Greece Gets The Green Light, But Will It All Work?

Well, as reported over the weekend on this blog, the EU Commission did in fact demand “more sacrifices” from the Greek people, and in the end Prime Minister Papandreou had to make a last minute TV appearance to explain to his incredulous listeners that the time had come “to take brave decisions here in Greece just as other countries in Europe have also taken….We all have a debt and duty towards our homeland to work together at this difficult time to protect our economy.” I thought that that time had come last November, but evidently I was precipitate in my judgement, but now it has finally arrived, although I ould note that hope does spring eternal, and that even now not everyone is 100% convinced.

When Adreas Papandreou said Greece needed the same brave decisions others have taken I presume he was in fact referring to Latvia, Hungary and Romania.

More than the measures themselves, what is interesting about the Brussels acceptance speech were the series of measures put in place to monitor and control Greek economic policy. As the Financial Times put it, the EU puts Athens under close scrutiny.

“The European Commission, the guardian of Europe’s fiscal rules, struck out into uncharted territory by placing Greece’s economic and budgetary policies under closer surveillance than has yet been applied to a eurozone country.”

In fact the European Commission has put Athens on an unprecedentedly short leash, since there is to be a mid-March interim progress report, a further one in mid-May, and quarterly updates thereafter. In addition, an infringement procedure was also launched against Athens for “failing in its duty to report reliable budgetary statistics”.

The Commission recommendations will now be forwarded to EU finance ministers for possible approval on 15-16 February. If endorsed, it will be the first time that a eurozone member country will be put under such strict surveillance.

And the agreed measures are obviously far from being the end of the road, since the EU executive only conditionally approved Greece’s three-year fiscal plan and warned further cuts in public sector wages would be required (that dreaded internal devaluation) if, as many economists believe, the measures so far announced prove to be insufficient to generate the economic growth which will be needed to meet the steep deficit-reduction targets. Thus the die is cast, and Greece will not, as I recommended, be going to the IMF. Such a move is now seen as superflous, since the EU Commission is steadily transforming itself into a local “mini-version” of the Fund in order to try to handle the cases of those countries who show continuing reluctance in implementing those much needed deep structural reforms. I only hope the Commission have the will to follow this through with all the determination that is needed, since if Greece do now finally go to the IMF for help it will surely now be as an ex-member of the Eurogroup.

Not that this weeks session was entirely accident free. Retiring Economy Commissioner Joaquin Almunia gave yet another example of how clumsy he can at times be, by declaring that “En esos países (Greece, Portugal and Spain), observamos una pérdida constante de competitividad desde que son miembros de la zona euro” (a “continuous” loss of competitiveness), which appeared in the English language press as: “Almunia Says South Europe Has ‘Permanent’ Competitiveness Loss“. It isn’t clear to me from this distance whether he was speaking in English and his core message got “lost in translation”, or whether he thought the speech out in Spanish, and the faux pas is down to his advisers. Either way the damage was done, causing even more problems than needed – according to data from CMA datavision, Credit Default Swaps were up on Spanish Sovereign Debt to 151 bps, or up 18.24 on the day. Portugal CDS also rose sharply on the day – 28.47 bps to 195.80.

As Deutsche Bank’s Jim Reid said after the announcement:

Clearly aggressive fiscal tightening can look plausible on paper but the reality is that the path will be full of potential roadblocks. Future strike action will be sign of how prepared the general population is to take the hard medicine. The jury must still be out on this and the market will look to exploit any set backs. However in the short-term the market does seem to have lined up an alternative target.

So the jury still is very much out on just how viable the GDP targets being offered by the Greek government really are. George Papaconstantinou, Greece’s finance minister, may have told the Financial Times that he expected a return to economic growth from the middle of this year – boosted, he said, by strength in the shipping and tourism industries and the “hidden power of consumers” in the shadow economy. But saying this is one thing, and achieving it is another. Growth across Europe will at best be modest this year – let’s say between 0.5% to 1% of GDP at the most optimistic – with labour markets week everywhere, so I think it is rather unrealistic to expect a tourist boom going much beyond the one we saw (or didn’t see) last year, and the same goes for shipping, which is a sector where surplus capacity still abounds. As for those affluent Greek consumers he is talking about, we have to hope they all dig deep into their wallets, and that each and every one of them now insists on a VAT valid invoice!

