The Choice between a Hard Landing and a Crash « Euro

The Choice between a Hard Landing and a Crash

May 23, 2012 by

by Nikos Chrysoloras*

Many would argue that the phrase “they all got what they deserved” could serve as a stand-alone snap analysis, on the inconclusive result of May 6th’s elections in Greece. The centre-right Nea Democratia (ND) and the centre-left PASOK – the two parties which have dominated Greece’s political landscape since the restoration of democracy, in 1974 – got what they deserved for allowing the country to go bankrupt under their watch. Both suffered unprecedented losses in polls, attracting fewer votes than any other time in the country’s post-authoritarian history. Also, the eurozone Member-States, especially Germany, got what they deserved for imposing the most extreme programme of austerity measures ever implemented in modern history. The outcome of the elections in Greece is a huge blow to the EU-backed Adjustment Programme, since the majority of the population rejected it, casting doubts not only over Greece’s future, but also on the eurozone’s stability as a whole. Markets’ sentiment and reactions since May 6 are indicative of what is going to follow…

 

But such “got-what-you-deserved”-analysis would be superficial. First of all, the numbers are more complicated than they look: pro-Adjustment Programme parties (including those that did not pass the 3% threshold to elect MPs) got almost 40% of the vote. Hence, although not supported by the majority of the population in Greece, austerity attracted an extremely high number of votes, despite its severity. Moreover, the Coalition of the Radical Left (SYRIZA, 16, 78% of the votes) and the Democratic Left (DEMAR, 6, 11% of the votes) also support Greece’s membership in the eurozone, although they oppose the Memorandum of Understanding between Greece and the Troika of International Lenders (ECB, EU, IMF). The same goes for the Green Party (2, 93% of the votes), the populist LAOS party (2, 90% of the vote), and the leftist “Kenoniki Symfonia” (0, 96% of the vote). In fact, the only parties in Greece, which clearly favour an outright default, a return to the drachma and an exit from the EU, are the Stalinist KKE (8,48% of the vote) and the Neo-Nazi “Chrissi Avgi” (6,97%), while the nationalist “Independent Greeks” (10,60% of the vote) are ambiguous on the subject. Thus, despite the painful measures, the insults by EU governments, the lecturing and often demeaning comments in the international press, and the implementation deficiencies of the Adjustment Programme, an overwhelming majority of Greeks still supports the country’s membership in the eurozone and the EU, while almost 4 in 10 Greeks voted for even more austerity.

Obviously, the election result reflects the deep fragmentation of Greek society. Greek voters, blaming the two big parties for the fact that their country is in recession for a fifth year in a row and unemployment has reached record highs, chose to support fringe formations in the far left and far right, all of which blame the Adjustment Programme for Greece’s woes. PASOK lost 30 percentage points since the last election, in 2009, while ND suffered a 15 points drop from its last historical lows, also in 2009. Both are blamed as well for economic mismanagement, nepotism, incompetence and corruption. On the other hand, under ND and PASOK’s watch, historically poverty stricken Greece made it to the list of the world’s 30 richest countries and, before the global crisis, it was ranked among the 20 most developed nations in the world, according to the UN Development Index.

 

Their mixed record is reflected in last Sunday’s results: PASOK and ND lost millions of votes, but no one replaced them in their hegemonic place in Greek politics. In fact, no party attracted more than 19% of the votes. It is therefore clear that Greek voters are divided about what to do next. The once stable ground of old certainties is shaking. And obviously, there is anger and frustration, among a significant part of the population. Anger and frustration explain the rise of Chrissi Avgi (Golden Dawn), which attracted almost 7% of the vote.

 

Readers should know that Chrissi Avgi is not a “typical” far-right party, even by the stretched standards of European extremism. Numerous members of the party have been arrested in the past for attacks against immigrants and leftist activists, while at least one of them served time in prison for attempted homicide. Its leader Nikos Mihaloliakos made no effort to hide his intentions, during his triumphal post-election press conference, in Athens: “All those who have betrayed our country, should now fear us. We are coming!” Before that, the journalists who had refused to obey his command and stand up to attention when he entered the pressroom of his party’s office were kicked out.

Chryssi Avgi started as a fringe organisation of “Nationalist Socialist Studies” more than two decades ago. It published a little known magazine, often praising Hitler’s contribution to humanity, while its muscular activists and its leader, casually exchange Nazi salutes among them. Until 2010’s municipal elections, it drew very little support. Besides, Greece has suffered a brutal Nazi occupation during WWII and has tasted the bitter experience of a military dictatorship, between 1967 and 1974. However, after the financial implosion, the influence of Golden Dawn’s virulent anti-immigrant and anti-IMF rhetoric, often accompanied by “militia patrols” of its members in the most crime-stricken neighbourhoods of Athens, grew faster than its most fanatic supporters could dream of.

