Sisyphus and Achilles - Village Magazine

28 March 2015

VER since October 2009 when the Greek

Government ﬁnally faced up to bond-market

pressures and admitted that its predecessor

has falsiﬁed the national accounts, the euro

area has been unable to shake oﬀ a sovereign-

debt crisis. When the dust ﬁnally settled on revisions,

the Greek debt-to-GDP ratio shot up from 98 percent at

the start of 2009 to 133 percent of GDP in early 2010.

Five years of subsequent Troika interventions, support

programmes, enhanced agreements and debt restruc-

turings underwrote the Greek debt-to-GDP ratio rise

to 175 percent of GDP, the highest in the world for any

country with a ﬁxed exchange rate.

As the Economist wrote in April 2010, “Greece has

become a symbol of government indebtedness. …It

cannot grow out of trouble because of ﬁscal retrench-

ment and its lack of export prowess. It cannot devalue,

because it is in the euro zone”. The Economist went on

to claim that despite these realities, Greeks “…seem

unwilling to endure the cuts in wages and services

needed to make the economy competitive”.

As we know now, the reality is far worse than that.

Contrary to the Economist (and the prevailing con-

sensus across European elites and analysts), it was not

the lack of Greek willingness “to endure the cuts in

wages and services” that persistently and consistently

undermined Athens’ ability to reverse its economic

fortunes.

Reality of internal devaluation

Economically, the macro ﬁgures tell a story that can

also be narrated through social and personal experi-

ences of the Troika-impoverished nation.

Greek GDP per capita declined 22.5% in real terms

from the end of 2007 through 2014, based on the

latest estimates from the IMF. Ireland’s decline (the

second largest in the Euro area) was half that at 11.9%.

Total investment, as a share of GDP, fell 12.3 percent-

age points in Greece, against 10.8 percentage points

in Ireland. This decline in investment was clearly

accompanied by the internal devaluation: savings, as

a percentage of GDP, rose by 2.4 percentage points in

Greece. In contrast savings fell in Ireland by 3.0%.

Ireland is commonly presented as a country that

has managed to deliver an export-led recovery, while

Greece is usually seen as a laggard in this area. This

too is false. Greek current account balances improved

by $46.4 billion between January 2008 and the end of

2014, while Irish current account rose by $22.5 bil-

lion. And as a percentage of GDP, Greek current-account

gains amounted to 14.7 percentage points, against Ire-

land’s 7.8 percentage points.

By all indicators, Greece has been solidly dealing with

the problems it faces, in the Troika-ordained manner.

Flowing from the internal devaluation ‘success’,

Greece’s employment and unemployment situation

remain dire. The ratio of those in employment as a

percentage of the total population declined 7.3 per-

centage points between 2007 and 2014 in Greece,

much steeper than in Portugal (-4.6 percentage points),

but less than in Ireland (-9.0

percentage points). Overall

employment is down 18.8 per-

cent on 2007 levels, compared

to Ireland’s 10.3 percent. The

unemployment rate rose 17.5

percentage points between the

end of 2007 and the end of last

year in Greece, almost triple the

rate of increase in Ireland (6.5

percent).

Unemployment and the col-

lapse in economic activity are

two core factors driving down

Government revenues and

pushing up social-protection

spending. In Greece, state rev-

enues fell 10.6 percent between

2007 and 2014, less than in

Ireland (down 12 percent). Fol-

lowing Troika orders, Greek

government expenditure was

down 18.8 percent by the end

of 2014 compared to the end of

2007. Ireland’s ‘best-in-class’

austerity performance shrank

public spending by only 0.7 percent over the same

period of time.

The ‘un-reforming Greeks’ have, thus, endured a

much sharper rebalancing of public spending (a swing

between revenue and expenditure adjustments of over

15 percent) than Ireland (downward adjustment of 6.4

percent).

