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Greece=Icarus?

Monday 19 November, 2012

The Chicago Council on Global Affairs invited Nick Malkoutzis, deputy editor of Greece’s only English language daily newspaper, Kathimerini English Edition,to speak about Greece and the Euro: The Flight of Icarus.  He led off by putting in perspective the fact that Greece is less than 4% of the GDP & debt of the European Union.  Icarus is the Greek god who had wax wings which melted when he got too close to the sun.  He is likened to the Euro, which when embedded as an anchor in the European economy, was expected to solve many economic problems.  Prior to the advent of the Euro, Greek per capita incomes tripled from 1981-2001.  During that time there were many fiscal danger signs which were not heeded.  After the introduction of the Euro, currency devaluation was no longer an option, so it became more difficult for the Greeks to compete.

Politically, the 2 main parties in Greece were rife with rigidity & cronyism, which led to little reform & an ineffective public sector & hence uncompetitive economy.  Inequalities went unchallenged & cheap money covered cracks in the system.  4% growth masked false prosperity.  Rising prices & wage increases eroded economic competitiveness & boosted consumerism, which inflated a housing bubble & boom.  Imports doubled to €3B while exports remained stagnant, which caused balance of payments in Greece to destabilize.  In 2004, Greece won the EuroCup & hosted the Olympics as debt rose to 7% of GDP, twice the rate of the rest of the EU.  2004-2007 Greece took on €56B in debt.  By 2009, the deficit had risen to 9% of GDP that  led to the bailouts in 2010, which were front-loaded & only postponed austerity measures.  The IMF underestimated the fiscal deficit by 100% as the economy shrunk 20% & will shrink by 5% next year.  Unemployment stands @ 25% as salaries have fallen by 19% & taxes rise. & prices remain constant.  This is not sustainable as Greeks feel trapped by the EU.  The IMF is pushing sustainable debt, which is now 170% of GDP. restructuring, & extending maturities.

This situation has developed into a morality play which avoids the structural problems with the Euro & pits fiscal policy vs. growth.  The ESM, European Stability Mechanism, has been given the green light as a banking union is coming, but this doesn’t change reality.  Mistrust still leads to resentment.  The political situation is now more balanced-the Greeks should suffer through austerity for another 2 years as they make inroads on their deficits.  They’ve had current account surpluses for the last 2 months.  Greece has risen in the “Doing business in…” rankings from 100+ to 78.  The potential return of the drachma has spooked investors, so they must continue structural reforms, break down cartels to increase competitiveness, develop tourism opportunities, encourage agriculture to come back, & invest in technology with well-educated youth who have fluency in multiple languages.  Although the future lies with the youth, the power still lies with the old.  Greece needs a new generation of politicians & entrepreneurs.

Q&A

The extreme & nationalistic Golden Doom movement is shocking-civil society is required to combat it.

Although there is no light @ the end of the tunnel, the path laid out by the troika of the ECB, IMF, & EU for the next few years is clear:  austerity, & turning deficits into surpluses, but there are many if’s, such as if all the austerity plans are accepted

There is still much friction slowing down European integration, which hinges on elections in Germany next year.  The result may be a 2-tiered Euro zone, & if Italy falls, the Euro would collapse.

Many Europeans are antagonistic towards the Germans.  Germany has profited since the introduction of the Euro.  As the value of the Euro declines, German exports go up & Germany’s borrowing costs go down.

Politicians are reluctant to take the issue of whether or not there is a “democratic deficit” to the public.

For Greece to leave the Eurozone is not mainstream thought & the politicians have not bought into that.  It would not happen immediately, & the problems are structural:

  • leaving the Euro won’t fix the problems
  • there is yet no coherent tourism strategy
  • the drachma is creating political havoc
  • mainstream parties are pro-Euro
  • to be the 1st to drop out would be disastrous

The architecture of the Euro should be changed to create a level playing field.  Eurobonds would help.  Like the saying “Put water in your wine,” it must be a gradual process.

Greece is targeting solar & wind power on the islands, but they require a stable environment & investment.  They are exploring for oil & gas, & found some on Cyprus.

Ireland’s banking crisis was different & the Irish are borrowing again.  Portugal follows Greece & the ESM is helping.  The world must nurture the periphery of Europe.

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