least the Italian Prime Minister Matteo Renzi has the courage today to tell Germany that “Humiliating a European partner after Greece has given up on just about everything is unthinkable … the humiliation of Greece must stop” (Source).

There have been several ‘plans’ circulated in the last few days by commentators outside of the so-called negotiations as to how to resolve this human tragedy.

One such plan came from a couple of German-based researchers – A Workable Reform Programme For Greece – which insists that the “rules and regulations” of the Eurozone are maintained and Greek obeys them.

Not a good start.

It wants Greece to continue paying its toxic (my word) public debt obligations and suggests that the EU structural fund stump up €35 billion to provide funding for investment in Greece.

The money, by the way, is due under EU regulations to Greece, but this fund requires euro-for-euro matched commitments by the national government and Greece “simply didn’t have the money” to participate in the scheme.

Why not? Because it was paying back bailout money that was largely going to external interests rather than stimulating the Greek economy.

So this proposal maintains this drain of Greek ‘growth’ dividends (the growth coming from the investment) by claiming that Greece has to “achieve a primary surplus of 2% of GDP” until at least 2019 or 2020.

In recommending that they also note that a “binding step of this kind is subject to economic risks since a worse-than-expected economic environment always brings spending cuts that damage the economy or push up debt”.

Yes, we already know that austerity fails, so why recommend it? They just cannot break out of the Groupthink no matter how ‘helpful’ they want to be.

There can be no legitimate case for the Greek government running primary surpluses at this time. They need substantial fiscal deficits to stimulate growth.

An investment of €35 billion from external funds, while helpful, would not be anywhere near sufficient to get the economy back on a growth path.

Another plan came from the “Left Platform of Syriza” and is labelled – The Alternative to Austerity.

It at least confronts the reality – Greece has to exit and “interrupt” the debt repayments unless austerity within the Eurozone is abandoned.

It recognises that the Troika have resorted to “blackmail” and that the Greek government should instead only agree to:

… a program without any further austerity, providing liquidity, and leading to debt cancellation, or exit from the euro and default on the repayment of an unjust and unsustainable debt.

And moreover, they recognise that austerity is tantamount to any insistence of “primary surpluses and balanced budgets” and that “exit from the euro” and the:

… cancellation of the major part of the debt … are absolutely manageable choices that can lead to a new economic model oriented towards production, growth, and the change in the social balance of forces to the benefit of the working class and the people.

They note that exit is a “feasible process” that saves Greece from “the unacceptable programs included in the Juncker package”.

They appear, however, to only see exit in terms of the current bailout discussions rather than the broader issue of the basic dysfunction of the monetary union, as noted above by Oskar Lafontaine. Exit is the option that all Eurozone nations should plan unless the basic architecture of the monetary union is radically altered to create a true fiscal union.

The Left Platform of Syriza appears to be the only Greek political element that understand that exit would:

1. Restore “monetary sovereignty” and allows the financial system (banking etc) to be safeguarded.

2. Provide the capacity to invest in Greek infrastructure and engender employment growth.

3. Aid the development of productive enterprises.

4. Bring “fiscal justice and redistribution of wealth and income”.

5. Accelerate growth and reduce unemployment.

They also understand that being part of the EMU does not mean you are European just as leaving the EMU does not take away a nation’s status as being European.

Last year, I analysed the third-quarter Greek national accounts data to get some perspective on the scale of the problem confronting the nation – in terms of the data. Please read my blog – Greece – return to growth demonstrates the role of substantial fiscal deficits – for more discussion on this point.

To try to understand what an investment injection of €35 billion (as proposed above) would mean, given that the nation would continue to run fiscal surpluses, I spent a bit of time yesterday considering the most recent national accounts, trade and labour force data for Greece.

While it is common knowledge that the Greek economy has shrunk by around 26 per cent in real terms since 2008, it is less understood what a recovery path might look like.

The stark reality is that the Troika’s austerity has inflicted such a scale of damage that even recovery will be decades in the making if there is not a radical change of direction away from austerity.

Consider the following graph which shows the Employment to Population ratio (employment as a percentage of the population above 15 years) in Greece from the March-quarter 2001 to the March-quarter 2015 (blue solid line). This is the data drawn from the quarterly labour force survey conducted by the Hellenic Statistical Authority (El.Stat) – Labour Force data.

The ratio has dropped from a peak of 49.2 per cent in the September-quarter 2008 to 37.8 per cent. This is incredibly low by international standards. Nations such as Australia have EPOP ratios around 61 per cent.

The next graph show the evolution of total employment over the same period.

The peak employment level was 4639.6 thousand achieved in the September-quarter 2008. Then the sudden drop occurred as the Troika closed in on the Greek government and the conservative Greek government surrendered as the pressure was put on them to inflict austerity.

Between the peak quarter (September 2008) and the trough quarter (December 2013), Greece lost 1,159.7 thousand jobs or 25 per cent of their total employment base.

