Monday, July 6, 2015

The OXI Fallacy: Greek Austerity and Economic Sustainability

On the surface, the Greek referendum on July 5, 2015 was a rejection of austerity and a bid for a new economic deal. Without realizing it these voters also said "No" to sustainability which may be the country's best hope for recovery.  Sustainability has been shown to provide a host of social and economic benefit. This includes combating poverty and providing jobs.

The "No" side would say that they voted against austerity, but they fail to realize that their decision may very well produce the opposite effect of what they claim to be seeking. From the perspective of many in Europe, including those that are in a position to offer Greece a new deal, the country has opted to abandon the Euro and leave the European Union. Even the most optimistic economists expect that the situation in Greece will go from bad to worse.

The situation

The situation in Greece is dire. The nation is suffering from a protracted recession, high unemployment and banks that have very little capital. Greece has defaulted on its payments for the 240 billion Euro bailout assistance that it has received.

Simply put the economy is in shambles and the people are suffering under the weight of crushing austerity measures. In response, the people of Greece have understandably called for a better way forward. Despite the Greek government's promises, the systemic problems in Greece cannot be remedied by a referendum.

Greek "leadership" is to blame

When we look at the current predicament in Greece from the perspective of economic sustainability or the green economy, the government's leadership has been a dismal failure. The historical failure of successive Greek governments has gone from bad to worse.

Greek Prime Minister Alexis Tsipras who has been widely accused of worsening an already dire financial crisis since being elected in January, called the no vote a "victory of democracy."  His questionable take on events led him to suggest that the referendum outcome is a "bright day in the history of Europe." His pledge to negotiate and deliver a new better deal within 48 hours can be interpreted as either wildly optimistic or outlandishly delusional. Even optimists concede that it is inconceivable that his game of brinkmanship will produce the results in the time frames he has promised.

While Tsipras said a "no" vote would embolden his negotiating position with the rest of Europe, those he hopes to strike a deal with are nowhere near as confident that an agreement can be reached.  German Chancellor Angela Merkel's Bavarian allies referred to the ruling Greek government as "clowns." It is sure that Greece's creditors, the International Monetary Fund (IMF) and the European Central Bank (ECB)  have animosity over the Greek government's handling of the crisis.

As an indication of how bad the situation is, European negotiation partners do not want to deal with the Greek Finance Minister Yanis Varoufakis due to his "ignorant and dishonest" comportment during the Greek bailout talks. As part of the Tsipras desperate attempts to get talks started Varoufakis has been asked to resign. Varoufakis' put his hubris on display when he said, "I shall wear the creditors' loathing with pride."

As explained in a recent New Yorker article, a recent IMF report blamed Varoufakis and his colleagues from criticism. Indeed, it said that if the Greek government had carried out all of the policies that the country’s creditors were demanding, “no further debt relief would have been needed.” Last year, the report notes, things were going pretty well. But in recent months there has been a “substantial weakening in the delivery of structural reforms,” which has undermined hopes for stronger economic growth, “leading to substantial new financing needs.”

While the economy was improving at the start of 2014, it has worsened considerably since the Syriza government was elected. The Greek economy has fallen back into recession which has reduced tax revenues and increased the budget deficit. The Syriza government appears to have deliberately sabotaged negotiations and generated a great deal of insecurity. However, as the New Yorker article points out the problems in Greece predate the Syriza government.

Why not write-off the debt?

The same New Yorker article argues for debt forgiveness. The Greek government and many others who support such a haircut (writing off portions of Greek debt) point to the precedent of debt forgiveness in post World War ll era Germany. However, what they neglect to mention is that the Marshall Plan contained a host of stringent economic demands.

Unsurprisingly Spain and Italy have both suggested that Europe should deal with Greece and perhaps even write off some of Greece's debt. If a substantial portion of Greece's debt is written off, as many hope, this will set a dangerous precedent for other troubled European economies (eg Italy, Spain and Portugal). The net result of writing off Greece's debt could be wider European economic instability and perhaps a return to global recession.

