Greece is counting the cost of a possible EU exit: Heading for a stalemate or a bright new dawn?

Greece is set to go to the polls, but one election may not me sufficient to choose a coalition that can work and get the country back on track, write Ann CahillKostas Karkagiannis and Ray Kinsella

Can Greece ever afford to pay back the €240bn it borrowed, and even if it can, will it? Or will it leave the eurozone, triggering problems for other countries?These questions are worrying Europe at the moment as Greece prepares to elect a new government and the likelihood that the main opposition party, left-wing Syriza, could form the next government.

Syriza leader, Alexis Tsipras says he wants Greece to stay in the euro but wants a new agreement with the troika to reduce the country’s debt and promote growth.

But whatever the arguments, the facts for now remain that whatever government is in power will need to find between €17bn- €22bn to cover salaries and pensions this year and €31bn worth of bonds will need to be repaid/refinanced during the year.

This includes €1.5bn due to the IMF in March, June and September. To do this it will need the troika’s €7.2bn due before Christmas but delayed because conditions were not met.

The new government will be told it must continue to run a budget surplus, continue with privatisation and reform pensions. Syriza says it wants to reverse privatisations that have occurred. The ECB earlier this month added to the pressure pointing out that Greek banks’ access to funding beyond February will depend on Athens completing this final bailout review and undergoing a follow-up plan with the troika. The ECB has relaxed the rules to provide funding to the banks up to now.

Growth returned for the first time in six years to at a modest 0.6% and is expected to rise to 2.9% this year, the jobless rate fell to 25.8% in October from a record 28% in 2012.

But can Greece really afford the massive debts? Economists like German-based Andrew Watt of the Hans-Böckler-Foundation says yes, provided the ECB does its job and gets inflation up to around 2%, and the EU provides investment funds.

The country’s debt repayments amount to 4.5% of GDP — well down from the initial 7%. This is about the same as Ireland’s and less than Portugal’s and Italy’s — and not much more than Germany’s at 3%, he says.

Greece is paying an effective rate of 2.4% — one of the lowest in the eurozone, even lower than that paid by Germany and considerably lower than Ireland’s.

While a new government is expected to ease austerity, reduce the spending cuts and tax hikes, these costs should be be offset by economic growth — provided the ECB gets inflation back to around 2% with Greek inflation remaining below the eurozone average. The result would be a fall in the Greek debt ratio to GDP, and the country would become more competitive, says Mr Watt.

“All the debt deals were contracted with inflation of around 2% in mind and it is a form of breaching the contract that the inflation rate is less than this,” he said.

Greece could achieve nominal growth rates of 3% in this scenario and provided there is EU funding for investment, austerity is eased and other eurozone countries invest in their growth.

In the meantime what has the troika and its programme achieved in Greece? Very little worthwhile, according to Theodore Pelagidis, economic professor at Piraeus university and formerly of Harvard, LSE and a Fulbright professor at Columbia university.

“The product market is still oligarchic and young entrepreneurs cannot find work. The political system retains institutional defects such as the supermajority the parliament needs to elect a president who has no power, and the electoral law gives the party that comes first in elections, even by one vote, a bonus 50 seats in the 300-seat parliament.

“Yet the oligarchic class attached to the political system continues to ruin the country. The troika has done very little to open the markets to free, healthy and transparent competition, to give real opportunities to a new middle class which might otherwise assume key economic and political positions”, he said.

Instead the troika insisted on an internal devaluation, leading the government to impose higher taxes on the productive economy and sharp cuts in wages that were never very high.

Costs increased for the parts of the economy that were productive. Electricity prices and excise duty on fuel were massively increased. Energy costs are as a result up to 80% more than in other EU countries

Talk of Grexit by Germany and others is a bluff, according to Marco Giuli, a researcher at the Madariaga foundation in Brussels. Such a move would have serious implications both economically and politically for the entire EU, he argues.

