Thursday, September 29, 2011

Greece; a country on the edge of a nervous breakdown

Greece is  only days away from national humiliation. The Greek government will admit what we all already know-that it can no longer service its debt. It will ask its creditors to restructure and write down government liabilities to more manageable levels.

Understandably, the Greek people have become deeply pessimistic about the future. This is reflected in the latest consumer sentiment surveys. Sentiment has fallen off a cliff, and Greeks are on the edge of a collective nervous breakdown.

Nevertheless, it is wrong to think that Greece is an outlier. It is not a special case. It is not unique. The Greek government made the same mistakes that other European countries made.

The Greeks allowed the state to grow to the point where it completely dominated economy. In parallel, Greeks created a welfare system that reduced incentives to work and take risks.

Even sectors that were notionally private, such as construction, were beholden to public officials through a complicated and obscure system of state procurement. The state was the omnipresent funnel for corruption, both on a great scale and on the most pettiest of levels.

The Greek people, for the most part, wanted a bloated welfare state, where no one paid for anything. They liked generous pensions, early retirement, and free healthcare. Greeks learned to adapt to the daily indignities that the state inflicted upon them. They bribed and scammed their way around the incomprehensible morass of rules and regulations.

Perhaps understandably, the Greeks did not want to pay for their deeply dysfunctional public sector. Tax evasion became the national hobby. When the government could not balance tax revenues with expenditures, it borrowed from the bond market. There were plenty of willing banks ready to accommodate Greek fiscal imbalances.

In order to hide its deep structural economic weakness, Greece joined the Euro at an overvalued exchange rate. The lack of competitiveness destroyed the remnants of Greek manufacturing. The Euro didn't just wreak Greek manufacturing.  Traditional service sector industries, such as tourism, became overpriced.

The Greeks had an answer for the economic dislocation caused by the adoption of the Euro. Rapid credit growth to the private sector created an asset bubble, which spawned a huge service sector centred on the financial market. What it could not produce at home, it purchased from abroad. Greece ran up a huge current account deficit, which is financed with cheap loans from northern Europe.

This bizarre economic model continued so long as Eurozone interest rates remain low, and and no one paid too much attention to the health of the financial system.

Four years ago it all came crashing down. The flows of cheap capital stopped, the government could not finance its deficits, asset bubbles suddenly collapsed, and all the weaknesses of the Greek economy became horribly exposed.

Does any of this sound familiar?

1 comment:

  1. A good summation of the situation here. Most Greeks realised a few years ago that ditching the Drachma in favour of the Euro was a big mistake, but of course, hindsight is 20/20 vision. Mind you, graft has been part of the system since long before the advent of the Euro, it just started involving larger sums that could be creamed off. The EU and it's benificence proved to be an irresistible milch cow, and all those that could, flocked to it's teat. And now the shit has hit the fan the government is running around like a headless chicken. They haven't a clue. Their "austerity measures" simply involve taxing the population into penury, and to no good effect. When you are talking multiple billions of debt, and a total population of 11 million to service that debt, it starts bordering on the surreal.

    Shame to see a once great country reduced to this.