Game Changers for Growth
31 July 2013
The IMF’s latest report on Greece lays bares the country’s grotesque situation, and exposes the charade of EMU policy.
It states that public debt will reach 176pc of GDP this year, despite the haircut already imposed on pension funds, insurers and sovereign wealth funds (Norway for instance) who loyally stood behind Greece after categorical assurances by EMU leaders that Europe would never let an EMU sovereign state default.
The debt level is supposed to return to 124pc by 2020; a figure for some reason deemed sustainable. Such a feat is obviously preposterous in an economy that is still contracting violently, has seen a decline in exports over the last year, still has a structural current account deficit of 6pc, and (in my view) still has a badly over-valued currency. This target can be achieved only by massive debt write-downs.
“The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program,” said the Fund.
The IMF’s mission chief Poul Thomsen was explicit yesterday, saying the only question is how much it will have to be. There is already an €11bn shortfall to meet targets by the end of the year, but that is a fraction of the losses that must inevitably come.
Yet German Chancellor Angela Merkel insists there can be no second package of debt relief. She knows all too well that the next haircut is for German taxpayers — and of course Dutch, Finnish, Austrian, French, Italian, and Spanish taxpayers — who have yet to suffer one bent Pfennig in losses from all the EMU guarantees handed out like confetti.
All EMU “solidarity” so far has been in the form of loans, adding further debt. There have been no grants or transfers. The rhetorical pledges to save the euro have been entirely cost-free for taxpayers of the creditor states. The moment that this starts to cost real money, we will enter a new phase of the EMU saga. That is why Greece remains neuralgic, even if it is completely insignificant (apologies to Greek friends) in global macro terms.
At that point, Mrs Merkel will have to explain to the Bundesbank why large losses will have to be written into the budget, and why other line items may have to be cut: perhaps social welfare benefits in Ruhr. She will have to explain why the liability ceiling of €211bn for EMU rescues agreed with such solemnity — after furious debate — has been breached.
This cannot be countenanced before the German elections in September, and for the sake of appearances it cannot be carried out immediately afterwards either. That would be too cynical. So the ghastly decision has been quietly deferred to some vague point in 2014, and even then it may not happen unless the Greeks start playing rough.
So Greek society continues to be broken on the wheel to suit the electoral calendar of northern Europe, and because Greece’s own ruling elites still refuse to acknowledge that continued membership of EMU is blocking recovery.
The IMF admitted in its famous mea culpa earlier this year that the Troika bail-outs had been scandalously botched, that the growth forecasts had been delusional, that loans been disbursed (the biggest in IMF history as the share of any country’s quota), in violation of three of the IMF’s four key guidelines on rescue packages, and that the whole policy was designed to save the euro, not to save Greece.
In other words, they admitted that the Fund had allowed itself to be hijacked by European politicians, for the benefit of the European Project. Yet having bravely come clean, they are still playing along with this game. Let us hope that this dirty episode does not destroy a splendid organisation that has served the world well (with hiccups, like East Asia in 1998) since the Second World War.
The IMF says Greek GDP has already contracted 25pc since the peak in 2007. It expects the economy to contract by 4.2pc this year, with tentative recovery of 0.6pc next year.
Well perhaps, but the Greek think tank IOBE expects GDP to fall by 5pc this year, and it has been far more accurate throughout this crisis. Its latest report says “sudden death” has been prevented by the Troika, but little else.
Stabilisation is a relative concept. “Private consumption contraction is likely to intensify during the current year to reach around -9.0%. The fall of investment is expected to reach about 10%. The illusion that the threat of economic collapse has irreversibly passed should be avoided."
“One gets the impression that the external partners and large sections of the Greek economy and society more easily accept the solution of adjustment through deep recession than active policies that will remove the key weaknesses of the economy.”
“The restructuring of the public sector has made a minimal progress, while the relationship of the public administration with the general public and the business sector, a major weakness in the past, has not been put on new foundations. The downsizing of the public sector through horizontal cuts of wages and jobs certainly provides a fiscal respite, however it is not sufficient in order to improve its efficiency. Moreover, the tax system has not yet become more simple, stable and transparent.
The restructuring of the mechanism for tax collection and audit has not made much progress. The full computerisation and linking of the information systems of the public institutions has not been completed. Red tape, overregulation and ambiguous and uncertain legislative framework still create an unbearable burden on the households and the enterprises, while the justice system has not improved significantly.”
You get the drift. The Troika is nothing more than an enforcer for the northern creditor powers, insisting on its pound of flesh, and the rest is eyewash. Lord Palmerston used gunboats. Less hypocrisy, same objective.
Professor James Galbraith has an excellent piece here on Naked Capitalism. He makes the point that Gazprom pulled out of the privatisation deal for Greece’s gas monopoly quite correctly because it did not believe the underlying economic assumptions supposed to underpin the future income stream.
“And did I mention that this is a gas monopoly? We are talking here about a reasonable projection on the part of a competent firm that the economy underpinning the revenue stream of the gas monopoly is failing. Right? It doesn’t take much if we ask ourselves, on what basis does a rational government sell a gas monopoly for cash? The only reasonable answer is: When it needs cash immediately and does not expect to survive for very long, because a gas monopoly is a revenue stream that goes on forever unless you sell it, in which case it goes away. It’s just crystal clear what the situation is from the eyes of the government of Greece at the present time.
Now when they fail to sell the gas monopoly, then on six hours’ notice with no cabinet discussion and no parliamentary debate and no vote, they shut the state radio and television, ostensibly to save 200 to 250 million euros over the course of a year in order to satisfy an arbitrary demand for that amount from the Troika, and to show how tough and resolute they were.
Well, the Greek people said, no, that’s enough. That’s enough. You can put up with a lot of privation, but you cannot put up with a direct attack on the one – however flawed – institution of public discourse that the country actually has. You can’t do it, so the journalists took over the buildings, the trade unions kept the power on, and the crowds went outside to protect them. It was fantastic.
But it was something that really tells you you’re not far away from the brink. And there are more things that can and will happen over time, but you’re not far away from having a confrontation that will lead to a real, let’s say, breaking point.”
Quite so. Nothing whatsoever has been resolved, either in Greece, or in Portugal, or in Cyprus, or in Spain, or in Italy. Nor will there be under the current contractionary policy structure. There is no Deus Ex Machina.
These nations will remain trapped in slump and mass unemployment until they take matters into their own hands, form a debtors cartel, confront the head-on gunboat creditors from a position of strength, and dictate the outcome. But first they have to defenestrate out their own cowed elites.