 

The next steps

 At the same time when a non-negligible part of the Greek population is flirting with extremism, while another significant part continues to support the country’s membership in the EU, eurozone Member-States have made clear that if Greek voters choose to oppose the Adjustment Programme in the forthcoming elections, which will be held on June 17, then the financing of the Greek economy and banks will stop and the country will be forced to abandon the Eurozone. So, what is the right course of action?

First of all, I have to admit that I feel incredibly guilty for making suggestions from the safe distance of Brussels, and while, unlike hundreds of thousands of Greeks (including members of my own family), I still have a job. But I am totally and fully convinced that, even though austerity indeed depresses economic output, the Adjustment Programme is not the root of Greece’s woes. Greece’s growth model, based on fiscal laxity, cronyism, nepotism, and corruption, is unsustainable in the absence of cheap credit. In fact, the Greek economy went into recession not after the implementation of the MoU in 2010, but well before that: immediately after the global 2008 financial crisis, which signalled the end of cheap and easily available credit. Already in 2009, Greece ran a huge public deficit (15.6% of GDP) in order to avert the recession, and it failed to do so (GDP contracted by 3.2%). So even if Greeks ‘kick out’ the people of the Troika, cheap credit will not be made available again in the country, for decades to come. Greek economy will keep contracting. In a sense, Greece now finds itself in “the desert the real”, as its standards of living are adapting to a world without loans, and reflect the actual production of wealth in the country.

Expansionary policies, like those followed during the 1980s, even if they were feasible today, will not stimulate growth, just as they did not stimulate growth during the 1980s (the economy was growing at an average annual rate of 0,75%, while public debt quadrupled, and inflation was consistently above 20%). Most importantly, they will not solve any of the problems of the Greek economy: public finance mismanagement, over-reliance on public and private consumption, lack of medium and large export-oriented enterprises, extremely high percentage of self-employed professionals, low competitiveness, tax evasion, corruption, and weak administrative capacity. Neither is drachma and depreciation a solution, while comparisons with Argentina are out of place. Unlike Argentina, Greece does not have its own currency to devalue. It will have to introduce a new currency from scratch. Leaving aside the logistics of such endeavour, printing a new currency while already in a state of default is a suicidal move. Unlike Argentina, Greece is not a net exporter of raw materials. Hence, it will have no means to support the new currency, which will have no exchange value. The country will be unable to pay for oil, gas, food, and medicines with drachmas. Chaos will ensue and uncertainty will spread to the rest of the Eurozone. If we allow populism to prevail, the EU will lose a strategic outpost at the crossroads between Europe, Asia Minor and Northern Africa, while it will have to deal with a new source of tension in the wider Balkan region.

 

At the same time, the Greek economy will keep shrinking, until we decide it’s finally time to move on with reform. This is no easy path. Tens of thousands of Greeks will find it difficult, even impossible, to adapt. Changes will take years to bear fruits, and Greece can only hope that, with the help of the eurozone, it will be able to support the most vulnerable. Hard and insensitive as it may sound, in my most humble opinion, this is the best of all possible worlds for Greece at the moment. Restoring the competitiveness of the Greek economy and changing its structure is the only way for the country to survive in the absence of cheap credit. The gigantic support programme by EU and IMF can only help Greece escape a crash. But the hard landing cannot be avoided. So the greatest mistake of the Troika so far was that it promised quick solutions, both to the Greek and the German voters. The hard truth is that Greece will have to stay in intensive care for years to come. Embracing this truth in Athens, Berlin, and in Brussels, will eliminate uncertainty, a key factor, which has led the Greek economy into depression.

In addition, parametric changes to the policy followed by the eurozone can and should be made. First of all, giving the medicine of Greece to everyone else in Europe, even to countries that run primary surpluses, is a German fixation, which is difficult to understand. If consolidation programmes relax in the rest of Europe and the continent avoids a double dip recession, then the Greek economy will also benefit from increased tourist arrivals and stronger exports. More importantly, from now on, conditionality for the disbursement of cash from the bail out mechanism should be tied to meaningful reforms that will improve the quality of life of the Greek people. A one-year extension to the deadline for reducing the deficit below the 3% threshold would also give the Greek economy some valuable breathing space, at a very low cost for the eurozone. All this not much, but it’s the best we can hope for in Greece. The alternative will be a disaster for both my country and Europe. Unfortunately though, as we approach the date of the new elections in Greece, it seems that both my countrymen and many European politicians are determined to jump from the cliff, just to see what happens.

*Dr. Nikos Chrysoloras is a Brussels-based correspondent for Kathimerini, Greece’s leading newspaper and a Robert Bosch Stiftung “EU Journalism Fellow” for 2012.

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