Unemployment rose by 973.2 thousand (27.8 per cent) from 364 thousand (7.3 per cent).

There was a slight reprieve in job loss in mid-2014, but since then the economy has contracted again and employment is falling again.

The dislocation associated with the current craziness will see substantial losses in the coming quarters as Greece sinks back into deep Depression (worse than recession).

But the employment losses are massive already and have been caused by the imposition of the fiscal austerity and the obsession with fiscal surpluses.

There is no doubt that an early exit in 2009, when it was obvious the Eurozone was a failed structure (it was obvious before that – like in 1991 it was obvious it would be), that these employment losses could have been avoided.

I recalculated a prospective future employment growth trajectory as a mental exercise and the result is captured by the blue dotted line.

Suppose that total employment in Greece grows steadily from this point forward (latest data is for March-quarter 2015) at the average quarterly rate of growth that was achieved between the March-quarter 2001 and the peak September-quarter 2008.

In historical terms, that was a fairly robust rate of employment growth – almost what we might call exceptional.

That average growth was 0.3 per cent per quarter. The blue dotted line then simulated total employment growing steadily at that rate – note it is the same slope as the earlier growth period without the little real-world wobbles.

I kept pushing out the projection until the new total employment level was once again equal the September-quarter 2008 peak.

Past 2020 I went, past 2025, past 2030, until the extrapolation ends in the December-quarter 2034.

This suggests that even under very favourable growth conditions (which were evident before the crisis), it will take Greece another 20 years from now to regain the employment lost by the imposed policy austerity.

And by then the population will have continued to grow modestly. The average labour force growth over the 2001-2008 period was 0.2 per cent. So employment growth before the crisis was slightly faster than the underlying population growth which allowed the unemployment rate to fall slightly.

Assuming the labour force growth matched its previous average, then by 2034, when employment finally catches up with where it was in the September-quarter 2008, unemployment will still be 937.3 thousand or 16.8 per cent of the labour force.

These numbers are not wild guesses and they are on the optimistic end of the scale. It could be that the situation in Greece remains so dire that labour force growth doesn’t occur (it is currently negative) as people leave the nation looking for opportunities elsewhere.

The nasty little Baltic states which are among the shrill chorus berating Greece for daring to challenge their ‘Austerity Path to Oblivion’ model of nationhood, have seen substantial reductions in their population. That is one of the reasons that ratios that put the population or labour force in the denominator (like unemployment rates etc) look better now.

It is certain that if Greece follows the austerity path any longer it will gradually become a geriatric state as its youth abandon the nation in search of better opportunities elsewhere. They along with the skilled workforce.

Given employment growth even under favourable conditions is unlikely to be as high as it was pre-crisis, the situation will remain worse than this simulation might suggest.

Unemployment will remain very high for decades.

But then we know that austerity will not produce such growth rates remotely like those that Greece has achieved before the crisis.

Then the situation becomes more dire than one could imagine. Then Nemesis has to enter the picture but at a much delayed time with the damage done by the hubris irrecoverable.

The other point is that productivity growth is now negative again in Greece despite the massive internal devaluation that has occurred (wage cuts etc).

This brings into question the logic of internal devaluation which is meant to stimulate external competitiveness. But if productivity falls as unit costs are falling, there is no certainty that competitiveness rises.

It is far better to stimulate gains in competitiveness by a high wage, high productivity culture. The exact opposite of austerity and internal devaluation.

On the national account front, the labour market damage is replicated by what is happening to output growth and capital formation.

The following graph shows the evolution of the investment ratio (total gross capital formation as a percentage of GDP) since 1995 (blue line). It has dropped from a pre-crisis peak of 25.1 per cent to an abysmal 13.5 per cent.

Of course, that is based on the actual GDP path which, as we know, as declined by 26 per cent since the pre-crisis peak.

If you extrapolate the growth path out based on pre-crisis trend growth rates and recalculate the investment ratio in terms of this ‘potential’ GDP, the current ratio would be 8 per cent.

Almost unbelievable.

If gross capital formation was to once again be 25 per cent of GDP and if GDP had have kept growing on trend, then Greece now has a shortfall of around €13,666.7 million, which makes the €35 billion proposal look decidely wan.

Conclusion

The question remains: Is being able to have a euro in your pocket worth the sort of sustained income losses outlined above?

I cannot construct any situation where you could possible answer yes to that question.

In one news report (Source) – an unnamed European Commission official was quoted as saying:

No one wants to see a North Korea in south-eastern Europe

No, that would conflict with the ‘North Korean-like’ installation in Brussels, Frankfurt and Washington.

An exit is not rocket science. But it surely is better than the future that Greece is facing under the conditions that now appear to forming the latest bailout options.

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That is enough for today! (c) Copyright 2015 William Mitchell. All Rights Reserved.