It would see Greece defaulting on its debts which would cost German and other taxpayers dearly since 62% is owned by eurozone states and the ESM bailout fund, 8% by the ECB and 10% by the IMF. It would also call into question the legality of the bailout fund as the system was deemed legal by Germany only on condition it would not burden taxpayers. And failure to pay the debt would be a violation also of the ‘no bailout’ clause. Restructuring and providing Greece with longer maturities would be the better option, he says.

 

For many, Syriza is merely the best of a bad lot

by Kostas Karkagiannis

Right now, the Greek people are breathless having been through a roller-coaster over the past five years. It is obvious that they have had enough. As a result, Syriza will win the general election.

It’s not that they have a lot of firebrand supporters. Some of their politicians and supporters are of course, and think they are going to achieve a socialist revolution of some sort. But most of those who will vote for them are just fed-up with the conservatives, including PASOK, the labour party.

So the polls show many voters are turning to Syriza, asking themselves how much worse can they be than the other parties — it’s a matter for them of choosing the least bad. One must realise that Syriza are deeply populistic, and deeply conservative. The Greek people are deeply conservative and Syriza is promising them things that they badly want. I suspect a big number of those who will vote for them know the reality, but their attitude is, “let me get the pension now and who cares what happens to the country next year”.

One major question is: Will one election be enough? Syriza are unlikely to get an absolute majority, so they will need to form a coalition, but it’s possible they will not be able to do so.

They would prefer to have the Communist KKE join them, but this will be impossible for this grouping. They might be tempted to form a coalition with the conservative nationalist Independent Greeks, but this too is unimaginable, as their political stances are so different. They could turn to PASOK, but the main problem is that PASOK got the troika into Greece and they signed all the memorandums. Nevertheless, it is a possibility.

Another option would be To Potami (The River, the pro-EU party formed last March by journalist Stavros Theodorakis) that is neck and neck with Golden Dawn to become the third largest party in the parliament.

However, to form a coalition with either PASOK or To Potami, Syriza would have to water down its policies, agree to negotiate with the troika and try to complete the current review of the programme, and negotiate a new programme, including a credit line.

The reality is that if Syriza forms a coalition, they have already compromised their positions and become less radical, forgetting their demands for debt haircuts, and their insistence of not talking to the troika. But are they ready to do this?

There is a limit for them and I am not sure they are ready to do all this. Part of their problem is with some of their own members, former communists who are not willing to compromise. The danger will be if they revolt and split the party. Or Syriza leader Alexis Tsipras may be able to buy them off and avert a mutiny in the age-old human tradition.

The current prime minister Antonis Samaras and his right-wing party New Democracy is likely to close the gap with Syriza over the coming few days, but not fast enough I believe. Also, there is a feeling that Samaras believes it may be in his best interests to have Syriza govern for a few months when he thinks they will collapse, and he will be able to form a new government from the right.

Then there is the game of Grexit, which we heard before at the last elections. There is a feeling that they are crying wolf again and citizens don’t know exactly what to believe now.

There is another scenario of course: That Syriza cannot form a government and we have to hold a second election as before, generating more concern; we have seen an increase in the transfer of deposits from Greek banks in November and December. We could see a repetition of Cyprus with banks closed for a week and the Eurogroup threatening to close off liquidity.

Syriza has been modifying its rhetoric, especially addressing the public outside Greece with talk about going after the Greek oligarchs. I (many) would love to believe them, but the question is why during their time as the main opposition party they did not begin this process, or fight to make the tax system more fair, or take on monopolies and strengthen competition.

Or take on the media barons when their history of dealing with staff and policy at their own radio station (Sto Kokkino) has been dire.

In the past two-and-a-half years, they have not put forward any draft laws addressing these issues and I am not sure they will transform themselves so quickly.

Their main interest, I believe, is to defend the public sector, which is large enough to to earn a majority. So, while they claim to be in favour of transparency, they are opposed to evaluation of public servants’ work.

Then there is Golden Dawn, the fascist party that won 16% in the Athens municipal elections and 10% in the EU elections. They are expected to poll around 5%.

Of course, there is the white vote. People get a ‘protest’ white sheet of paper along with their ballot paper. Casting it means they are not satisfied with the options presented to them. It is ironic that, according to our electoral system, this vote goes to the party with the biggest number of votes.