But so far there is not much sign of this, and retail sales are actually falling steadily (see chart below). In fact I seriously doubt we are going to see much support from internal consumption at this point. Greece is all about exports now, but where are they going to come from? And how is the country going to get a trade surplus big enough to achieve the sort of economic growth they are talking about without a much stronger internal devaluation?


Industrial output has been falling for some time.

And the latest January PMI only served to underline how Greece was becoming detached from the recovery elsewhere.

Commenting on the Greece Manufacturing PMI survey data, Gemma Wallace, economist at Markit said:

“The onset of the new year brought little hope of a near-term recovery in Greek manufacturing. Accelerating contractions in new orders, output and employment caused the headline PMI to sink to an eight-month low. Meanwhile, firms were struggling to cover rising costs, as strong competition and unfavourable demand conditions rendered them unable to raise charges.

Eurozone unemployment hit 10% for the first time in December, underlining the extent to which the timid economic recovery has yet to translate into job creation. Spain’s jobless rate rose to nearly 20%, and Ireland, which like Spain has also been hard hit by a housing downturn, saw its jobless rate climb to 13.3% from 13%. As is normal Eurostat didn’t have data on the jobless rate in Greece, where, as Market Watch point out, statistics are notoriously hard to come by. The lastest – EU comparable – number we have is for October, but at this point such a data point is the next best thing to useless. A similar situation exists in the construction sector, we have no clear idea of what is happening since the Greek statistics office simply to not supply comparable data to Eurostat.

Meanwhile the drama in the bond markets looks set to trundle on:

Greece’s acute problem is the need to raise financing to allow it to roll over maturing debt in April and May, while preserving sufficient cash to fund current expenditure. We estimate an additional funding need of at least €30bn by May. The concentration of maturing debt is unusual, but even if this immediate source of stress can be overcome, the funding profile for coming years remains demanding. The next three months will have a heavy bearing on the profile that is followed, but whatever happens, Greece and other peripheral euro area countries will still suffer from a chronic need to improve productivity, raise national savings and cut government borrowing.
Christel Aranda-Hassel, Director, European Economics, Credit Suisse.

An all the doubt continue as to whether, with the fiscal retrenchment process and the competitiveness correct Greece can manage to achieve the debt to GDP reductions promised in their Stability Programme. As Credit Suisse’s Giovanni Zanni puts it, previously

Nominal GDP growth was systematically higher than the average rate of interest paid on the government’s debt. The implication was that the government could run significant fiscal deficits and still reduce the debt-to- GDP ratio. It did not exploit that advantage significantly, however, and the Greek government’s debt ratio fell only slightly over the period. Things have changed drastically since last year. Nominal growth fell to 0% in 2009. Although it should recover from 2009 lows, we think it will remain subdued relative to the recent past. Even if Greek sovereign credit spreads versus Germany fall back somewhat from the peaks reached last week, it seems extremely unlikely that the favourable dynamics of the past will reappear anytime soon. As such, there are few options open to the government other than to move the primary balance into surplus – a surplus that is sufficient to first stabilise the debt-to-GDP ratio and then push it downwards.

This primary surplus seems a very, very long way off at this point. And Greek bonds fell again yesterday, pushing the premium investors demand to hold 10-year securities instead of German bunds up by 12 basis points to its highest level in a week. The move followed news that Greece’s biggest union had approved a mass strike while tax collectors began a 48-hour walkout. The Greek 10-year yield jumped 8 basis points to 6.76 percent as of 11:45 a.m. in London. The difference in yield, or spread, with benchmark German bunds was at 365 basis points. It widened to 396 basis points on Jan. 28, the most since before the euro’s debut in 1999.

And Citicorp warns that investors may well continue to cut their holdings of Greek bonds amid skepticism the government can overcome public hostility to budget cuts.

“Although Greece has secured the expected backing from the EU for its latest austerity program, we expect markets to remain very fearful of the potential for the fiscal consolidation process to slide or to be derailed by public dissent,” according to Steve Mansell, director of interest-rate strategy at Citigroup in London. Investors, he said, may be “more prone to lighten exposure on any significant spread tightening moves”.

