Thursday, February 5, 2015


The recent election in Greece of a far Left government presents a challenge to decades of thinking in the halls of European Union and the 19 nation Eurozone group.  Always oriented to the Left in spite of the usual “conservative/democratic socialist” pendulum swings among the governments in the member nations, the treaty based organizations now find themselves dealing with a revolt against fiscal discipline in a small nation that ironically is “too entrenched in the system to fail”. 

New Prime Minister Alexis Tsipras led his Syriza party to a parliamentary plurality with the appeal of his defiance of a punishing austerity program imposed on the Greek economy by its bail out saviors, the European Central Bank and the International Monetary Fund. 

Years of corruption, tax evasion and profligate government spending to support the never ending demands of a huge and highly unionized public labor force and the purchase of voters support through the unsupportable expenditures of an advanced welfare state, brought about the inevitable reality of economic crisis.

The crisis is not new but the tipping point was the 2009 world-wide recession.  In 2010, when Greece faced the possibility of not being able to pay its international debts the EU and IMF extended two “bailouts” in the form of $140 billion and $165 billion.  Private sector investors (banks) wrote off three quarters of the value of their Greek government bond purchases and recast the remaining balances to longer maturity dates and lower interest rates.

These actions did not represent “gifts”.  Conditions were attached which included significant government spending cuts, tax increases and major “labor market and government pension reforms” (cuts).  However, so  dependent by the government on the injection of liquidity into the economy by its spending patterns that the “austerity” reforms had the effect of drastically reducing government tax revenue.   The result was a kind of circular and self -reinforcing crisis. The crisis also led to potential bond purchasers to demand significantly higher rates of return which also heightened the burden of future repayment of interest and principle.

In spite of the hardships and contradictory outcomes of the austerity conditions ECB officials, led by Germany and IMF officials held fast to their determination that any relief demanded that the Greek government bring about future financial stability and live up to their repayment obligations for the loans already paid out.  That resolve remains today as tax payers (and voters) in financially stable Eurozone nations object to bailing out what they see as irresponsible excesses by former Greek governments.

Eurozone finance ministers in 2012 gave Greece until  2016  to meet the required deficit reduction requirements.  This is a huge problem as Greek debt and the interest payments it produces amounted to $407 billion or 175 % of GDP.  With   government tax revenue, already low because of rampant evasion, it was, and remains,  grossly inadequate.

The politics of the crisis represent a seemingly impossible conundrum.  From the point of view of the ECB,  private sector investors and the IMF, loan forgiveness, new loans and below market interest rate concessions without the necessary cuts in spending which demand cuts in public services, public employment, and tax reform, creates a permanent black hole of international support. 

However, without support in the short term the Greek government is in danger of default on its sovereign debt.  This debt is issued in the Eurozone currency, the Euro.  Default would result in the devaluation of the Euro across the zone and would probably require Greece to drop out of the Eurozone.  That in itself would exacerbate the crisis since a return to the Greek drachma currency would immediately result in a major devaluation of that currency since Greek debt would no longer be propped up by the Euro.  This would make it almost impossible for Greece to borrow in international financial markets as well as cause hyper-inflation in Greece as everything imported would be much more costly.  The prospect of a nation essentially going bankrupt would loom on the horizon.  EU leaders want to avoid such a scenario if at all possible.

This would seem to point to tough negotiations to achieve some sort of compromise which afforded new bail out monies and a continuation of,  if somewhat less stringent, austerity measures. 

Now the context of negotiations has changed with the new Greek government.  The hardships of the situation on the Greek people have produced a reaction which focuses on relief from the austerity program without concern for the longer term prospects of a lack of reform.  This should not be a surprise given the growing strength of the political Left in Greece and in other southern European nations hard hit by the recent financial crisis, especially Spain and Portugal.

The victor in the January, 2015 Greek election, the Syriza party is led by Alex Tsipras.  Syriza is actually an acronym for the group named the Radical Coalition of the Left, itself an umbrella group of leftist parties.  Mr. Tsipras, a forty year old activist and now Prime Minister, came from the youth wing of the Greek Communist Party, and was a candidate for mayor of Athens in 2006.

He campaigned on a vow to reject the austerity program required by the extenders of the billions of bail out money and to demand a renegotiation of all terms.  That such a promise was politically popular is no surprise.  What is a bit unusual and reflective of the widespread unhappiness with the conditions is the creation of the “strange bedfellow” of Right wing party New Democracy with which Tsipras formed a coalition government in order to create a parliamentary majority.

It remains to be seen how long this “marriage of convenience” will last.  What they have in common is a strong anti-austerity position.  New Democracy leader Panos Kammenos has described the nation’s creditors as “foreign conquerors” but unlike the Sryiza Party’s current position which endorses continued membership in the Eurozone,  New Democracy feels that Greek sovereignty has been diminished by the EU and IMF.