Kostas Karkagiannis is a journalist with Kathimerini Greek daily.

 

Troika got it wrong as eurozone struggles on

Despite what Germany says, a Greek exit from the Eurozone does matter and sets in train a game called 'who's next?', writes Ray Kinsella

The Greek people will shortly vote on whether, or not, they have a future in the eurozone. It pleases the power brokers in the eurozone, especially in Germany, to say that it no longer matters, one way or another, whether Greece stays or goes. After all, they assert, Greece only accounts for a small fraction of the eurozone’s total GDP. Also, much of Greece’s debt-burden is on the balance sheet of the troika and not the private markets. And so on.

It’s called whistling into the wind. The decision of the Greek people next Thursday matters. A Greek exit from the eurozone opens up “appalling vistas”. It sets a precedent for other countries impacted by austerity. It kicks in a game called “Who’s next?” It signals that, at least for one member of the eurozone, all of the suffering imposed on the people was in vain. It highlights that austerity didn’t work.

So, the likely election of the left-wing anti-austerity Syriza party, led by Alexis Tsipras, and the outcome of any yet-to-be-decided renegotiation of the programme with the troika matters a very great deal. It places the troika between a rock and a very hard place.

A failure to renegotiate a sustainable debt-reduction might well impel Greece to exit. Equally, a successful renegotiation would demonstrate that, in the final analysis, the troika simply had to listen to a people pushed too far, and by elite peddling a toxic adjustment model. It raises the question: what was it all for?

The strongest demonstration that austerity did not work is the current state of the eurozone economy, more than five years on. It grew by less than 1% in 2014. It is mired not just in recession but in deflation. Despite all of the summits, all of the treaties, all of the special measures, the eurozone economy is caught in a toxic deflationary trap. That ‘trap’ is characterised by minimal growth, inflation that is well below ECBs target level, and negative inflationary expectations which directly challenges the ECB’s price stability mandate.

The important point is that all of this is happening despite the ECB’s unprecedently low interest rates. In terms of conventional weapons for combating recession, the ECB’s interest rate policy is pushing on – it’s having no effect on the real economy.

This means that heavily indebted countries cannot grow their way out of debt. They cannot inflate their way out of debt. They cannot depreciate their way out of debt – which is the option that would be open to Greece were it to exit.

The ECB’s ‘last chance saloon’ is Quantitative Easing (QE). This means, effectively, the ECB system buying government bonds off member countries and printing money to pay for them.

This is the “second time around” that the ECB has been down this road. In 2012 Governor Draghi announced that the ECB would “do what it takes” to support the euro, by engaging in Outright Monetary Transactions (OMT) aimed at buying bonds of members in crisis and thereby reducing the borrowing costs.

The use of such unorthodox measures tells its own story. It is also contentious. Germany, in particular and German members of the ECB board opposed OMT. They took their case to the German Constitutional Court which referred the question on to the European Court of Justice (ECJ).

The (non–binding) decision of the ECJ, announced last week, asserted that the ECB needed to have “broad discretion” in how it conducted monetary policy during a crisis. The decision gave the green light to OMT. It’s important to point out that there are some differences between OMT and QE. But the broad principle is what matters and the courts decision on OMT is unlikely to be challenged by Germany in respect of QE. This being so, it clears the way for the ECB at its meeting this week to engage in Quantitative Easing across the eurozone.

There is a very large “but”. Unlike the positive impact of QE had in the US and the UK, the impact across the eurozone is likely to be limited. There will be leakages, (including a shortage of bonds) and there will time-lags. This means that the total impact of QE is likely to fall well short of what is needed to stir the eurozone economy out of its deflationary torpor.

The markets are likely to respond positively But much of any positive impact is already priced into expectations. QE won’t solve the problems of the eurozone – its large members, like France or smaller ones like Cyprus. Or Greece.

What this means is that to mitigate the “shock” of an anti-austerity victory in Greece – and a possible Greek exit – the ECB will be constrained to do a deal with Greece. The point here is that the ECB know that any write-down cannot be confined to Greece.