Public opinion polls show that 74 percent of Greeks want to keep the Euro and remain in Europe. This is understandable because staying in Europe is a sweet deal, particularly when compared to the bitter reality of reverting to the drachma and printing money to stay afloat. This would mean rampant inflation and radical devaluation of the Greek currency. This is an apocalyptic future that will put Greece on a par with some struggling African nations.

Bleak future

The current Greek government is engaged in populist pandering that may lead to the worst tragedy in Europe of modern times.

There is a Eurozone summit scheduled for Tuesday July 7 to discuss the crisis. However, despite the rhetoric coming from Tsipras, the future for Greece looks very bleak indeed.  No one really wants to deal with Tsipras and the  Syriza government. Their is a well earned absence of trust that will make already near impossible negotiations that much more difficult.

As explained by Jeroen Dijsselbloem, the head of Eurogroup, the organization of eurozone finance ministers, this is "very regrettable for the future of Greece." As explained by Dijsselbloem, "for the recovery of the Greek economy, difficult measures and reforms are inevitable."

With the utopian dream of shelving austerity altogether Tsipras may have made a terrible situation much worse. As stated by Germany's vice chancellor and economic minister, Sigmar Gabriel, the Greek government is leading its people "onto a path of bitter austerity and hopelessness." Tsipras has "torn down the last bridges" which could have made a compromise possible. "Its difficult to imagine negotiations over an aid package," Dijsselbloem said.

The European Central Bank has provided 90 billion Euros in emergency liquidity assistance (ELA). However ELA has been maintained in past days but there is no reason to believe that it will increase or even continue. It is the elderly and the poorest that suffer the most from the Greek governments political powerplays and brinkmanship.

People are currently only allowed to take 60 euro daily cash withdrawals or 120 Euros per week. In the absence of assistance from Europe even these paltry sums will be denied the Greek people altogether. This economic fiasco has immense social costs. It can be expected to devolve into a humanitarian crisis.

In the wake of  the no vote Greece is unlikely to have access to more bailout money from Europe to buoy their bankrupt economy. Analysts expect that the European Central Bank (ECB) is unlikely to provide more emergency assistance. 

The real problems

To understand the debt problem in Greece we must examine the context in which it arose. Greece has not employed its resources optimally nor is its economy anything remotely resembling efficient. Greece suffers from a host of environmental problems ranging from emissions to deforestation. The country also has a major water pollution problem, it over exploits its water resources, it has degraded its coastal zones. The result of tremendous air and water insults is biodiversity loss both in terrestrial and marine ecosystems. However, environmental neglect is only a symptom of a far wider problem.

Tax evasion and corruption is a major and systemic problem in Greece.  The Economist quotes Greek politicians who have called tax evasion "a national sport." According to this article up to €30 billion each year goes uncollected. This is a serious problem that persists to this day. As explained in a Guardian article, published at the end of 2014, corruption is still alive and well in post bailout Greece.

People point to the injustice of Greek debt without understanding that this was debt accrued and mismanaged by the state. Greece's debt has been described by many as "unsustainable." While Greek debt may be at the heart of the crisis we must acknowledge that the current debt load is a function of irresponsible governance.

There is no benefit to poring billions of dollars into states that mismanage funds. It is entirely appropriate that these funds should come with preconditions.

Economic Sustainability and the Green Economy

The adoption of economic sustainability and support for the green economy may offer a solution to many of the problems in Greece. Sustainability includes the fight against corruption and it actively combats the underlying culture of corruption.

In more general terms sustainability is defined as efforts that do not, "diminish the prospects of future persons to enjoy levels of consumption, wealth, utility, or welfare comparable to those enjoyed by present persons."
The three pillars of sustainability are economy, society, and environment all of which are at play in the current Greek crisis.

As explained by the economist Peter Soderbaum, "Social, cultural, health-related and monetary/financial aspects have to be integrated into the analysis [of sustainability economics]."