The prospects for a workable negotiated compromise are daunting.  Market factors which are not controlled by either side are having a dramatic impact on the problem.   In response to the new Left wing government’s election,  concerned investors drove Greek stock prices down  and borrowing costs up.  Bank shares lost 27% after the election.

In simple terms the short term Greek situation is as follows:

The bail out in progress by the ECB, the European Commission and the IMF is scheduled to end on February 28, 2015.  Under prior agreement an additional 1.8 billion Euros could be provided in the form of loans if the new Greek government fulfilled the “austerity” conditions previously required.  However estimates of the amount Greece will need to meet its obligations in the first quarter of 2015 run as high as 4.3 billion Euros leaving the Greek government  little leverage in negotiations to renegotiate debt already outstanding.

The Greek Prime Minister and Finance Minister are traveling the capitals of Europe  (2-4-15) for meetings with top political and European Union officials in an attempt to negotiate the required terms to keep the Greek economy afloat.  Early reports indicate that the Greek officials have “blinked” with regard to their domestic assertions that Eurozone held debt would have to be “written down” i.e. forgiven at least partially.  Resistance by Germany and EU officials made this a non-starter in negotiations .  However, there have also been some conciliatory remarks from the President Hollande  of France with respect to the need to find some compromise. 

However the political situation which results from Prime Minister Tsipras victory has made his ability to negotiate much more difficult even if he wanted to, which is dubious given his background and ideological orientation.  He promised to increase government spending,  not reduce it.  Included in this effort was to be forgiveness of electrical bills, expansion of food stamps and an apparent abandonment of a proposal to raise revenue by privatizing government owned entities, as well as the more general promise to seriously diminish the austerity program through renegotiation.  Failure to live up to these election promises could create significant political problems for his government coalition.

The political stakes are also significant for the Eurozone since major concessions to Greece will not be lost on Leftist and populist movements in other struggling countries such as Spain.  Germany and the EU Commission which is executive branch of the entire European Union, are very concerned that such a turn of events could destroy the cohesiveness of the Union and drastically affect the value of the Euro.  Nonetheless,  a failure of Greece to take the necessary steps to stabilize its economy and default on its debt could bring about a voluntary or mandatory withdrawal from the Eurozone which Germany and the Commission also want to avoid.

The multiple causes of the Greek crisis may offer lessons for other EU and Eurozone nations which are already known and may come too late to avoid .  A fundamental flaw in the structure of the Eurozone contributed and remains.  The European Central Bank, a rough equivalent of the U.S. Federal Reserve Bank was charged with managing monetary policy for the Eurozone nations.  The difficulty of imposing a single policy on nineteen different political economies and political cultures was clearly underestimated.  Inflation, employment, export vs. domestic industrial prospects and the ability of the central banks of the individual countries in the zone to issue debt denominated in the shared currency all represent a weakness in the system.

 Also in Greece as in most of the EU nations, the ideological orientation which informs the creation of advanced welfare states lays at the foundation of the crisis.  A bloated public employee sector designed to provide political patronage and prop up employment produces nothing to contribute to economic growth and demands constant increases in expenditures in the form of wages, benefits and retirement. 

Tax evasion was tolerated and public services and ever growing entitlements expanded as deficits were funded by debt creation.  The reality check imposed by the 2009 world recession brought an end to the cycle of debt creation, interest obligations and unchecked social program expansion.  The  debt service to revenue ratio simply became unsupportable.  This is basic economics but the demands of domestic politics turned the heads of the political leadership and the crisis imploded.

Now citizens of Greece and other southern European nations blame their governments for the harsh remedies imposed by international lenders without much concern about the failed underlying policies from which they benefitted.  The so called array of “populist” movements will try to defy the dynamics of the self- correcting capitalist systems but will inevitably fail.

The results of the Greek crisis do not apply equally to the U.S. but the symptoms are relevant.  The U.S. economy is huge and diversified and it enjoys the benefits of the U.S. dollar being the foremost international reserve currency.  But the constant expansion of advanced welfare state characteristics, especially uncontrolled federal debt to pay for associated excessive spending will have consequences.  Higher interest rates to renew such debt and the growing diversion of national income to service the debt, at some point will put pressures for devaluation of the dollar against other currencies and will be inflationary by making foreign imports more expensive.  The Federal Reserve’s response to inflationary pressures will be to reduce the money supply by selling government bonds and raising short term interest rates. It is a delicate balance and the current deficit/debt growth and the ideologically based expansion of government demands similar attention as that being applied to Greece.

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