The Greek government, the European Commission, and the International Monetary Fund are all denying what markets perceive clearly: Greece will eventually default on its debts to its private and public creditors. The politicians prefer to postpone the inevitable by putting public money where private money will no longer go, because doing so allows creditors to maintain the fiction that the accounting value of the Greek bonds that they hold need not be reduced. That, in turn, avoids triggering requirements of more bank capital.
But, even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.
And a massive default, together with a very large sustained cut in the annual budget deficit, is, in fact, needed to restore Greek fiscal sustainability. More specifically, even if a default brings the country’s debt down to 60% of GDP, Greece would still have to reduce its annual budget deficit from the current 10% of GDP to about 3% if it is to prevent the debt ratio from rising again. In that case, Greece should be able to finance its future annual government deficits from domestic sources alone.
But fiscal sustainability is no cure for Greece’s chronically large trade deficit. Greece’s imports now exceed its exports by more than 4% of its GDP, the largest trade deficit among eurozone member countries. If that trade gap persists, Greece will have to borrow the full amount from foreign lenders every year in the future, even if the post-default budget deficits could be financed by borrowing at home.
Eliminating or reducing this trade gap without depressing economic activity and employment in Greece requires that the country export more and import less. That, in turn, requires making Greek goods and services more competitive relative to those of the country’s trading partners. A country with a flexible currency can achieve that by allowing the exchange rate to depreciate. But Greece’s membership in the eurozone makes that impossible.
So Greece faces the difficult task of lowering the prices of its goods and services relative to those in other countries by other means, namely a large cut in the wages and salaries of Greek private-sector employees.
But, even if that could be achieved, it would close the trade gap only for as long as Greek prices remained competitive. To maintain price competitiveness, the gap between Greek wage growth and the rise in Greek productivity – i.e., output per employee hour – must not be greater than the gap in other eurozone countries.
That will not be easy. Greece’s trade deficit expanded over the past decade because Greek prices have been rising faster than those of its trading partners. And that has happened precisely because wages have been rising faster in Greece, relative to productivity growth, than in other eurozone countries.
To see why it will be difficult for Greece to remain competitive, assume that the rest of the eurozone experiences annual productivity gains of 2%, while monetary policy limits annual price inflation to 2%. In that case, wages in the rest of the eurozone can rise by 4% a year. But if productivity in Greece rises at just 1%, Greek wages can increase at only 3%. Any higher rate would cause Greek prices to rise more rapidly than those of its eurozone trading partners.
So Greece faces a triple challenge: the fiscal challenge of cutting its government debt and future deficits; the price-level challenge of reducing its prices enough to wipe out the current trade gap; and the wage-productivity challenge of keeping future wage growth below the eurozone average or raising its productivity growth rate.
Ever since the Greek crisis began, the country has shown that it cannot solve its problems as the IMF and the European Commission had hoped. The countries that faced similar problems in other parts of the world always combined fiscal contractions with currency devaluations, which membership in a monetary union rules out.
A temporary leave of absence from the eurozone would allow Greece to achieve a price-level decline relative to other eurozone countries, and would make it easier to adjust the relative price level if Greek wages cannot be limited. The Maastricht treaty explicitly prohibits a eurozone country from leaving the euro, but says nothing about a temporary leave of absence (and therefore doesn’t prohibit one). It is time for Greece, other eurozone members, and the European Commission to start thinking seriously about that option.
* Dr. Dimitrios N. Koumparoulis is ISF's Athens-based Research Associate.
State University Lecturer
written by Dr. William Mallinson, July 03, 2011
Koumparoulis is absolutely correct. The Greek cleptocracy is simply reorganising the dirt.It has reduced Greece to being a zombie. The only reason that the banksters, IMF and EU are lending money to Greece, is so that Greece can repay it to the EU banks that lent it to Greece in the first place, and to keep them solvent,lest the German population demands action against its own cleptocratic regime. These loans are only being given to Greece, so that Greece can give them straight back, maintaining the illusion that the German and other anks are still are still holding solvent loans on their books.It is a Ponzi scheme, pyramid banking, a ruse, a fraudulent show for the mass consumption of the ognorant masses. It is a prime example of the unacceptable face of capitalism. In 1949, Albert Einstein wrote: 'The economic anarchy of capitalist society that exists today is, in my opinion, the realsource of evil.' Today,matters are far worse, the result of pure HUMAN GREED. Having read ad nauseam various analyses by trained international economists, it is clear that continuing with the charade of unsustainable loans is going to continue to destroy not only Greek productivity, jobs and livelihoods, but reduce Greece to a backward client state of arms and electronic companies such as Siemens. At the same time, Greece is still buying billions of Euros’ worth of defence equipment! Greek defence and foreign policy could be seriously undermined.