The green economy is defined in a report titled Towards a Green Economy:Pathways to Sustainable Development and Poverty Eradication – A Synthesis for Policy Makers. This UNEP Report is pertinent to the current situation in Greece. It defines a green economy as one that “improves human well-being and social equity...” The report indicates that a green economy increases wealth and GDP, alleviates poverty and creates jobs.

The current situation in Greece is the polar opposite of sustainability and sustainable development.  In discussing the Greek economy many talk about the need for sustainable growth. This is perceived as being related to increasing income levels year after year. While this is something which is completely unrealistic in Greece for the foreseeable future, sustainable development (SD) may be more relevant and achievable. SD is a process for meeting human development goals while sustaining the ability of natural systems to continue to provide the natural resources and ecosystem services upon which the economy and society depend.

SD entails attributes like efficiency, transparency, and responsibility. These are attributes that are altogether lacking in the Greek economy today. Greek leaders have missed the mark, assuming they ever took aim at sustainability in the first place.

While adopting sustainability may not be a panacea, it is a crucial step in the right direction. If Greece can do a better job of managing its economy and allocating existing resources, it may be able to find an efficient, responsible balance over the longer term.


Sustainability is about finding enduring solutions both socially and economically. However, such solutions must be realistic and achievable. Dreamy eyed idealism is not a substitute for engaging practical economic realities.

The Greek government needs to audit and overhaul its economy. Above all it need to take responsibility for its failure to responsibly govern. This is as much of a cultural issue as it is and economic issue.

While the no side have accused their creditors of blackmail it may be more accurate to say that it is the Greek government that is trying to blackmail Europe.

Greece voted no in an attempt to secure a sustainable economy, however they are unlikely to realize the promises they were sold. Tsipras' dangerous brand of populism will transform Greece from a deeply troubled nation into what may amount to a failed state.  

Regulation or Revolution
Fiscal Sustainability: Austerity or Stimulus


Anonymous said...

Aside from ethnic and cultural differences, one may find that there is a stark resemblance between Argentina and Greece on several fronts: political, economic, and social. It is very dangerous to live like there is no accountability, unlimited resources (the grass always grows back up) and when people think that anyone else is the matter but me. It gets to a point where the bucket with its myriad of neglects and indifference towards the country's sustainability and future well-being cannot be passed on any longer

Franco F. Yanine

Anonymous said...

I do not understand how you could write about sustainability and the Greek/EU crisis without mentioning the financial mismanagement that has created such an unsustainable situation for the people of Greece. For example, why have you not addressed nor even acknowledged the scale of dishonesty and deception of the EU bailouts?

According to Richard Parker, the Harvard University Economist who was an informal advisor to the Greek government, in each successive bailout, 'the money comes in from the IMF, and lands in an account in Athens, and it turns right around and goes back to the bondholders, which were the banks'. To be precise, for every one hundred Euros loaned by European taxpayers to Greece, ninety-eight point two Euros were returned (plus interest) to the banks and other lenders.

This means that only one point two per cent of these loans went in to the Greek economy. Yet the common view presented by the media, and in your article above, is that the Greeks have mismanaged their economy. This has nothing to do with ordinary Greeks, who have had no part in this debacle. It has everything to do with the banking sector, and that includes the lack of financial regulation of this sector by the EU.

The Green Market Oracle said...

The amount of Greek debt means that much of the money that flows into Greece goes right back out to service its debt. However, Parker's analysis does not include European Central Bank's provision of 90 billion Euros in emergency liquidity assistance. This keeps banks solvent and directly flows back into the Greek economy.

While I will concede that unsustainable debt is the problem, my article was focused on corruption and domestic financial mismanagement that got Greece into this situation in the first place. I also looked at how the crisis has been exacerbated by the populist pandering of new Greek government.

Nobody would opt for austerity by choice, but in the case of Greece there really is no other way forward.

While the new Greek government has maligned and lamented the bailout, it has not provided any tangible roadmap for structural reforms.

To blame the creditors for the problem may resonate with the general public but it does not accurately portray the problem and it undermines attempts to find a solution.