Olli Rehn, the EU’s Economic Affairs Commissioner, has urged the Greek government to tighten its belt and make further cuts—-translation: slash wages! This is perhaps to be expected coming from a member of Finland’s Centre party, but it is deeply divisive for Europe. Unsurprisingly, a centre-right Commission holds centre-right economic views—views which are unchanged despite the lessons of the current financial and economic crisis.
Overspent or underfinanced?
Yes, Greece has a serious current government deficit about which it cooked the books (12.5% of GDP in contrast to 10% of GDP in the US). But the public stock of debt as a percentage of GDP is around 40% of GDP, well below the Eurozone norm. The problem in Greece has been wrongly portrayed as one of overspending. And although some Greek public sector expenditure is nepotistic and unnecessary, most of it goes to low-paid teachers, nurses and other public servants. The real problem lies elsewhere; namely, in a poor tax collection system allowing the rich to move money to tax shelters. Poor tax collection is greatly compounded by the collapse in government revenue resulting from recession, and these matters will not be put right overnight. Mr Papandreou must be given time if he is to bring about fundamental structural reform. He does not need the sort of labour unrest which will follow a massive wage squeeze.
Devaluation not the answer
Several British economists writing in the Financial Times have suggested that Greece might briefly leave the eurozone in order to devalue. But devaluation is not the answer. The view that devaluation has been good for Britain (for which there is still scant evidence) cannot be applied to the eurozone as a whole. Had the eurozone not existed, the markets would certainly have attacked the drachma, punt, peseta and so on, possibly unleashing a round of competitive European devaluations of the sort experienced in the 1930s. Moreover, in the unlikely event of Greece temporarily leaving the eurozone, its euro-denominated debt would rise in value relative to the new currency, thus exacerbating the country’s problems.
The key question to be asked is how rich eurozone members can help the poorer ones guard against currency speculators. There are two types of actions to be taken: short-term and long term.
The short-term solution
The short term solution is for the European Central Bank (ECB) to extend beyond next January its refinance operation in which government debt rated at less than A- is accepted as collateral. The ECB engages in weekly “refinancing operations” to add liquidity to the European banking system. Banks that need cash can trade in bonds in return for fresh euros, the ECB then charges them interest in return for what is effectively a secured loan. Prior to the crisis, the ECB would accept any bond rated A- or above by any of the three major ratings agencies. During the crisis, to get more liquidity into the damaged banking system, the ECB dropped the required rating to BBB- or above. On January the 1st 2011, the ECB will return to the old A- standard. It is the fear that Greek Eurobonds cannot be traded for cash—not the fear of the Government ‘going broke’—that is at the heart of the refinancing problem. Postponing a return to the old A- standard beyond next year would solve the crisis. It would not cost the German taxpayer a single euro, and it would not cost ordinary Greeks their jobs.
The longer-term solution
The longer term solution involves changing the economic architecture of the eurozone in two critical respects. The eurozone needs a proper Federal Budget enabling the centre to help the regions. A number of economists have called for this before; eg, Andre Sapir called for a Federal ‘rainy day fund’ back in 2003, and several prominent MEPs have recently argued that a genuine Federal Budget is needed. Such a budget—perhaps 5% of Eurozone GDP initially— could easily be funded by a small Tobin tax on euro foreign exchange transactions.
What is also needed—and here I recall the argument advanced by Keynes at Bretton Woods in 1944— is a mechanism whereby countries such as Germany spend their surpluses in deficit countries in a matter which increases the productivity, and hence the repayment capacity, of the latter.
The powerful nations of the eurozone have generously bailed out their banks using ordinary people’s money. It is time for them to support the ordinary people who are most at risk from swingeing cuts in government expenditure being called for by these same financiers.