The Troika will now listen, with bad grace, to the outcome of the Greek election. They will try for a “fudge” to help them to save face. They may attempt, for example, a debt extension. For Greece, with a debt/GDP ratio of 180% that is simply keeping the country in gaol for longer. Syriza should not even discuss such an unsustainable and regressive “proposal”. The markets will, of course, see through it and so will the anti-austerity parties in those countries facing general elections in the next year or two. In Spain. In France. And in Ireland.

This takes us to the key issue: the troika got it wrong. The policy of austerity lacked empirical support, as former IMF chief economist Joe Stieglitz has long argued. The austerity adjustment model, driven politically from Germany, showed no understanding of the scale of the crisis — and the corresponding need for a Marshall Plan–type approach, including significant debt-write offs. They showed no sensitivity to the impact of austerity on already deeply stressed economies, nor did they pay regard to the possibility that ordinary people who marched in anti-austerity processes across Europe were right. They know now – and they are trying to play catch-up.

The end game is this: neither a resolution of sorts to the Greek debt issue nor QE will bring stability and direction to the eurozone. Governor Draghi believes this will require full political union. Not many governments will want to be saying this to their electorate.

And so the eurozone – flawed in design, fixated on power at the centre and unable to resolve all of the inherent strains — will struggle on. Until either common sense prevails or it is swamped by a perfect storm, generated by its own internal contradictions.

 

CASE STUDIES

‘Many cannot afford a snack at school’

Elena Skarpidou, Teacher

“I am a teacher for 23 years and teach English to boys and girls 12 to 15 years, and after school I teach the sex education programme. I see a dramatic change for teachers since the crisis.

“Everyone is worried they may be fired and we have to do an evaluation that steals out time from educational work. We do not have enough teachers. Before Christmas I know we were short 1,500 teachers because the government cannot pay them.

“But the most outrageous change is in the students themselves. A lot of them look very miserable and you can see it in the classrooms. Their parents have been fired, some have emigrated so they live with grandparents.

“Some families have moved to the grandparents’ houses and a lot of people live together in small houses and many of them cannot afford a snack at school.

“One girl student was so sad, she said she had not seen her parents for three years. They are in Germany working, she misses them and lives with her grandmother who was sick and old. I just got a message on Facebook saying she is with her parents in Germany and she will not come back.

“In my school we collect second-hand clothes, food. Sometimes we pay for the snacks ourselves and we worry very much about their future. The education system has become even more exam-oriented and this is very bad. They study all the time and cannot live their lives.

“Students who come from poor families cannot go to higher education because you have to pay for private lessons. I had to pay a quarter of my salary for private lessons for my son for the last two years so he could get into a polytechnic.

Before the crisis I was paid €1,450 14 times a year before tax, now it is €1,200 12 times a year and we pay more tax and everything is more expensive. Younger teachers get less than €1,000 a month.

“I pay €400 a month for the mortgage. My boyfriend helps. He was a decorator and with no work he became an artist. My mother helps too but my father died six months ago and she has less money now.

“I have to pay rent for my son as we are considered rich and he could not get a place in a student hostel. We have a small garden with some vegetables. Money is only for eating now, nothing else.

“I hope a new government will change things in education especially for the students. A lot of my former students are abroad trying to find work. The best of them, the best education, masters degrees, lots of languages, and they are sad”.

 

We were a guinea pig for creditors

Giorgos Geogakopoulos, Journalist

I came back to Athens in 2004 from studying and working in London. In the seven years I was away, a lot had changed —better infrastructure, growth in tourism, the Olympic Games, a new government. People were more upbeat and nothing prepared people for the recession.

We were aware of several factors — we realised the global crisis was going to hit us, we knew the banking system was susceptible to problems, and we always knew that Greece was a fragile economy based on services and not on manufacturing — it meant that Greece was the weakest link in the eurozone chain. Greece struggled to enter the monetary union — we knew the numbers had been cooked.

But we never expected that, at the end, we would suffer such profiteering in international markets.

