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Ireland's political and cultural magazine
28 March 2015
E
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
95
90
85
80
75
70
65
2008 2009 2010 2011 2012 2013 2014
60
Source: OECD
Source: OECD Employment Outlook 2014
Non-financial corporate Household Public
50
100
150
200
250
300
350
400
450
Ireland
Portugal
Belgium
Greece
Spain
Netherlands
Italy
France
Finland
Austria
Germany
Eurozone
UK
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
30 March 2015
OPINION GURDGIEV
of the old debt got swapped for the new one. Interest
payments on debt swallowed another one sixth of the
entire bailout. In total, payouts to the private-sector
bondholders, banks recapitalisations and debt swaps
and interest payments used up 81 percent of the total
lending to Greece.
Little of the bailout funding went to lower the debt
burden carried by the Greek economy, and much of it
indeed went to increase it.
Instead of funding debt redemptions and interest
payments at par via new debt, the EU could have writ-
ten off close to one third of Greek debt held by official
lenders on terms similar to those carried out in the
private-sector restructuring. The new restructured
debt could have been held interest-free in long maturi-
ties within the Eurosystem and/or indexed to economic
performance.
As we know, the Troika did no such thing, contin-
uing to insist throughout 2013 and 2014, that Greek
debts are sustainable, until the latest political reshuf-
fling in Athens brought about yet another manifestation
of the crisis.
At the time of writing, Greece is facing an uncertain
future.
In securing a four-month-long extension to the bail-
out in February, Athens had to sacrifice a number of
core principles that served as the election platform
for Syriza. The first was the idea of debt restructuring.
Athens failed to ask for any debt writedowns in negoti-
ati ng the extension. The second was the prom ise that the
Government will not allow any extension of the exist-
ing programme. Before the February agreement with
the Eurogroup, Syriza had proposed expanded public-
works programmes. These, along with other measures
in the Syriza manifesto, were costed at €12-28bn. The
February agreement puts Athens back on to a pre-Syr-
iza spending path. Syriza’s plans for using the funds
left over from recapitalisation of the banks to fund a
fiscal-stimulus programme have been effectively blown
out of the water. And the dreaded Troika – the one that
the new Government committed to abolishing – is still
there, conveniently renamed ‘Institutions’.
With this, Greece will have a very weak hand in shap-
ing the post-June agreement.
Firstly, the ECB and the IMF have both already
stressed that any new agreement will require Athens
to adhere to the terms and conditions of the previous
programme.
Secondly, both the ECB and the IMF hold serious
trump cards: over the second half of 2015, the IMF is
due repayment of €4.2 bn of maturing debt, and the
Eurosystem is due €6.7bn. There’s roughly €2bn more
of short-term debt maturing in July on top of that. Need-
less to say, even with the funds held by the EFSF, Greece
does not have enough money to cover these maturities
and coupons due – a problem exacerbated by the fact
that January-February 2015 tax collection was severely
impaired by the political mess.
All of this makes Greece insolvent, and explains why
Syriza made such a public turnaround in its negotia-
tions with the Troika in February. But it also means
that following the February decisions, the Greek crisis
is now moving into a new stage not that much differ-
ent from all the previous stages. Risks of policy errors,
political instability and the high likelihood of further
deterioration in the fiscal and economic performance
on foot of these cannot be discounted.
Debt, economic stagnation, social decline, and the
democratic will of the sovereign people will not derail
Europe’s dogmatic insistence on the self-destructive
and self-defeating prescripts of the European institu-
tions. As a living embodiment of Jean-Claude Juncker’s
formula for Europe that “There can be no democratic
choice against the treaties”, Greece is set to soldier on:
from one crisis to the next. •
Greece has deflated
its labour costs by 26
percent – more than
double the 11 percent
reduction achieved
by Ireland
“
