Sunday, 26 February 2012

Over the edge

Article published  in The Malta Independent on Sunday on 26 February 2012
Lending money to Greece under the terms of the bailout scheme put together by the EU through the new €130 billion scheme is like throwing money down the drain. Why? Simply because the arrangement offered to Greece is not redemption out of its debt problems. It is more like a stay of execution.

Greece is living the harrowing experience of someone who has just woken up from a 10-year long dream only to realise that it was a lie; that the high standard of living their politicians induced them into was debt-financed; that once credit is no longer available, they cannot keep up with the bills which keep coming.
Even though the bailout makes provision for a sizeable “voluntary” debt reduction, Greece would still be left with high debts impossible to service. Even in the best of the optimistic hypothesis of the bailout plan, Greece would still be nursing debt to GDP ratios in excess of 120 per cent by 2020.

For a country to pull itself from such high level of debts it will have to meet at least one of the following three conditions:

  • They are in command of a reserve currency which carries the trust of most investors throughout the world (e.g. like the US and the US dollar)
  • The debt is mostly internal and there is strong home bias among local investors (e.g. as is the case in Malta).
  • The debt has been used for productive and infrastructure investment which can be expected to generate strong economic growth (certainly not the case of Greece, where most debt has been used for consumption).
Greece meets none of these conditions. As its economy continues to be crushed by austerity meant to bring down internal costs and restore international competitiveness, the debt burden, even at the reduced absolute levels, will be heavier on a relative basis.

Obviously, if the Greeks were to accept the austerity as a necessary programme to save their country, much in the way as in Ireland and Portugal, the economy would probably hit bottom and start growing again in the medium term.

But economic growth demands investment, real productive investment, and investors – both domestic and foreign – will stay away from Greece, no matter how cost-competitive it may become, if the population does not accept the austerity as a necessary evil and investors continue to see the awful scenes of strikes and violence which have become the regular fare on Syntagma Square.

I don’t blame the Greeks for protesting. I would probably be protesting too, if I were going through what they are going through: protesting against the politicians who promised heaven and drove their country to hell.

But, most of all, I would be protesting about why these same politicians are still in cabinet, obstructing the technical Prime Minister who, as in Italy, needs to deliver the necessary bitter medicine without being vote dependant.

I would be protesting that Greek politicians are insisting on fresh elections in such dire conditions which could well force the democratic process to elect to power extremists and demagogues rather than capable statesmen that can redeem the country.

I would be protesting about not being offered a referendum to choose between two stark alternatives: either a long term austerity programme to stay within the eurozone and the EU, to be executed by a technical government as in Italy with tenure of several years, or refusing austerity, defaulting on debts, pulling out of the euro and probably out of the EU, seeing the country’s banking system collapse, blocking Greece out of the capital markets for several years and then, after such a sharp shock possibly producing anarchy conditions, to start building up again from scratch.
Given this stark choice,

I am sure that a large majority of Greeks would have embraced the EU austerity route and, rather than continue protesting in Syntagma Square, they would roll up their sleeves to liberalise their economy, fight corruption, elect technically savvy politicians who can bring to book tax evaders and the past perpetrators of corruption, and change the country from a consumption-oriented society of moaners who believe that someone owes them a living, to an export-oriented machine.

It is possible to save Greece, but only if the austerity of the bailout package is accompanied in equal measure by growth initiatives. Apart from the general acceptance of the country through a democratic referendum, such growth strategies would require a great show of solidarity from the core countries, especially Germany, who have been making an economic feast out the Greece’s largesse and economic troubles.

Germany has become like Ptolemy’s theory of the universe – that the earth was at its centre. The euro has become a Ptolemaic system, with Germany at its centre. As the HSBC Group chief economist Stephen King wrote this week:

“[this Ptolemaic system] requires economic adjustment by others to protect the interests of German taxpayers and voters. It is more important, apparently, that the southern European nations reduce their current account deficits than that the northern nations reduce their surpluses.
This Ptolemaic system needs to be replaced. This is not an issue concerning Greece alone… It is about the need for adjustment by those who appear to be in a strong financial position…. encouraging domestic demand to grow more quickly; allowing its real exchange rate to rise with a more tolerant approach to inflation; ensuring that its current account surplus is invested… in factories in southern Europe and welcoming migrants from southern Europe as they try to escape unemployment.”
If Germany does not take such growth initiatives, then sooner or later it will have to choose between leaving the euro itself or seeing the euro system blow up altogether.

Before there is a coordinated programme on these lines, twinning growth with austerity measures and spreading the burden of adjustments on surplus countries as much as on deficit countries, any money that Malta may lend to the bailout funds is gravely at risk of non-recovery. I know parliament has already approved such bailouts, and it may be difficult to stay as the odd one out, but this is our hard-earned money and Malta – as a recent entrant to the euro – has neither benefited from nor contributed to the problems of Greece the way the original core countries have. They should carry the burden of adjustment rather than spread it around unfairly to include the newcomers.

And in a local context, the bail out of Air Malta is becoming more and more like an expensive Greek tragedy. If the restructuring makes Air Malta incapable of performing its functions as a national airline, opening routes and taking a long-term view in its operating strategies for the protection of the tourism industry, if Air Malta has to be stripped off its productive assets like valuable airport slots, then the obvious question to ask before continuing to sink more money into it is whether we need an Air Malta which cannot deliver what it was set up for.

Between them, Greece and Air Malta could push us over the edge.

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