Sunday, 17 June 2012

A Sunday of elections – hostages to Greece

This Article was published in The Malta Independent on Sunday on 17 June 2012
Three crucial elections are being held today. In France, President Hollande hopes to see his socialist party take control of Parliament, as this will give him better prospects for pursuing his electoral pledges of budgetary discipline through economic growth. These are often conflicting objectives, at least in the shorter term. Hollande will need the backing of a socialist controlled Parliament to stay the course and operate with the necessary flexibility. In Egypt, there will be the run-off for the first free presidential election where many spring revolutionaries are dismayed at being forced to choose between the mosque and the military.
But the election that is attracting most international attention is being held in tiny Greece, the second time in six weeks that the Greek electorate has to vote. They voted on 6 May but on that day the result was inconclusive and they have to try again.

On 6 May, the Greeks showed clearly what they do not want. They gave a hard beating to the two main parties, New Democracy to the right and Pasok to the left, which governed Greece since it emerged from military rule and which, between them, created the economic mess their country is now in. The political space vacated by the traditional political parties was filled by new parties from the extreme left and the extreme right, which, free from the guilt baggage of incumbency could promise illusionary relief from the pain of austerity suffered since the country’s financial deficits were exposed and access to international funding dried up except through toughly conditioned bailouts from the IMF and the EU.

This time the Greeks have to choose what they want, not just what they do not. They have to choose whether to elect a coalition government that would respect the bailout agreement and gracefully and tactfully negotiate a growth package to run in parallel so that the population can be offered some light at the end of the long and painful austerity tunnel. Or whether to elect a government that cancels the bailout agreements and goes its own way by bullying the EU to continue bankrolling Greek inefficiency for eternity, merely to avoid contagion spreading to other countries like Ireland, Spain, Portugal and Italy that are determinedly undertaking tough austerity programmes to redeem their country from a debt trap that is threatening their economic survival.

Basically, Greeks have to choose between staying with the euro or leaving it: indeed, by implication whether to stay in or exit the EU. The outcome of the Greek elections remains highly uncertain till the end. Many voters remain undecided and the prevalent wish of a large majority of the population to stay in the euro may finally force protest votes of 6 May to vote for the future rather than simply vote to condemn the past.

It is unfortunate that we had to arrive at this tragic point. It was clear from the very beginning that an austerity recipe on its own would never be enough to heal Greece’s economic ailments. In an article in this series published more than two years ago entitled “Something has to give” (TMIS, 7 March 2010), I had said:

“Greece and others, however, cannot do it on their own. The adjustment cannot be extracted solely from oppressive fiscal measures. Economic growth has to be a key feature in the recovery plan. The problem is that fiscal oppression impacts negatively on economic growth. Domestic demand shrinks, as people lose income, pay more tax and get generally uncertain about their future. Growth can only be achieved through external demand but this can only grow very gradually, as the country recovers its competiveness.
“It is here that the big rich countries in the euro area have to support Greece. The rules of the monetary union need to be re-jigged and an exit route for those countries that cannot live by the rules has to be created. The absence of a threat of being forced out of the euro has led to moral hazard, as undisciplined countries thought they could get away with lax fiscal management. Secondly, euro rules have to include progressive sanctions for countries that register structural intra euro area payments imbalances, surplus as much as deficit.
“The Germans should not claim the high moral ground of fiscal prudence. They benefited from Greece’s indiscipline by enjoying structural balance of payments surpluses. The weakness that the Greek crisis inflicted on the euro exchange rate has benefited Germany much more than Greece as it is Germany that exports most to countries outside the eurozone, rather than Greece or its Mediterranean peers.
“North European powerhouses have a strong moral obligation to stimulate their economies to create demand and growth opportunities for Mediterranean economies, as they undergo compression of internal demand and painful fiscal adjustments.”
All this went unheeded for two years where round after round of austerity continued to crush Greece’s economy rather than help it recover competitiveness. It is only in the last six weeks, since Hollande won the French presidential election, that thinking has started to change. Finally, many woke up to admit what ought to have been clear from the start − that restructuring without growth becomes democratically impossible to deliver.

