The dual nature of the Greek crisis

2011-07-09

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What would the great philosophers say about the crisis?

In a previous article I offered an overview of the four dimensions of the Greek economic crisis, where I drew the picture of the broader situation with relation to the role of the Euro and the EU in it. In this article I will be looking into the very nature of the crisis in the Greek economy.

Greece faces two crises in one. On the one hand it has to deal with a non-sustainable sovereign debt together with a non-viable budget deficit and on the other hand it has an uncompetitive, non-expanding economy. To cope with these issues, measures towards different directions need to be adopted.

To deal with the extravagant sovereign debt and the great budget deficit, Greece needs to create primary surplus that will in the long-term make the debt controllable. In other words the state must drastically reduce the budget deficit, either by increasing revenues, or by decreasing expenditures. This means that Greece must either undergo strict austerity measures that will reduce expenditures by slashing social services, privatizing publicly owned assets and by increasing taxes. OR it must take more radical measures of massive nationalizations of privately-owned, over-concentrated wealth.

Taking money from the poor has always been the only choice of governments and the above does not seem to be a dilemma for them. They find it more easy (and perhaps more acceptable) to slash essential services, to drastically reduce wages, to massively increase taxes even on basic goods, to deprive the lower parts of the income distribution from their few savings; rather than do what a just government would: That is to distribute the burdens of the crisis evenly, putting most of it on the shoulders of those who can endure it and those are the plutocrats, the banks and the Greek Orthodox Church.

So what the Greek government does today in its attempt to create primary surplus is to take the first option, that of austerity measures. The first memorandum with the troika (EU, IMF, ECB) was permeated by this rationale. The so-called medium-term programme, which basically is a second memorandum, also follows the same direction, but this time with more outrageous attacks against the lower classes and against the very sovereignty of the Greek state.

The above where the one side of the nature of the economic crisis in Greece. If that was the only problem then a solution would be found in one way or another. However the situation is far more complicated as the factor that perplexes the issue is the other side of the crisis which pertains to the structure of the Greek economy, which is an economy with numerous and serious flaws. The Greek economy has an increasingly negative trade balance as it imports three times more than it exports. It has a sizable, cumbersome and unproductive bureaucracy that only causes delays in investments and private ventures. It has an ineffective tax collection mechanism. It has some very counter-productive benefits for certain classes of public servants who are allowed retirement at their 50’s, coupled with pensions that are almost as high as their original wage.

Furthermore the Greek economy lacks a high-quality diversified production as it falls way behind in the sectors of agriculture, renewable energy investments, high-technology innovations. Moreover the Greek state failed to grasp more from the revenues of its shipping sector, by adding favorable tax regimes and relevant services that would bring the Greek fleet back to the country, thus repatriating and recycling a greater portion of the generated wealth.

These are only some of the major factors that make the Greek economy uncompetitive and unable to grow. To tackle these issues, serious and deep reforms need to take place. Greece has a high potential for growth if it focuses on producing some high quality agricultural products, luxury tourist packages, full-scale green growth investments that will exploit the abundance of solar and wind sources. Moreover the considerably high concentration of human capital can allow space for developing niches in the fields of high-technology and medical services.

But for all these changes to be done, the economy needs to work with low taxation, with correct and well-worked state interventions and certainly without the anti-social attacks on the lower parts of the income distribution, who constitute the backbone of every robust economy and every healthy society. That is exactly the real problem of the Greek crisis and that is the reason why Greece cannot avoid default under the current conditions. Because the austerity measures hinder any effort to make the Greek economy grow, as they deprive the real economy from its competitiveness through increased taxation and generally through the massive extraction of money and wealth from the market.

As I said above, Greece faces two crises in one. Solving the one will worsen the other. Within this vicious cycle the only one who benefits from the “safety” packs, from the bailout packages are the creditors of Greece, since all the money that ostensibly comes to prevent the country from declaring default is in fact immediately recycled into major European banks (mainly German and French) and none of it stays in the country for use in structural reforms. Under such conditions it is better for Greece to default sooner rather than later. At any rate the day-after will be tough, but if Greece defaults in some years from now, after the real economy has undergone an outrageous attack of austerity measures then the effects will be far worse.