And it isn’t only the bank analysts who are not convinced. According to this article in Le Monde IMF head Dominique Strauss Kahn and his close associate Jean Pisani-Ferry, director of the Brussles based think tank Bruegel also have their doubts:

Celui-ci estime que l’UE n’a ni la vocation, ni les équipes, ni les techniques pour analyser les carences d’un pays et préconiser des remèdes. L’Union n’a pas l’habitude d’affronter l’impopularité des thérapies de choc et pourrait céder aux manifestations de rue. Le FMI peut jouer de sa réputation de dureté pour aider le gouvernement grec à imposer les sacrifices inévitables.

Which in plain English says that they thing the EU Commission has neither the vocation, nor the teams, nor the technical experience to take on a job of this size, and while it is vital that the necessary structures and policy tools are developed, in the meantime the clock is ticking away, and the infection is spreading to the Sovereign Debt of other countries – even as far away as Japan. Basically M. Strauss Kahn seems to feel that the EU Commission is assuming an unnecessarily high risk, and that the Greek dossier should really have been sent to the IMF as a matter of some urgency. I cannot but agree.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo' is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

17 thoughts on “Greece Gets The Green Light, But Will It All Work?

  1. Just a small fact correction from me: in paragraph 2, the name of the current greek Prime Minister is *George* Papandreou (he is the son of former PM Andreas Papandreou -it can be pretty confusing, I know, and the fact that George Papandreou’s middle name is Andreas doesn’t help).

  2. Cutting wages in public sector will create dramatic fall in internal consumption. Latvia has already got GDP decrease of -22%. Is this intended also for Greece?

    In Latvia there are no mechanisms which translate austerity measures into PPI decreases. PPI grows again in December, because many sectors are monopolised now due to harsh measures. Will the Greece be different?

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  4. Olrandir: isn’t that still the Greek tradition? At least the Bulgarians and Russians still name that way.

  5. Before the direct intervention in Greece by the EU, the consequences of both action and inaction should have been examined. Pointing out the political impossibility of an Euro break-up should not prevent from examining the likely side effects of a Brussels-imposed medecine, which is based on:

    - Severe internal deflation to restore external competitivity,
    - Severe cuts to public spending to restore public finances.

    That comes in the context of a fixed exchange rate system, the euro. A deflation trap (nominal GDP and nominal incomes going down, public and private debt ratios getting automatically higher) seems possible. Also, restoring competitivity in today’s EU is like trying to catch up with a German car. A fast moving target indeed. By itself, this simple fact could make the cure impotent.

    As the euro is a unique experiment, Greeks will be Guinea pigs (piigs?) for a cure that has not been tried before, because the disease has never appeared in this exact form. Thus the Greek medecine, at best, is an experimentation whose outcome is unknown, and at worst, could become a potential danger to the EU itself.

    One can make some worrying parallels with IMF bailouts in South America in the 80s and the 90s. Propelled by the intellectual firepower of the Washington consensus, these adjustment policies imposed to helpless populations:

    - Severe real income decrease for most people, esp. middle and lower class,
    - Severe cuts to public spending to restore public finances.

    In some cases that came in the context of a currency peg to the US$.

    The social cost of these ‘adjustments’ was high, but the economic benefits regularly fell short of the mark. With the IMF itself having quietly moving slightly away from the Washington consensus, it is surprising to see the EU ready to apply an hardened version of it to parts of itself.

    I agree that it is tempting for the integrationists to use this crisis to increase the powers of Brussels. (“It would be a crime to waste such a good crisis”, as was said in other circumstances). However this assumed cynicism could turn into a dangerous game of Brussels roulette if the popular reaction of IMF-adjusted countries in the 80s and 90s is a sign of what could brew in the PIIGS after similar policies are imposed to them by non-elected foreign bureaucrats.

    Perhaps some PIIGS people will look then at the various travails of Argentina over the last 20 years and conclude, rightly or wrongly, that it would be less painful to quit the euro, devaluate, and default (either totally or, more likely, partially by converting debts in local devalued curriencies). Or, worse for Brussels, default and stay in the euro, forcing the Commission to swallow it or consider expelling Greece from the euro and possibly the EU. This dilemma might not be what the integrationists have in mind.

  6. This is a classical situation for Sun Tzu’s “Concubine Focus” exercise. The EU are the “good cops” whereas the IMF are the “bad cops”.

    As Greece seems to be playing games, let them pick door #3. Maybe if they don’t like what’s behind door #3 they can get a “do over” and pick door #2.

  7. The example of USSR shows that when even one member of some empire leaves it, very rapidly this empire falls apart. This is not a politics, just systems science.