Instead of resigning their seats honourably, the parliamentarian cleptocrats, responsible for betraying the Greek people, are hanging on desperately, because they want to continue to take their huge salaries, save their dirty faces, and serve their foreign masters. These so-called parliamentarians are the highest paid in the EU, while the average Greek is one of the lowest paid!
The so-called Prime Minister is simply reshuffling the dirty pack, spraying the toilets without cleaning them. I think that the least bad options for the people of Greece are the following: the immediate suspension of the Parliament, including all members’ salaries; the administration of our country to be run by the Secretary Generals of the ministries; a referendum to leave the Euro; the creation of new political parties; elections; and therefore, a rejuvenated and cleaner Greece. The election should take place in early December. Failure to do this could otherwise result in the current cleptocracy calling in the army and imposing martial law, to preserve their jobs and inflated salaries; in other words, a malign dictatorship.
Is President Papoulias sufficiently independent of PASOK to now apply the emergency paragraphs of the constitution to achieve the above, and has he got the guts to simply do it? In the meantime, negotiations with Russia, and if necessary China, are necessary, for the cheap loan that Georgaki rejected a year ago, and for a more Russian stance on the Bourgas-Alexandroupolis pipeline. That way, perhaps the Greeks will be able to emulate Turkish diplomacy, and gain a little more independence than they have. I am sick of the thought that much of the money 'lent’; to Greece goes towards feathering the nests of shareholders in German, French and US arms companies (the British are still trying, mind you!).
I know that in 1878 many Greeks of the English party did not want a big Russian Bulgaria, but I think that it is about time that Russia is allowed to help Greece in its own interests, especially if it is mutually enlightened, and makes Greece less dependent on the worst excesses of financial terrorism and pyramid banking. Greece should nevertheless remain a member of the EU, if only for appearance’s sake, since the latter has clearly failed – at least thus far – in being a democratically accountable organisation.
In short, it is time for a Capodistrian policy.
The above is the least bad of the options or, as the Greeks say, ‘to min xiron veltiston’.
Dr. Bill Mallinson
Associate Professor of Political Science
written by Craig Webster, July 04, 2011
I find the analysis interesting and it certainly is an innovative proposal (the temporary leave of absence). Unquestionably, these are tough times for Greece. But there is also a great deal of concern about other states in the eurozone.
My only question would be if the temporary leave of absence would be permitted for legal/political reasons. In addition, I could envision a number of states wanting this as an opportunity in the near future (next 5 years or so). There could be a number of states in a revolving door situation (taking a temporary leave of absence and then re-entering the zone). It sounds a bit chaotic for a monetary union, but I understand the reasoning for injecting this type of temporary opt-out for purely practical reasons.
This is a novel approach that seems pragmatic since it suggests a workable solution without the dissolution of the current monetary setup and would free Greece from some of its present economic constraints. It may work. But it may work so well that a number of countries take advantage of this as well. This could create some concerns and doubts regarding the permanence of the eurzone and its currency.
The unanticipated consequences for the eurozone and its members from such a policy of a temporary leave of absence should also be considered, even assuming that the leave of absence solves all the financial problems of Greece.
written by Dr. Dimitrios Nikolaou Koumparoulis, July 04, 2011
I would like to mention the following statements:
1.this crisis is a case study of economic hitman wars against the Euro
2.politicians frauded and stole under immunity and were lured to do so by Goldman Sachs
who themselves followed a long-term objective using it against Greece and the EURO years later
very much alike what they did to SE Tiger States in 97/98
they grew too fast and succesfully, so the international financial bounty hunters betted against them and in the end they had to pay a multitude of debt to foreign creditors - the same who lent in first place, bet against them and lent the second money at much higher rates to repay the principle debt... same old scheme
did you ever hear the name John Perkins ?