Something similar is reﬂected in Government deﬁ-

cit ﬁgures. In 2007, the Greek Government deﬁcit was

6.81 percent of GDP. By the end of 2014 this had fallen

to 2.69 percent – an improvement of 4.1 percentage

points. In the same period of time, Irish deﬁcits wors-

ened 4.4 percentage points. Greek austerity was even

more dramatic in terms of primary deﬁcits (public def-

icits excluding interest payments on debt). The Greek

primary balance in 2014 was in surplus of 1.5 percent

of GDP, up 3.52 percentage points on 2007 perform-

ance. Irish primary balance was in a deﬁcit 0.3 percent

of GDP, marking 1.1 percentage point worsening on

20 0 7.

How Greece and

its unrecognised

reforms have

been paralysed

by the Troika

and debt

Constantin Gurdgiev

OPINION

INTERLOPER

Sisyphus

and Achilles

The Irish

state avoided

passing the

pain onto the

multinational

sector and

dumped the

entire economic

adjustment onto

households

and domestic

companies.

Greece had no

such choice

“

March 2015 29

Is competitiveness the real Achilles’ heel?

If internal devaluation were to be a measure of success,

then Greece should be outstripping Ireland in terms of

economic improvement. In reality it severely lags us.

The driving factor behind Greece’s frailty is not the

current state of its economy’s competitiveness, but the

legacy of pre-crisis debts accumulated by the country,

together with the variegated and idiosyncratic natures

of the respective Greek and (for example) Irish crises

and recovery paths.

Ireland went in to 2008 with two economies run-

ning side-by-side: the domestic economy, dominated

by the building and construction sector, rampant bank

lending, a property-asset bubble and unsustainable

sources of funding for the Exchequer. This domestic

side of the economy contrasted with the multination-

al-led exporting economy based on decades-long tax

arbitrage, paraded as FDI – which supported it. The col-

lapse of the former economy was painful, but it helped

sustain the latter economy, as the state avoided passing

the pain onto the multinational sectors and dumped the

entire economic adjustment burden onto households

and domestic companies.

Greece had no such choice available. Its economy,

when it comes to domestic ﬁrms, was marginally more

competitive than the Irish one. But it had no MNCs-

dominated tax arbitrage model on the exports side.

Strikingly, pre-crisis, the index of unit labour costs –

an imperfect, but still indicative metric of economic

competitiveness – was signaling lower competitive-

ness in the Irish economy (including the MNCs) than in

Greece. Since 2009, however, Greece has deﬂated its

labour costs by 26 percent – more than double the 11

percent reduction achieved by Ireland.

Debt, inglorious debt

So the immediate problem with Greece is not a lack

of competitiveness or feebleness of conviction to cut

back unsustainable expenditures. Instead, the prob-

lem is exactly the same one that plagued the country

at the time of its national-account revisions in 2009,

and at the moment of signing the ﬁrst Memorandum of

Understanding with the Troika in May 2010, as well as

in February 2012, when the second bailout was ratiﬁed

by the funding states.

That problem is the level of debt.

The Troika disbursed to Greece, directly and indi-

rectly, vast amounts of funds over 2011-2012: some

€337bn worth of various ﬁnancial assistance, mostly

in the form of new debt, but also via restructuring of

privately-held Government bonds.

As one third of the funds disbursed in both bailout

programmes was used to retire maturing debt, parts

Source: OECD Employment Outlook 2014

Greece Germany Spain Portugal France Italy Ireland

110

105

100

2008 2009 2010 2011 2012 2013 2014

Source: OECD

Source: OECD Employment Outlook 2014

Non-financial corporate Household Public

100

150

200

250

300

350

400

450

Ireland

Portugal

Belgium

Greece

Spain

Netherlands

Italy

France

Finland

Austria

Germany

Eurozone

USA

Chart 2: Debt as a % of GDP

Source: “Deleveraging, What Deleveraging?” Buttiglione, Luigi et al, ICMB, 2014

Chart 1: Greece vs. Europe –GDP since the crisis, indexed to 2008