#1 by Tim - Macedonia on March 2, 2010 - 10:31 pm
Greece have not only economic problem to avoid bancrupcy,but also this country does not a democracy to be in Europe.Greece is nationalistic country that does not recognize any ethnic minority like the Macedonian,Turkish,Vlach or Albanian minority.In Greece you are alowed to be and speak only Greek or you will end up in jail..The minorities have the same right like in Sudan..no rights..Also everybody knows that Greece is blocking Macedonia to join Europe an Nato for 18 years.They want Macedonia to change its name and they want to erase the identity of Macedonians to be named Skopians or else..This is nacionalistic and nazi request from Greece to chnage the identity of other independent nation…Now ,you see that in country with this kind of nationalistic belief like Greek one the economy is second place..Where they spended 400 billions of euro..On millitary,government bribes,secret spending,corruption with no democratic checks and balances..
Greece does not meet the democracy standards like other east european countries that joined Europe..Why is Greece in Europe??..This country does not have democracy,no rights for the minority citizens,its a millitaristic government,only they borow money with fake reports and projects,they undermine the euro,they are to blame for 20% of EURO drop in the world market..If Greece was a company long time would be banned or closed for forging its accounting..
#2 by Ronald Grünebaum on March 3, 2010 - 10:21 am
A good article which only misses one key point. It seems that work morale is rather poor in Greece. Whilst some people seem to have low salaries, there are also many who get more money than they are worth. Cases where salaries are paid to people not even showing up are not rare.
Greeks seem to have a strong sense of entitlement, even demanding that the Germans bail them out now. But Germans built their wealth after WWII through hard work, economic discipline and saving for their kids. Will Greeks be able to get their act together in the same way or will they continue to believe in free lunches?
The issue is rather the national mentality than economic mechanisms.
#3 by Myself on March 3, 2010 - 10:22 am
When you say Olli Rehn asked Greece to cut wages, do you mean the 14th salary in the public sector? I repeat, the 14th salary??? Do they have a 14th salary in Finland, I dont know. But I reckon if the country is experiencing a crisis like that, perhaps forgoing the 14th salary as a measure to ‘tighten the belts’ is not such a crazy idea.
#4 by Jean-Baptiste Perrin on March 3, 2010 - 10:47 am
Even if they get rid of the 14th month (which is in no way a uniquely Greek speciality), it is not going to solve the problem. Half of the Greek economy is untaxed, be it shipping or oil revenues, safely declared in tax heavens or convenience flag countries, or simply through the huge parallel economy. Most of these untaxed revenues are not the lowest ones, but the richest people and companies. And that’s a lot more money than the 14th month.
#5 by Roger Cole on March 3, 2010 - 11:11 am
If the value of the dollar is rising when its government deficit is 10% of GDP why can’t Greece just have to reduce its from 12.5% to 10%? Since Greece spends 4% of its budget on its military by reducing it to Ireland’s level of 1% and by introducing a fair and equitable tax system then it should be able to achieve a 10% government deficit. It is of course in its own interests to continue to seek to gradually reduce its budget deficit but not by reducing the wages and working conditions of the people. Of course it would be even better for the global economy of the US reduced its military expenditure to 1% of its GDP as well.
#6 by someone on March 3, 2010 - 3:17 pm
US still has the highest expenditure for its military, and Mr. Nobel Peace Prize recently increased it even more.
Greece spends a lot on its military because it has a very unstable neighbor (Turkey). The recent coup plotters wanted to start a war with Greece. Cyprus has two British bases on its soil, but when the Turks invaded and split the island, UK did not come to its aid. Should Greece feel safe with “friends” like that?
#7 by Jean-Baptiste Perrin on March 4, 2010 - 11:26 am
Maybe the reason nobody came to help when Cyprus was invaded was that the Greek Colonel dictatorship of the time was seen as the agressor and Turkey as merely overreacting. Moreover, since then, it is not Turkey, nor Northern Cyprus that blocked any advance on this problem, but the Greek side. So the military stand off with Turkey makes no sense at all. Also now both Greece and Cyprus (unfortunately) are EU members, which obliges non-neutral other member-states to come to the rescue, should the country be truly under attack.
#8 by lets get it right on March 4, 2010 - 12:37 pm
Greece has been under attack since 1000bc.
She has been raped and pillaged by Turks,Italians,Germans,Celts the list goes on..
