Rioting in Athens

Anyone watching last night's riots in Athens would justifiably conclude that the very foundations of the Hellenic Republic were at stake; which is, in fact, very close to the truth, only in exactly the opposite way to what the demonstrators and rioters claimed. The Parliament was voting for an emergency bill, that would allow the government to sign a new bailout with the European Union, the European Central Bank, and the International Monetary Fund, whilst committing itself to enact measures which purport to reverse the budgetary deficits and increase the competitiveness of the greek economy. Were the Parliament to fail to pass the emergency bill, the aforementioned international institutions would no longer extend a line of credit to Greece and Greece would default on its obligations, beginning with a large chunk of bonds which are to mature in March, which would not be paid. This would lead to the uncontrollable bankruptcy of the Greek State and, almost inevitably, to Greece exiting the Eurozone and returning to a national currency. A national currency would, of course, be devalued almost instantly and Greece would experience galloping inflation, not to mention a shortage of most goods, including food.

Yet, all those demonstrators alleged that the passing of the emergency measures would lead to a virtual occupation of Greece by its lenders, poverty, recession, and a loss of labor rights. These allegations were based on the text of the "Memorandum of Understanding on Specific Economic Policy Conditionality"; the Memorandum's most controversial provisions provide for a drastic reduction in the minimum wage and of the power of collective labor agreements reached at the branch level (i.e. the sector of the economy involved) versus those reached at a company level - or the terms of individual labor contracts. Another provision that has proven controversial, contained in other documents of the emergency bill, relates to a waiver of sovereign immunity on the part of the Hellenic Republic when it comes to its lenders' rights to collect the loan by seizing the property owned by the Greek State. It should not come as a surprise, nowadays, that provisions concerning the reduction of the overblown state, even by means of redundancies of public servants, did not prove as controversial.

The former provisions are seen by their opponents as a big blow to the labor movement, as leading to poverty and deepening the recession (since they will lead to smaller wages). What is strikingly absent in their considerations is the current unemployment rate, which has topped 20%. As long as no provisions for mandatory hiring (as a means of reducing unemployment) exist - which, fortunately, not even the strongest proponents of a controlled economy have put up as proposals yet, keeping an antiquated regulatory regime in the labor market strips the unemployed from even the slimmest chances of acquiring a job. Moreover, a black job market, in which actual wages are way below the official minimum wages of today, is left to flourish, much to the actual detriment of workers' rights there. The Prime Minister, Mr. Papademos, has explained how a reduction in labor costs (including both wages and social security contributions) will lead to an increase of hirings in the medium term. As far as the waiver of sovereign immunity is concerned, its wording (which has, in fact, been used in many bonds and guarantees by the Hellenic Republic in the past) has given rise to an urban legend, that, in the event of default, the lenders of Greece would have the right to seize and sell the Acropolis, the general allegation being, that Greece is no longer a sovereign nation (and, as such, is under foreign occupation).

If anyone had taken the time to read the memorandum, they would have realized that most of its provisions are nothing less than essential modernizing measures and are, in fact, beneficial to ordinary citizens. For example, they will not be forced to hire a lawyer in the event of a real-estate transaction, as was the case so far; the regulated profit for pharmacists should be drastically reduced; companies should no longer be forced to publish their economic data in newspapers; a number of taxes that are earmarked for certain groups should be abolished. Such provisions strike a blow to several vested interests that have fragmented the greek society but reduce the burden on society as a whole and should have been welcomed by the demonstrators.