German Chancellor Merkel seems to be the last (wo)man standing, preferring austerity to growth and in denial that German surpluses are as destabilising as Greek deficits and both have to be addressed concurrently.

In so far as we are concerned, Malta is highly exposed to these events. Headlines like Der Spiegel’s “Europe’s Future Hangs in Balance”, The Economist’s “Dithering in the dark – Europe dithers at the edge of an economic abyss” and a UBS research paper “Greek election preview: Fasten your seatbelts” give a taste of how serious the situation is and what could happen if the Greeks put the wrong foot forward. We are exposed to whatever happens around us, and if the confusion following a Greece disorderly exit from the euro leading to an outright default causes contagion, a financial meltdown and a long recession would be probable.

These are things we can do little about and just have to be prepared to take the blows on the chin and push forward as we have done before in the face of adversity.

Unfortunately however, we are making life even more difficult for ourselves. Rather than using euro membership as a credential to boost economic growth and attract foreign direct investment, we are pathetically allowing these events to entangle us in unfair commitments which could strategically impair the solidity of our financial structures.

The euro we decided to join in 2008 had clear provisions that all countries had to play within the rules of fiscal prudence and that every country had to remain responsible for its own debts. The financial crisis that hit soon after we joined, meant that many countries did not abide by the fiscal rules, either because like Greece, Portugal and Italy they were too fiscally lax in the good times, or because like Ireland and Spain their banking system was crushed from massive exposure to real estate development, and the state had to take on private sector debts to save the banking system from total collapse. Many of these countries needed bailouts to avoid default as they were shut out of the commercial capital markets. Why Malta, as a newcomer to the Euro has to carry the same bailout obligations, on a pro rata basis like core Europe, simply escapes me.

If we had known that it would come to this, it would have paid us better to adopt the euro through a currency board without actually being part of the euro area. It is basically what Switzerland is doing at present when it officially hinged the Swiss France to a 1.20 rate for every euro and its Central Bank intervenes regularly in the market to defend this rate from market pressure to revalue.

Malta’s lending so many millions to Greece, with very high probability we will have to write-off their recovery sooner than most think, and committing another one hundred million euro to support the recapitalisation of Spanish banks through the Spanish sovereign is forcing us to take very unfair risks.

I am not saying that these countries in distress should have been cut off and their bailout requests denied. What I am saying is that we should not have agreed (and here I am also including the Opposition in my criticism as they assented to these things too readily and uncritically) to carry the same, or worse, pro rata burden as the founder countries of the euro. These founder members, the core Europe, are directly responsible for admitting Greece when it was clearly not yet ready to take on euro obligations. They set a bad example when they forced their way to break the rules with impunity when their own economy slowed down. They looked the other way while Greece was evidently cooking the books. They received great economic advantages from their euro membership as the loss of competitiveness of the peripheral countries actually boosted the core’s internal and international competitiveness. As new members to the euro we have not shared in this bonanza when Greece was spending as if there was no tomorrow. They were buying French military equipment and German luxury cars. They certainly were not buying Maltese honey. The burden sharing should have exempted countries that joined just a short time ago.

Unfortunately, no one seems keen to defend our sovereign interest the way any self-respecting nation should do. We are allowing ourselves to become hostages to whatever the Greeks decide today and that is unappetising.


  1. PLAN B for EU:
    South out AND North of the willing (D, NL, Scandinavia 77% EU GDP)
    South EU people can work in North for drachmen wages and earn real Euro's
    80& real GDP is already North EU.
    People forget dual labour economies do work:Eu was always dual !
    Greeks just don't want to work or pay taxes and now they can becom a waiter in greece or a migrant worker.

  2. I would have preferred the greeks to vote for an anti-austerity platform, exit the eurozone and be done with it. The result only means they will be hoping for more handouts as a gift for staying in the eurozone. And their 'stay' in the eurozone is by no means guaranteed.