The Chinese taking over two third of Pireas has helped the economy, increased the number of containers coming in, and breathed some new life into the Greek railways as Hewlett Packard and GE ship their goods into central Europe. It’s still services but at least it is something.

It is great that the price of oil has gone down because the big tax on fuel has had major implications, forcing people to heat their houses with timber and making Greece one of the most expensive places for business.

This is one of the reasons we do not have an industry. We are the guinea pigs of the creditors. We are still at the receiving end of novel policies, untried policies, first by the IMF and now the eurozone.

Greece is the big experiment — we have seen the positive side by sorting out our fiscal situation and getting back to growth.

But now we are expected to deal with how to suppress a nation which is trying to express itself against our creditors. We are probably going to see an extreme left party win the election, write off the debts and secede from the euro, which is a nightmare scenario.

My wife works at a store that sells spare parts for sewing machines — people mend their old clothes instead of buying new ones.

My daughter is four. I cannot say what it will be like for her in two decades. I would like to give her all the assets she can have to help her choose what is best for her. I would like if she spread her wings and left Greece for good.

 

Life is harder but we get by with help

Eleni Chlouveraki, Pensioner

“I am 73 and my husband is 82. Our families have always lived on Crete although my daughter lives in Athens working with the National theatre.

“I like to be active and when the children were grown up I started a business, building a house on a piece of land that belonged to my parents in Frangokastello, Nostro Villas. I started with one and built four more. I rent them to tourists from March to November for about €90 a night for four people. I learned how to mail and use the computer when I was 68 because it was necessary.

“I work with the guests, cleaning and in the vegetable garden, repairing and painting. The crisis has brought changes. I feel all Europe has difficulties. Some years ago all my guests at 7pm were well dressed, the children too, and went to the tavernas to eat. Now they do not go to the tavernas as often for the last four or five years and do not spend as much when they go.

“In Crete in the small villages people have a piece of land and can live cheaply. You can have olive oil, vegetables, snails, some chickens and if you have eggs you can give them to your friends who give you potatoes. It’s not as bad as in the towns.

“But now we have to pay many taxes that we did not have before. In Sitia where we live for the winter with 15,000 people it is harder, there are poor families but we help each other. I have my pension and income from the houses so I do not feel the crisis very strong.

“I work 13 to 14 hours a day all summer. It’s not easy but we don’t suffer. But some of my friends, it is not as easy because of the banks. It came many times offering money to better your business, buy a house instead of paying rent. And it was easy when both couples had their own salaries. But finally when they lose the jobs, that is a big problem for many families, for many businesses.

“I did not borrow because I remembered my father who says if you have a basket hang it at a point where you can reach, so I tried, slowly, slowly to build one house, finish it and build a second. But young people make a dream and now have many difficulties.

 

‘The wealthy had millions but now have billions’

Gregory Bersis, Pharmacist

“The cost of medicine has gone way down in Greece since the crisis. It’s cheaper now for the health system, but the costs to pensions has doubled. Before the crisis they paid just €2 towards drugs that cost €20. Now the same medicine costs €10, but they pay half, or €5.

“I have the same customers for years, they live in the neighbourhood, but their pensions have been more than halved. Before they had €1,000 14 times a year and now they get around €600 on average 12 times. Nothing extra for Christmas or holidays.

“Many of them do not have another income, so they have debts. They tell me every month “I will pay you when I get my pension”. I don’t know how much longer the pharmacy can afford this.

“They are my friends, they have always supported me when the times were good and I cannot tell them go away. I try to tell them give me some money now and some again.

“A lot of pharmacies are closing down, and if it will go on like this I will have serious issues. The problem is not so much me as them. They are really sad, really angry, asking why they have to pay so much. I see a lot of people trying to find a substitute for their medication but most of them are cutting things from their budget to pay for the medicine. I consider myself quite fortunate.

“I have less income but I’m not in a bad situation like the unemployed. I have a huge mortgage, property tax is quite big now and they are trying to tax everything. I really don’t know how long this can go on. I hope for a new government that will get a cancellation of part of the national debt, but maybe I am dreaming.

“I hope they do something about the wealthy. They used to have millions but now they have billions.”

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