Unfortunately, the dangers inherent in bankruptcy were not enough to convince the demonstrators that the passage of the emergency bill was of the utmost importance. What strikes anyone who will read the Memorandum, however, is that almost nobody has come to defend its provisions, other than the controversial ones, which are undoubtedly in the common interest. Sadly, vested interests still play a large role in Greek politics and it seems costly for someone to publicly support even the most reasonable of provisions, that would even barely touch their privileges. The result is that the political class trying to pass the emergency bill does so in a defensive and apologetic way; the threat of bankruptcy is the exclusive argument presented in favor of the Memorandum which is presented as a series of austerity measures, its developmental significance being overlooked (although a coherent policy of attracting foreign capital in the form of foreign direct investments is strikingly absent). But, then, this gives rise to populist cries about national dignity, not to mention the notion that Europe would never allow Greece to default on its debts but would somehow (despite the constant failures to honor the commitments already undertaken and the risk to other European taxpayers' money) intervene at the last moment. This also leads to actual faults in the Memorandum not being criticized; if, for example, the significance of being able to pay off a company's debts to the State in 60 installments were made clear to the Memorandum's authors (who reduced the maximum umber of installments to 12), such provision would possibly not have entered the Memorandum - or the aforementioned lack of any coherent policy to attract foreign direct investments might have somehow been remedied.


It is unfortunate that any such discussion has eluded the rioters, who would chant and swear against the foreign occupation and international capitalism and forget that, in cutting off all channels of credit, Greece would be incapable of meeting its population's basic needs, even feeding itself. As it was pointed out by both the Finance Minister and the leader of the New Democracy party, the same lot who chanted "Hossana", when Jesus entered Jerusalem, would cry "crucify Him!" only five days later. Were the emergency measures to fail passage in the Parliament, the temporary jubilation and rejoicing would be supplanted by complete anarchy only a few days later.

Theodoros Pangalos Is Speaking the Truth! But Is Not Following Up on Policy.

This blog is no fan of Theodoros Pangalos, currently the Deputy Premier - for reasons too disparate to be put down here at length. However, it does enjoy his sporadic outbursts of truth, like his statement, yesterday, that the whole political system is complicit in the creation of Greece's huge public debt, as administrations by both major parties hired too many people to work at the public sector. That admission was, moreover, a direct answer to the question "Where did all the money go?", which is brandished against the political establishment by populist morning-TV-show presenters - the implication in that question was that the money was pocketed by corrupt politicians. And while it seems that many politicians did indeed enrich themselves at the expense of the public purse, a calm look at previous years' budgets would reveal that that salaries and pensions for civil servants were approximately equal to the government's tax revenues (and anything in excess of that would constitute our high annual deficit). Let me rephrase this: government expenditures on salaries and wages for the public sector are so large, as to consume all the taxes we pay. Or, to put it otherwise, those of us in the private sector work almost exclusively for the sake of those in the public sector (the inefficiency of which is almost of legendary status in Greece).

So, we now know, and the administration admits that it knows too, where "all the money" went. It also knows that it must produce, pretty shortly no less, surpluses, in order to start repaying its foreign debt. There are two ways to turn a deficit into a surplus: reduce costs and increase revenue. Cutting costs, insomuch as it would entail redundancies in the public sector, is out of the question in a political culture like the one in Greece. The Deputy Premier has presented a plan for many public agencies to merge, but any redundant personnel will be transfered to other services - the cost of their wages will still be borne by the government (a notable exception is a public-sector corporation, supposedly created for the digitalization of farmland maps, which was manned by hairdressers, professors of Theology, and other unrelated specialties, although each one of the hires could be traced to parliamentary deputies affiliated with the previous administration of the New Democracy party). Moreover, public enterprises, typically publicly-held corporations, in which the government owns the shares, have their debts guaranteed by the government. They are also hugely overmanned. The government has announced that the employees of the state-owned enterprises made redundant by its purportedly cost-cutting measures will not lose their jobs, since they will be hired by the government. Thus far, the only actual cost-cutting has come through a drastic reduction in monthly salaries for civil servants across the board.

