Greece is crumbling. Is there any way out?(Read article summary)
Greece's ties to the euro, along with four decades of mismanagement and corruption, means unimaginably difficult reforms for the Greek government and economic difficulty for its citizens.
Regularly, we are told that Greece will get another bailout from the International Monetary Fund and the European Union bailout if it agrees to dramatically reform every aspect of its government operations. A few months later we are told that more time is needed to “fully implement” the reforms and another bailout is needed. As these games continue, the misery of the Greek population intensifies to levels we in America or Britain cannot imagine.
There is no solution forthcoming. There can be no solution as long as Greece puts off government reforms. But what can Greece's politicians do? If they embrace reform, the government cuts will knock the economy and Greek living standards back to levels worse than in the Great Depression. Doing nothing is not an option and the third way means leaving the eurozone
Greece's dilemma is no proverbial rock and hard place. It's like swimming in volcanic lava and trying to survive.
The problems of Greece stretch back to 1974 when democracy returned after military rule. A corrupt two-party state instituted a patronage-based system that was grotesquely inefficient (and corrupt) at two levels. First, in order to dole out patronage, the state was bloated. Even today, every department of government is overstaffed. State-owned industries, notably rail and the post office, are even more overmanned. Workers were paid for 14 months a year, enjoyed 35 hour weeks, and could retire on a full pension at 50.
Second, in order to buy support from the unions and companies, systems were put in place that made Greece uncompetitive. One can buy a lorry or a moving van in Greece for the same price one pays anywhere. But to operate such a vehicle, one has to fork over hundreds of thousands of dollars for a license. It is illegal to transport goods or move a household using any other vehicle. The cost of those licenses is recouped via massively inflated transport charges, which are then passed on to customers. So it costs twice as much to move house in Greece as it does in London, while a litre of milk costs 60 percent more. This sort of modus operandi is endemic.
Until January 2001, Greece offset its utterly uncompetitive economy and unsustainable national debt by retaining its own currency, the drachma, which simply lost purchasing power each year. It was inflationary, unsustainable, but Hellas muddled by. Then, having moved most of its state debts off its balance sheet (aided by Wall Street’s brightest), Greece persuaded the rest of the European Union that it was fit to join the single currency, the euro. It has been downhill ever since. Grants flowed from Brussels for more or less anything. Much of that cash went astray, but the effect of suddenly having very low interest rates prompted a rash of speculative, highly leveraged investments to be made.
Eleven years later, Greece’s banks are all effectively bust. No structural reforms have been made. And the Greek state cannot even service the debt on its interest. Unable to maintain competitiveness via currency deflation, the economy (led by the tourist industry) has crumbled. Real unemployment (government statistics are unreliable) is about 30 percent. Youth unemployment is 55 percent. To stay in the eurozone (and receive more bailouts), Greece must privatize the state-owned industries, fire half its civil servants, slash state pension provisions, and institute all the structural reforms needed.
That will push unemployment up to 50 percent. The soup kitchens of Athens cannot cope now. Under that scenario, society would crumble.
Mass emigration is already underway. Others are leaving the cities and heading back to a subsistence existence in the villages. The two old parties are hemorrhaging support to new extremist groups (including the Nazi Golden Dawn party). Will democracy survive?
Or Greece could default on its debt and go back to the drachma. But if that happens, there will be no driver for the structural reforms she needs. A one-off 45 percent depreciation of the drachma against the euro will bring temporary relief. But with no reforms, the Greek currency will simply lose another 25 percent each year. Nothing fundamental will be solved. Emigration, urban depopulation, grinding poverty, and political chaos will still be the order of the day. There is no easy solution, only pain on an unprecedented scale for the people of Greece.
While no national nightmare lasts forever, Greece's could last decades – and its rebound decades more. It took Ireland 120 years to fully recover from its 19th-century famine and the mass emigration and social chaos that ensued. Greece could take as long to recover.
– Tom Winnifrith comments on life, economics, politics, and investments from a libertarian perspective on www.TomWinnifrith.com and a number of British websites, tweets on @tomwinnifrith, and divides his time between the Balkans and London.