The Greek tragedy began with its declining competitiveness in the early 2000’s. Simply put, they were producing far less than they were consuming. Many factors lead to this including their adoption of the Euro (see Hungy’s article here). Some have pointed out the irony of too much Democracy from the people who invented it: pensions rose, retirement age lowered, and public sector salaries increased. This explanation has formed the view of the Greek people as lazy and unproductive, a label which is misinformed.
Between 2000 and 2010, many multinational firms exploited the Greeks upon observing their large spending habits, and the situation of the Greek state. They broke competition laws and used corrupt Greek politicians to minimize their subsequent fines. An example of an offending firm is Coca Cola Hellas, which was fined €11,000,000 for Dominant Position abuse between 1991-2006. Other corporations which broke competition laws included Pearson, Nestle, BP, Siemens, and Heineken. There is little doubt that the illegal profits of these firms crippled competitiveness in Greece.
Fast forward to Tuesday 21st of February, when Euro-zone finance ministers forged a €130 billion bailout, which will see private creditors cut the face value of their bonds by around 50%, which will reduce national debt by €107 billion. This assumes 95% participation from bondholders. For more information go to http://blogs.wsj.com/eurocrisis/2012/02/21/quick-guide-to-the-greece-rescue-deal/.
This agreement wasn’t met with much fanfare however, as its implementation poses another set of challenges, and doesn’t necessarily get Greece out of the woods. The IMF concedes that adding even a small shock could see the country’s debt growing “on an ever-increasing trajectory.” Top think tanks are sceptical that the bailout will have any effect. Sony Kapoor, managing director of Re-Define, a financial think tank, said the IMF had engaged in “arithmetical gymnastics” to produce the assumptions to get Greece’s debt target down.
Hans-Werner Sinn, head of Ifo, a top German economic think tank, warns that the money will only help international banks. He argues that Greece can only solve its crisis if it quits the euro. He suggests rather that,
[The Euro] should give them the money to ease their exit from the currency union. The Greek government could use the money to nationalize the country’s banks and prevent the state from collapsing. The state and the banks must continue to function through all the turmoil that an exit will entail … The drachma will immediately depreciate and the situation will stabilize very quickly. After a short thunderstorm, the sun will shine again.[Greece] would become competitive again. Because Greek products would rapidly become cheaper, demand would be redirected from imports towards domestically produced goods. The Greeks would no longer buy their tomatoes and olive oil from Holland or Italy but from their own farmers. And tourists for whom Greece has been too expensive in recent years would return. In addition, new capital would flow into the country. The rich Greeks who deposited so many billions, possibly hundreds of billions of Euros, in Switzerland would see the falling property prices and wages and would have an incentive to start investing in their own country again.
For more from the interview with Sinn visit: http://www.spiegel.de/international/europe/0,1518,816410,00.html
Supporting this view is a 10-page memo obtained by Peter Spiegel at FT, which warned that the main principles of the bailouts may be self-defeating. Imposing austerity measures on Greeks could cause debt to rise by severely weakening the economy while its debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.
Greece’s exit of the Euro would not be without consequence. Upon leaving, the new currency would devalue significantly as the central bank prints money. Greeks would go on bank runs, taking out money in Euros to protect themselves from this. Economists at UBS predict that Greece could lose as much as 50% of its GDP in the first year of leaving the Euro. Banks which hold Greek debt would face the risk of defaults on payments, leading to bail outs in France and Germany, large holders of Greek debt.
There is of course the contagion which could spread across Europe. Other struggling economies in the Euro – Portugal, Spain, Ireland, Italy – may also leave the currency union, resulting in a collapse of the Euro, of European exports, and prompting a global recession.
A Greek default, which could prompt, or follow an exit of the Euro, could spell the collapse of credit default swaps (CDS), a $32.4 trillion market as of June last year. This would be disastrous for big banks, and the global pyramid scheme in general. For more information go to: http://www.commondreams.org/view/2012/02/20
All this is not certain, and is the worst possible scenario. Who knows what the future holds? Perhaps we should seek the advice of the Delphic Oracle, though she might be struggling in these hard times too.