As you may all be aware, Germany dictates the position of other EU Countries by supplying ARMS.
Greece put on hold a 160billion euro ARMS order from Germany and all of a sudden we are NOT FRIENDS ANY MORE… Ans se Danes….They dropped their weapons and shiit themselfs when they heard the germans were 2 weeks away….
Get it right people open your eyes ……Lets Audit Britain and see what we get….
More than meets the eye
#9 by Marcel on March 4, 2010 - 1:22 pm
Many of Greece’s problems can be traced to the outrageous demands of the public sector unions demanding inflation proof pensions, 14th and 15th month pay checks and their opposition to removing civil servants/bureaucrats who are paid but don’t show up. Many other countries are plagued with such public sector unions too. Britain for example has a large deficit as well, mostly fuelled by the massive increase in spending on government employee wages.
All of this of course, is not sustainable. Government as usual, is the problem rather than the solution.
And as for that ludicrous idea to increase the EU’s budget to 5% or even 7% of GDP, ridiculous. The EU is undemocratic and its budget should be reduced. Popular sentiment is heading towards less integration, yet still the elites want ‘more integration’ to be the only marching route.
If my country Netherlands and Germany would have to guarantee Greek debt, obviously the lenders are going to demand a bigger return in exchange for them buying our bonds. Greeces problem must be solved by Greece.
EU wide income taxes? NEVER!
#10 by EcoTort Theatre on March 4, 2010 - 2:44 pm
“the European Central Bank (ECB) engages in weekly “refinancing operations” to add liquidity to the European banking system. Banks that need cash can trade in bonds in return for fresh euros, the ECB then charges them interest in return for what is effectively a secured loan.”
- just out of interest, to whom is the interest on the ECB loan paid?? not the Rothschilds and/or their mates by any chance???
before 911 there were seven national banks NOT owned or controlled by the Rothschilds and/or their mates, since 911, there are FIVE remaining…. who are those five?
IRAN
SUDAN
LIBYA
NORTH KOREA
CUBA
WHO owns/conTROLLS the ECB?
#11 by Aristotle on March 4, 2010 - 2:52 pm
@Tim – Macedonia
Dear Tim I presume you have not been to Greece recently (namely the last 100 years). The slavmacedonian dialect that you refer to is spoken in some villages in the North of Greece (I presume you know that ithis is a bulgarian dialect). Can you please tell me what the situation is with the Greek-Macedonian population in SlavMacedonia particularly in Bitola (Monastiri – birthplace of my grandmother) where people are obliged to change their Greek Surnames into more “appropriate” slavonic ones. What about the language?
So I would say look into your country first.
#12 by Vasili, USA on March 5, 2010 - 5:16 am
Right on the money.
It is a myth that the Greek public servants are overpaid. The so called 14th salary is another name for the holiday bonus pay. But if look at the total compensation including the 14th pay it is less than half of other Eurozone countries. Targeting them is inexcusably unfair. I can grant you that the Greek public sector is ineficient and bloaded with too many people, but not overpaid.
The other myth is that Greece, a 2% of the Eurozone GDP, some how threatens the stability of euro! And that Germany only pays out and gets nothing in return from the euro! But if you look more carefully the numbers, the the trade surplus of Germany with Greece has been increased in the past decade, meaning that Germany has benefited from the opening the Greek markets too.
All this has started with a planned attack of the euro-skeptics and speculators on the weakest link of the Eurozone, and Germans unfortunately fell for it!
Germany has its own internal problems, after spending billions of euros to resurrected its busted banking system it finds convinient to blame somebody else, this is not the first time that has happenned!
http://www.youtube.com/watch?v=88GSGb-ny3I
#13 by Esso on March 5, 2010 - 7:45 am
Yes 14th, but 14 Greek salaries dont come even close to 12 finnish salaries or 12 western european salaries in general, many barely reachinh 1000 or 1200 euros before income tax…
#14 by Dan Asta on March 7, 2010 - 12:28 am
I get 26 salaries, I must be a rich man! Some people who work at McDonald’s are actually paid 52 times a year??!! Can you believe that?
