The Greek economy is in serious trouble. Of
the 19 Euro-zone (EZ) nations, Greece now claims the most precarious fiscal
position. This is not a new situation. Ever since we found out almost 5 years
ago that previous Greek governments had been cooking their national books with
far worse than grape leaves and lamb, the nation's finances have been at best
"fragile."
From the fiscal fallout of these mega-errors
Greece received a huge bailout from its 3 primary creditors – nicknamed
"the troika" – the European Central Bank (ECB), the 19 Euro-zone
finance ministers (the Eurogroup), and the International Monetary Fund (IMF). This
bailout allowed the Greek government to stay functioning, but required Greece
to seriously reform its wayward approach to doing the public's business and its
fiscal accounting. Since 2012 Greece has received total bailout loans of more
than €270 billion (B).
At the current euro/dollar exchange rate, that's $310B which Greece owes to 7
different groups of international creditors.
Despite being the larger-than-life birthplace
of public democracy, Greece is a fairly small nation. Its 2013 GDP was $267.1B, which represents only 2% of the EZ
GDP and makes the country's economic output worth about the same as that of the
state of Tennessee. Greece has almost twice as many people as Tennessee,
offering a perspective on Greek citizens' overall productivity. Greece's GDP
has fallen 25% since it initiated the austerity requirements imposed by the
troika as a condition of receiving its fiscal bailout. Greek unemployment
hovers around 25%, youth unemployment exceeds 50%.
In large part, these austerity reforms spurred
Greek voters to elect a new government last month lead by the left-wing Syriza
party. Syriza pledged to unilaterally dismiss the loathed "reforms"
that increased taxes, forced government agencies and businesses to dismiss
workers and generally made economic life worse for many citizens, all in the name
of improving Greece's economic productivity and becoming more worthy of the
loans. The Eurogroup ministers and Greece have been negotiating before Mar 5, the
first of Greece's many days of fiscal reckoning, when Greece will need to repay
€1.7B. Because Greece's economy has taken a
nosedive – in part due to the imposed reforms – everyone realizes, but is unwilling
to publicly state now, the country will not be able to repay all of the loans
on time without additional loans.
The first round of these negotiations has been
as much public posturing as private negotiations. If all goes badly, it's
possible that Greece will exit the Euro Zone, which is termed the
"Grexit." Nevertheless, on Feb 20 the Eurogroup announced that
despite big, bad Germany's vocal trepidations, the Eurogroup offered a
conditional 4-month extension of the Greek fiscal bailout. On Feb 24 the
Eurogroup accepted
the Greek government's latest bailout (extension) plan. The clamor surrounding
these negotiations has heightened because of the size of the debts owed, the
political divergence between the new, anti-austerity Greek government and the
powerful EZ austerians (primarily the Germans, with strong support from Finland
and the Netherlands) and the symbolism surrounding the euro currency's
viability.
Unlike America's 2007-08 credit crisis that
was initially founded on real-estate speculation, the troika cannot just
foreclose on Greece's delinquent bankers (including the government's central
bank) and, in effect, put the nation up for sale. Given the intricate rules and
procedures involved with all euro-zone policies, the Greek negotiations weigh
euro-zone credit regulations against Greek accountability. On principle, every
European politician, including even Germany's Chancellor Angela Merkel the
queen of austerity, has stated Greece should not abandon the euro. And, after
admitting to excess fiscal expenditures, Spain, Portugal and Ireland have each swallowed
the bitter austerity policy pills administered to them by the Eurogroup. Really,
why should Greece get special treatment just because the Olympics began there?
Ironically, Germany may particularly benefit
from Greece's travails because the euro has depreciated more than 13% in the
last 5 months relative to the dollar, in part because of this latest "euro
crisis." So travelling to Europe for Americans will be much less expensive
this summer than it has been in years; and the cheaper euro will mean more German-made
and exported Porsches, BMWs and Mercedes (as well as exports from other euro nations)
will continue to grow. When they think about it, having Germany's net exports
rise on the shoulders of still-unemployed Greeks will not likely sit too well
with Athenians. Interestingly, there is no other major economy that can top
Germany's exports as a share of GDP, at 46.6%. China's is
26.4%; the US's is 13.5%.
Although this latest 4-month extension agreement
seems to offer some timely political expediency, it really just kicks the
fiscal can down the viaduct. At some point the Eurogroup ministers and Greece will
have to acknowledge and face three fearsome, related realities. First, significant
structural reforms will need to be quickly and irrevocably implemented in
Athens and the rest of Greece – and not merely discussed. Given their electoral
platform, how the leftists of Syriza can get their political compatriots – and citizen-voters
– to swallow these changes is very uncertain. If Syriza sticks to its perceived
mandate, a Grexit won't be so far away. Second, even with such reforms, it's very
hard to imagine Greece's creditors not eventually getting a haircut (not
receiving all of their loans due to be paid back). No one wants to be first in
the fiscal haircut line. And third, austerity policies even if they could
improve public efficiency (which is not at all a given), have created such wide-spread
wreckage that it's not clear the pain is worth the possible gain.
The trails ahead for Greece and the rest of
the Eurogroup are unlikely to be happy ones in the next year, no matter how
many times they meet again.
