STAFF NEWS & ANALYSIS
What is Greece, and What Does It Pull?
By Staff News & Analysis - April 23, 2013

Greece will probably pull through … Greece is not yet out of the woods. But there is a credible path that could lead the country back into the sunlight. That's the main conclusion of a week I have just spent in the country. Although the economy will have a terrible 2013, next year should be better. But the outlook is fragile: political crisis could yet rear its ugly head, tax evasion is rife and there's the risk of external shocks. Look first at the good news. – Reuters

Dominant Social Theme: Austerity was a necessity and its fruit will be sweet.

Free-Market Analysis: This editorial is frustrating because it refuses to treat people as individuals but instead refers to them collectively as "Greece."

We would submit when this sort of analysis is performed on a country or region it is inevitably incorrect. It must be because all sorts of actors and cultures are being lumped under one political structure.

Greece, like most "countries," contains several different cultures and populations. To run such a broad brush over them is inevitably confusing.

Additionally, it is not "Greece" that will pull through but individuals who have suffered, often inordinately, under the misguided "austerity" that has been grafted onto the political culture and economic fabric.

One should certainly make a distinction between the political class and ordinary people who have lost their jobs, pensions and savings. Not doing so gives rise to various misinterpretations of what is going on in Greece, and we would argue this article contains many of them. Here's some more:

Antonis Samaras' coalition government has held together surprisingly well since it came to power last June following a period of political chaos, despite pushing through extremely unpopular measures … Samaras hasn't suffered the plunging support of Spain's Mariano Rajoy or France's Francois Hollande.

Largely as a result of Samaras' effective government, the troika – the European Commission, the International Monetary Fund and the European Central Bank – last week gave Greece a thumbs-up in its latest progress report. More bailout funds, which so far total around 200 billion euros, will be disbursed.

Last year's trauma, when it looked like Greece might quit the euro, and the ongoing austerity will cause the economy to shrink by another 5 percent or so this year, taking the cumulative decline to around 25 percent. Unemployment will probably rise to about 30 percent. These are grim figures. But Athens now seems on course to achieve "primary balance" this year.

In other words, it won't have a budget deficit before interest payments. That means it probably won't have to implement another round of austerity next year, so the economy won't be struggling against that headwind. Meanwhile, up to 50 billion euros of bailout cash is being used to recapitalise viable banks and shut down non-viable ones.

… The real danger would be if the Cyprus crisis deteriorates to such an extent that Nicosia quit the euro. Contagion to Greece would then be harder to avoid. That said, the outlook for Greece looks far better than it has for years. The country will probably make it.

Again, we see where this sort of analysis leads us: The "country" will probably make it. In fact, there was never any doubt about the country "making it." A country is a geological formation with manmade boundaries. The country exists and doesn't have to be "made" – or remade.

But there are plenty of Greeks who haven't made it – in contrast to this assertion about a geological formation. Greeks have taken sick from unbearable stress or simply committed suicide. Some of Greece's top professionals have been hounded out of the country by a new and more aggressive tax regime that uses satellite imagery to look for undeclared swimming pools.

Meanwhile, the cynicism of the average Greek when confronted with the chaos of the country under austerity has likely grown dramatically. There are apparently legitimate lists of Greek pols and others with Swiss bank accounts, yet these lists have not been acted on even though aggressive tax collection is one of Greece's highest priorities.

More importantly, austerity itself is not merely a slashing of budgets and benefits. Tax hikes, tax collections, monopoly privatization and even more Draconian regulation is part and parcel of this IMF-spawned approach to economic viability. As we have pointed out before, it is not necessarily the public sector that suffers under this program.

A better way to address the problems of Greece and other such countries would have been to devalue. That way the pain is spread throughout the population and no arguments can arise over who is or is not to be affected. Austerity can happen with a keystroke and by now Greece would be on the road to recovery, even within the context of its normal fiat profligacy.

But it is impossible to devalue, given that the Greeks have given up their currency and the ECB cannot do it for them. They are stuck in a terrible limbo of cuts, chaos and outside (EU) interference in their affairs.

This Reuters article tries to put a gloss on it, but the reality is likely a good deal more gloomy than upbeat reports would suggest. Readers know it, by the way. Here's just one scathing feedback to this editorial (by Hugo Dixon) received from "Dareconomics":

This is how these pieces work. If Dixon is correct, then he can claim to be the first to call the Greek recovery. If Greece continues its descent into depression, then everybody will have forgotten about this article in a few months anyway. Mainstream media types are rarely called to account for poor predictions with the consequence being that they make a lot of them.

In this article, Dixon combines his free trip to Greece with a few anecdotes meant to show how Greece is improving. Unfortunately for the Greeks, the economic data shows the exact opposite of those nice little stories about the brave Prime Minister holding the country together and tales meant to foreshadow Greece's coming economic rebound.

Let's cut away the hype and see what remains.

Samaras hasn't suffered the plunging support of Spain's Mariano Rajoy or France's Francois Hollande. This statement is not true. Samaras was elected with over one-third support of Greek electorate. His current support is less than 19%, which places New Democracy in a statistical tie with opposition Syriza.

But Athens now seems on course to achieve "primary balance" this year…That means it probably won't have to implement another round of austerity next year, so the economy won't be struggling against that headwind. Maybe Dixon is right, but maybe this will just be the third straight year that Greek promises of attaining a primary balance are pushed back . Moreover, budget cuts and tax increases don't go away after they are implemented. The economy will still be held down by a confiscatory tax scheme for the near future.

Meanwhile, up to 50 billion euros of bailout cash is being used to recapitalise viable banks and shut down non-viable ones. You can give the banks all the money you want. The economy is weak, so the demand for loans remains low. Banks are not lending in the periphery and will not as long as they can invest their capital in the ECB supported sovereign bond market.

… The Greek economy continues to contract, and there is no end in sight to the depression. Lower wage costs are still not low enough to make the unproductive Greek worker a bargain … The outlook for Greece looks far better than it has for years. The country will probably make it. What does "probably make it" mean? This is a vague prediction. As long as the country avoids a fascist coup, you could probably argue that Greece has made it.

However, if we mean that Greece will not default on its debt mountain and return to sufficient growth to cut its unemployment rate below ten percent, then poor Greece will probably not make it.

Once you cut away the hype, little remains.

After Thoughts

We agree more with the feedback than the editorial.

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