Confessions of an Economic Hit Man
3.I dont trust either of the two family dynasties in Greece,Papandreou and Karamanlis
4.it is not about Greece, Greece is the pawn in the chess-game btw. USA and EU
But it could turn into a Russian opening, killing one pawn makes you lose the chess game in one move
5.politicians are like one-day files, and that is their major handicap, they think in terms of elections - until the next - and that wont help solve long-term problems with visions over 20-50 years, coupled with the handicap of democratic party systems - being: only the biggest intriguers, assholes and liers make it to the top
politics is brandmarked by negative selection
6.IMF in itself primarily serves the interests of the financial decision-makers in the US in the background - so, I rather support the creation of a European rating agency and European Monetary Fund
Many IMF decisions had a lasting destructive impact on the national economies being subject to restructural programmes
7.unfortunately for greek people, salaries will fall, taxes raised, and prices climb
IMF erodes the middle-class of societies
Graduate student, Department of International and European Economic Studies, AUEB
written by Dionysios Solomos, July 06, 2011
First of all, I have to admit that Dr Koumparoulis was my instructor at some courses of my undergraduate studies. I really respect his attitude and I totally agree with his statement.
As far as the current situation in Greece is related, I think that the loans that Greece has already received and will definitely receive in the short future from troica constitute a self-fulfilling prophecy. Apart from the austerity of the meausures that are linked with the loan, the goal of the sustainability of the public debt will not be achieved. We just postpone a default or a restructural choice.
It is required a more european collective approach as the greek situation may have a domino effect and as a result it constitutes a pure european issue. The future of eurozone requires a proper solution in the greek problem.
Greek Euro Zone Leave of Absence
written by Mónica, July 07, 2011
Even though the article is a bit difficult for me to understand, I think that some aspects in the Greek economical situation described above reminds me of the ones in my country.
B.A. in Economic and Regional Development, Panteion University of Athens
written by Anathalia Vlachopoulioti, July 08, 2011
The above text gives an alternative policy that should be checked by european leaders, since the traditional recipes of the economic theory seem not to have a positive impact in Greece.It would be an ommision not to refer, that Dr. Koumparoulis was one of the best professor that I had in my undergraduate studies and a reason to remind them in such a bad environment for the greek universities.
written by Athanasios Fragkis, July 12, 2011
I am in agreement with both Dr. Koumparoulis and Dr. Mallinson. I would like however to remind Dr. Koumparoulis, that apart from the roberry of the public purse, we are faced with an overloaded public sector, that employes aprox. 1/3 of the Greek work force, in non productive occupancy. Greece, alone, I believe, in the world, has a large number of working age people, retired for a number of reasons (mothers with young children, military personnel, members of parliament after serving two terms (8 years). In this way, we have a large number of people that can work for 20 or 25 years, retire at the age of 45 and get a pension for 30 or 40 years, generally paid by the rest of the workers, who also are required to pay for the young, the disabled, the sick and create growth.I am sure that anyone with elementary knowledge of arithmetic would tell you that this cannot be sustainable.
Let me turn to Dr. Mallinson and add:
We need a drastic restoration of Democracy. A Democracy that has members of Parliament truly representing the wishes of the people, not the line of Political Parties. Political parties should be baned from Parliament.
Ministers of State directly elected for each ministry from candidates that have the credentials that qualify them for the respective job.
No Priminister (who actually has no spesific job)The Cabinet formed by the elected ministers will elect the chairman of the cabinet.
The President of the Republic with extented responsibilities, Represents the Country abroad.
These changes together with legislation to ensure that no meber of the parliament or in deed a minister of state, leaves office a penny richer that when he/she took office.
In this way, we can ensure that Democracy works.
written by Dr. Dimitrios Nikolaou Koumparoulis, July 12, 2011
http://journals.univ-danubius....e/view/627 just a recent article of mine for dear Mr. Fragkis to notice my documented analysis for the overloaded public sector. Dear Dionysis and Anathalia thank you for your kind words. I am very touched by the fact that my students still remember of me.
written by Athanasios Fragkis, July 13, 2011
Thank you Dr. Koumparoulis. Your analysis certainly answersa my comment
written by Dr. Dimitrios Nikolaou Koumparoulis, July 15, 2011
I expect the whole financial system to implode sooner or later, we are approaching another blast of the bubble soon, when you ask me about US economy, that is in fact the core question...