Things don't look so good in the field of increasing revenue, either. Diminished turnovers lead to diminished tax revenues, despite a significant increase in tax rates. Furthermore, the government has done nothing to make Greece attractive to investors (the increased tax rates only further discourage potential investors) and any money poured into the market comes from government (or E.U.) coffers. The government is all in favor of development and growth, but the path it has taken to reduce deficits is, in effect, stifling growth. It has become by now abundantly clear that the only way for the reduction of deficits, which would be consistent with any potential for growth, is actual redundancies in the public sector. To put it bluntly, the government needs to get rid of all redundant personnel - to get it out of its payroll. It has to reduce the bill it pays for salaries each month; not by across-the-board cuts, though (since there are civil servants who are compensated all too well for their services, while, at the same time, a number of them receive only meager wages), but by simply not paying for people, whose services it does not need. That goes for both the central government and for the local governments (municipalities, prefectures, areas, etc.). And, it goes without saying, to completely change the atmosphere for investments in Greece - but, more on that (and how Greece managed in in the '50s and the '60s), in a next post.

The Greek Economic Paradox: Austerity and Inflation

Greek inflation has economists worldwide scratching their heads: how can a country, in which public-sector salaries and pensions were cut drastically (almost 20%), and a contraction of 4% is predicted for 2010, have an inflation rate of 5.5%? With money supply that low, how can prices be rising (the paradox becomes even more intriguing, if one considers that Greece shares a currency with 15 other countries, where inflation is much lower - and even fears of a deflation have been expressed - and cannot print its own money)? And, on a political level, the Minister of Finance is criticized for not doing anything to fight inflation (I guess the critics favor the imposition of price controls). Well, really, things are not so strange from the viewpoint of someone living in Greece.

It is true that an initial spike in prices was the result of an increase in the rate of the VAT from 19% first to 21% and, a couple of months later, to 23%, in accordance to the commitments Greece undertook, along with other austerity measures, as a condition for its bail-out by the European Union, the European Central Bank and the International Monetary Fund. Taxes on alcohol, cigarettes and gasollne were also raised sharply (the latter increasing the cost of transport, leading thus to another across-the-board price increase for all products). But, then, again, surely diminished demand would lead to prices falling.

Well, yes and no. For starters, demand did not diminish as fast as one might have predicted: no noticeable shift in the consuming habits of Greeks has occurred, although they mostly refrain from making big buys (like cars or homes). Automobile prices have plummeted. The prices for low-income housing have taken a fall, as well. But, other than that, the prices for most goods and services have risen. This is not hard to explain, given that Greeks have historically had large bank deposits and had supported themselves or acquired goods or services through the informal economy. The deposits, actually, are so large, that even a significant relocation of deposits to banks outside Greece (mostly Switzerland and Cyprus) affecting around 9% of all bank deposits left a total of 216.5 billion euros in the banks. This means two things: first, that there are many consumers who can tap into their (or their parents') savings to keep on the same lifestyle they have had so far; and, second, that prospective sellers (for example, those in construction of residences for the well-to-do) are in no particular rush to sell and can afford to keep their asking prices high, in the hope that some prospective buyer meets them at those prices.

This seeming paradox, then, can be explained. However, the question on what the government could do to curb inflation remains. Unfortunately, the government has been very slow to bring about the structural reforms required for the opening of many sectors of the economy to competition, which would lead to lower prices. There are many strange oligopolies in the Greek economy (the so-called "closed professions"), which the government has undertaken to dismantle. For example, there is only a limited number of licenses for the operation of large vehicles, which undertake road transports. The government has yet to open this sector to open competition. Moreover, inflexible labor laws mean that employers cannot adjust salaries or working hours for their employees, so labor cost remains very high, in relation to the average employee's productivity. Another reason for the very high cost of labor in Greece is that it is saddled with ridiculously high social-security contributions (more than 30% on the salary) - more than half of which do not even go for the payment of pensions, but are administrative costs. There are a lot of things for the government to do, and it is too obvious that removing unnecessary regulation and cutting on its own costs is a vital first step.