This article shows the myth that Greeks overspend. Their private debt isn’t even half of other Euro countries. Instead, Greece is a poor country where a form of workfare exists in the public sector. This is how people get by. That workfare is papered over in flush times when revenues from tourism and shipping are pouring in. But because of the undiversified economy, a recession hits the country badly.
Germans have a lot of chutzpah saying NO BAILOUT while the poorer American taxpayer who works much harder generally than Germans and has less of a social safety net bailed out the most egregious dealer in credit default swaps, Deutsche Bank. From the AIG bailout alone, German banks received $17 billion of US taxpayer money, and more beyond that. Even German gov’t owned banks like KfW made billions off the USA taxpayer.
#15 by Vasili, USA on March 7, 2010 - 6:59 am
@Dan Asta
Excellent points Dan!
#16 by droom on March 10, 2010 - 10:30 am
What a shame. It’s quite rare on this site to find a good article which is not inspired by British or Irish euro-idiots. And see what happens we get all the local (non-economic) shit of 100 years Balkans trouble in response to the2 economic solutions Mr Irvin proposes. I would think that also a strong political independent body for managing the euro is needed in the future (by bye soveirgnity on the euro). And secondly, of course, why would anyone help any ceuro ountry what is deliberately cheating the other euro countries for years by providing incorrect stats on their economy? Let the Greeks solve their problems themselves (i do not care how many salaries they have) and do whatever they like with their country, but not at the expense of other euro-countries taxpayers, please. And provided teh ystick to their proposed budget cuts. The cynical thing is that it were Germany and France who were the first euro countries who got away with yearly budget deficits which were too high according to the Stabilisation Pact re. teh euro. But that is the difference in power between small and big states, i am afraid.
#17 by merlin on March 10, 2010 - 7:27 pm
In fact even if Greece never asks Germany to help pay its debt, the cost from euro’s downfall will make Germany to “beg” Greece accept its help. It’s just capitalism and its insanity…
#18 by ioana on March 18, 2010 - 3:21 pm
@merlin
here you have a point! If EU won’t bailout Greece than bye ,bye euro and finally game over for the EU. Because when we speak about monetary union we have to consider a “body” or institution to back up the union’s currency… a union means that it’s members stick together “For Better or For Worse”…
#19 by Avenger on December 14, 2010 - 4:57 am
A fed Bear is a dead bear.
http://me.woot.net/vancouver/deadbear.jpg
Feeding the Serbian bear with $20 billion grant aid from the West, and with $20 billion in weapons from Russia East, ended in 10 years war with 500000 innocent civilian dead, through execution, torture, raping, kidnapping and forcefully displacing millions of Croatian, Bosnian, and Kosovars. Shame on EU, shame on Russia.
The actions of Serbian beast ended in dismembering of Yugoslavia, and creation of many independent states, sworn enemies to Serbia. If you go to Croatia they say don’t forget VUKOVAR, don’t forget Srebenica in Bosnia, Vojvodina in Hungary, “Western Outlands” in Bulgaria, and about Kosova there never will be peace without justice. So, Serbia will end a dead Bear if not protected from outsiders forever.
Feeding Greece with grant aids, the West is creating another beast. Greece has created a virtual reality, with a very strong military, (330 Leopard tanks, F 16 jet fighters, a very powerful Navy, included up to date submarines, and more.)
http://www.fprado.com/armorsite/leo2.htm
http://www.hellas.org/military/navy/
THAT GREEKS CANNOT AFFORD.
The Greek people never learned to pay their taxes …. because no one is ever punished.
To make things more interesting Greece has FREE HEALTH CARE, LUCRATIVE PENSIONS, and HIGH PAID JOBS, which they cannot afford either.
So the WEST is feeding another Bear that soon or later will end in a DEAD BEAR.
#20 by Alan on October 4, 2011 - 10:13 pm
Actual economy 101
Work Hard, do not over spend = successful economy
Be lazy, do not over spend = sluggish economy
Work hard, overspend = boom and bust economy
Be lazy, over spend = bankrupt economy i.e. Greece
end of lesson.