By Anthony Harrington
One of the astonishing features of the Greek elections on May 6th was the reaction of the markets. The German DAX index crashed from the mid 6600s down to 6370, then, by Tuesday morning, it had shrugged off the election results in France and Greece and returned to the 6600s. This might have been because investors realised that any consequences from the elections would take a while to play out, since forming a Government in Greece from a shower of fragmented parties, looks like being a long job. But it might also have been because the ejection of Greece from the eurozone, as and when it happens - a racing certainty since the election results demonstrate that the Greek population rejects the EU's imposed austerity - is views as a positive thing for the eurozone, if not for Greece.
Actually, as a recent paper by Yannis Stournaras, Professor of Economics at the University of Athens and Director General of the Foundation of Economic and Industrial Research (IOBE) attempts to argue, Greece might not end up being the basket case that the rest of Europe seems to believe that it is. Stournaras argues that Greece "is a country with high potential and should in no way be deemed a "lost" case." Professor Stournaras is by no means blind to the depths of Greece's current predicament and has a clear grasp both of how the country got into its current mess and of the severity of its current problems.
"Spreads (on Greek bonds) continue to be in excess of 2000 basis points and CDS's price-in a high probability of default. Greece seems to be in a vicious cycle of high public sector deficits (8.5% of GDP), low economic activity (-5.5% growth rate) and a high unemployment ratio (16%)."
Against this bleak picture, however, Stournaras cites the following strong positives. The Greek state owns a massive amount of real estate, much of which can be developed to attract foreign capital, generating revenue and growth. On top of this, huge savings can be generated simply by shrinking the bloated public sector which is still "considerably bigger than the eurozone average", he points out. Then there is the laughable tax system which the "Germans" (the nickname for Troika representatives who have been seconded to Greece to help revamp its tax system) are determinedly overhauling and attempting to make fit for purpose. Stournaras sensibly notes that if future Greek governments manage to collect the tax they should have been collecting all along, before cheating the State became a normal part of business life, the country could get back to enjoying "primary general government surpluses close to 4% of GDP", i. e. similar to those that prevailed in the 1990s. On top of this, the State has the opportunity to generate revenue from privatisation exercises and from freeing up competition in Greece. "The opening-up of the labour, product and services market to competition (could generate) an implied long-run positive supply shock (worth) almost 17% of GDP," Stournaras says. At the same time, he blames Germany for adding to Greece's woes by blocking "the one single, most crucial decision that is needed to preserve the Eurozone", namely the introduction of "joint and several" common euro bonds.
"The eurozone and especially the member-states of the European South are trapped in a vicious circle of very low or even negative growth, high public sector deficits, banking problems and liquidity constraints. Under such circumstance s, a growth strategy is needed urgently, along with an enhanced role for both the ECB (to boost liquidity) and the EFSF (to buy bonds in the secondary market and recapitalize banks)."
Another possibility, he suggests, may well lie in support from China, not in the form of bail-out funds that have repayment obligations associated with them, but through China acquiring Greek assets, such as harbours, marinas and so forth, and in joint ventures with Chinese companies. The Greeks, he points out, feel "very positively disposed towards China."
"China's likely involvement in the eurozone also promotes the interests of globalization, the diversification of risks, the re-balancing of the resources of the world economy and, thus, of macroeconomic stability."
Some of his points and indeed, the main thrust of his argument, that Greece is far from being a write off, emerged from a White Paper which followed a Colloquium at the London Business School in October 2011 to discuss the Greek crisis. Participants included senior policy-makers and advisors both from Greece and the EU, and former IMF senior executives as well as academics, senior bankers and lawyers, plus turnaround advisors. This group too, called for the Greek government to step up its privatizations and to act positively across a broad range of measures.
"Structural problems of the economy and public administration, masked and neglected for decades but laid bare by the current crisis, must now be tackled... Greece needs to tackle real reforms head on - the alternative being a collapse, which would hurt Greeks and push Europe into a contradictory tailspin ..." they say.
The fact that the Greek economy has a very high self employment rate and a preponderance of very small businesses with minimal tax reporting creates the conditions for widespread tax evasion. For 20 years successive Greek Parliaments have made containing tax evasion a top priority but so far, without success. This needs to change, the Colloquim concluded. Whether there is time for gradual change to work remains to be seen. Greek poll still overwhelmingly favor the country continuing to be part of the eurozone while Greek voters have given a resounding thumbs down to EU austerity, without which there is no bailout cash. In classic EU fashion, despite Angela Merkel's hard line since the elections (there will be no renegotiation of fiscal compacts), the most likely outcome is probably going to be an easing of the demands on Greece to make it possible for the country to stay in the euro rather than provoking a messy and potentially destabilizing departure. We shall see ...