    Leving the EUR zone or even harder exercise leaving the EU is very high risk for other EU countries. Will the EUR be converted to drahma and then devalued? Will all the loans be converted from EUR to drahma? What will be the treatment in Greece of force majeure clauses? In Argentina’s case they were widely accepted for US businesses.

  8. Expelling Greece from EUR zone will require the bystanding it with a cheap loan of magnitude of 100 bn. Because massive downgrades, inability of companies to repay foreign debts, bank failures can very easily provoke a very heavy defaulting. The ECB itself can stay easily on failed loans of 60-80 bn, and in the enormously leveraged EUROSYSTEM this will lead to Ultima Ratio extremely high costs for other Eurosystem members.

    If expelled from EUR, it would be the best strategy of Greece to default, in order to invalidate liabilities.

  9. I don’t think that Greece willingly leaving the eurozone or EU altogether is a realistic scenario. Also I don’t think that anyone in Greece is seriously considering default as a desirable option. You make it sound like there’s nothing to it, debt written off without serious consequences for people and businesses. People suggesting those scenarios are probably motivated by their pre-existing anti-EU and anti-euro sentiments.

  10. point74, Oliver:

    You point out an unfortunate difficulty that makes things considerably worse than what they should be. From the beginning, the euro debate was almost religious in its ferocity. On one side of this religion war, the euroskeptics who never have and never will accept the European project. On the other side, the eurogagas who see Europe as some kind of divinity. Most of the population is more moderate, but the political debate has been, and still is hijacked by the extremes.

    Recent comments on the superior importance of the European project and the sacrifices it requires have a distinct religious flavor. To claim wanting to keep the euro intact ‘at all costs’ reminds of a general ready to fight until the last drop of blood of his last soldier. The European population may ponder other options.

    At the onset of the euro, some people asked about the wisdom of imposing the same medicine to patients with so different conditions. The argument was contempted away by the eurocrats (‘you are probably motivated by your pre-existing anti-EU sentiments’) who announced that, being subject to the same monetary policy, the european economies would necessarily converge. We pay today the consequences of this suppression, by a political diktat, of a necessary economic debate.

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  12. Being too religious about these things can easily cloud your judgement. For example someone may overestimate the impact of the greek debt crisis only because he cannot wait long enough for the demise of the euro. Same thing when making suggestions on how to handle the crisis. The “euro was a mistake” mindset isn’t very helpful really, unless you also have a time machine.

  13. Being too religious about these things can easily cloud your judgement. For example someone may overestimate the impact of the greek debt crisis only because he cannot wait long enough for the demise of the euro. Same thing when making suggestions on how to handle the crisis. The “euro was a mistake” mindset isn’t very helpful really, unless you also have a time machine.

    As any engineer will tell you, you can’t solve a problem when you don’t know the root cause.

    Anyway, I agree with most of what you state, and “religion” as you call it can definitely cloud judgment. I’ve always looked at the euro as a largely religious exercise, much like the people that always passionately defended democracy or free trade forever and always with no qualifiers.

    It strikes me that the “non-religious” solution to this issue would be to bring in the IMF, as they’d officially have no opinion one way or the other on the sanctity of the euro project. They’d do what they think is right to fix Greece. Belgian FM Reynders, Swedish FM Borg, and British PM Gordon Brown stated publicly they all think the IMF’s the way to go. However, Germany stated the IMF is a “no-go”. So while “religion” or “passionately-held beliefs” can lead to tunnel vision, they cannot be discounted.

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  15. Greece and Spain won’t pay back. This was a calculated Risk, and a Lesson for the Banking System. What is happening in Greece, is a very well orchestrated show, to get granted €110bn aid, to avert meltdown. A new deception compared with the old Trojan Horse. The only thing Germans can do is:
    REPOSSESS 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSSESS 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.
    Greece’s problem is too much debt. Greece has a budget deficit of 12.7% of GDP – meaning that the country is spending 12.7% more than the value of one year’s economic output.
    Greece is no different to a serial credit card borrower who can’t pay back his loans. But just like a serial credit card borrower, as long as Greece keeps relying on borrowed money to fund itself, the problem won’t go away. It will just get worse.
    http://www.defenseindustrydaily.com/Greece-in-Default-on-U-214-Submarine-Order-05801/
    But don’t worry; the ECB, the Fed or both will print the money.
    And all of us will share the pain, with our hard-earned money.
    Bad is never good until worse happens.

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