Saturday, 13 February 2010

With friends like these (once more on Greece)

Michael Burke: There are widespread reports including here, that the meeting of European Finance Ministers will agree to a series of measures aimed at preventing a deepening of the financial crisis as it affects Greece, and threatens to engulf a number of EU countries.

The terms of the bailout and its extent are unclear. But what is clear is that Greek workers will not be enjoying a bailout of any kind. Along with the lowest paid and those dependent on public services, Greek workers will bear the brunt of the 'adjustment process', through wage and welfare cuts, pension reductions, an increased retirement age and other austerity measures.

It is noteworthy who will not be targeted. Greece has one of the lowest tax takes in the Euro Area. In the 15 years to 2006, Greek total general government revenues as a percentage of GDP were 37.9% compared to an average rate across the Euro Area of 45.3% (and 36.3% for Ireland)*. This low level of taxation was, in the Greek case, the source of long-standing deficits which were hidden from a gullible EU (or Eurostat) inspectorate over a number of years. Greece taxation is also a long-standing burden borne by the poor. The FT reports that, according to tax returns, there are only literally a handful of Greek citizens who earn more than €1mn per annum, and that the Greek shipping magnates and others are registered as 'non-domiciles' in Britain, and consequently pay tax nowhere.

Greece has been in the firing line because of its high level of government debt, which existed long before the current crisis. Greek government debt as a percentage of GDP has been hovering close to 100% of GDP in all the years of this century, and is forecast by the EU to rise to 125% of GDP. The bond market fear which has pushed Greek yields higher was exacerbated by the decision of the European Central Bank in effect to remove Greek government bonds from the list of assets it would hold at the end of this year. A reversal of that announcement alone would transform the attitude to Greek government debt, but has not been forthcoming. Likewise, a genuine transformation of the tax system in Greece, as well as rigorous clampdown on tax evasion by the wealthy, would have a dramatic impact on the deficit.

Instead, it seems as if the European institutions are intent on acting as a quasi-IMF, with any support conditional on a deepening of current austerity measures. This is no more likely to be successful in Greece than it has been in Ireland. Greece is actually experiencing a mild recession compared to most industrialised countries. GDP is expected to fall by just 1.4% over 2009/2010. Yet investment is expected to decline by 25.5%, having started to fall a year earlier. It is this investment slump which has caused tax revenue to decline by 8.8%, which in turn is the source of the rise in the deficit. By contrast, the recession-related rise in government spending over the same two years has been just 3.5%.

The austerity measures foisted on Greece stand in sharp contrast to the reflationary measures adopted all across the Euro Area, and led by Germany (with the stark exception of Ireland). German reflation has amounted to 4% of GDP. The measures could have been better-targeted. But despite a stagnant Q4, forecasts for Germany's growth and its deficit are both on an improving trend. The question is therefore posed, why is a reflationary recipe that clearly works for 'core' Europe deemed unsuitable for Greece? Why can government investment work for Germany, France, Belgium, and so on, but is ruled out in the case of Greece?

The answer may lie elsewhere, in the countries of Eastern Europe. There, a number of countries had been hoping to benefit from further EU enlargement, which now seems postponed. Prior to enlargement, the EU demanded continual reform of the Eastern European economies – including further privatisations, liberalisation of the labour markets and a reduction of social spending.

The privatisations facilitated the arrival of Western European and US telecoms, agribusiness and other firms, but above all banks and financial firms. The drive to lower wages and social spending allowed a cheapening of labour, to be exploited by Western firms, and led to widepsread emigration. The removal of local producers expanded the market for Western goods.

This sounds like the package of 'reform measures' to be demanded of Greece in return for any loans. Greece may soon find that, while all members of the EU are equal, some are more equal than others.

* All data from the EU Commission Area Report, Winter 2009, Statistical Anne, unless otherwise stated.


Joseph said...

But as a Greek worker put it the other day (TV vox pop) "We the workers will not be made to pay for mistakes made by a wealthy few".

I have no doubt the Greek police will be needing to take a close interest in how the 'reforms' are foisted on the many (and who knows, possibly the Greek military too).

SlĂ­ Eile said...

@Michael Looks as if Greek workers are very serious indeed.
@Donagh you may have intended a differentn link. Here is the relevant link on ILR
Frankly, if the markets have their say in dictating terms and conditions to countries like the Baltics and now the 'pigs' we need alternative voices.

Paul Hunt said...

The Greek elite used EU largesse and fiscal incontinence to feather their nests and to buy off the rest of the people with welfare benefits and not very onerous - and often lucrative - public sector employment. Now that the bubble has burst those at the bottom of the social and economic scale are expected to pay to protect the gains made by the elite - or, at least, to minimise their losses. Does this sound familiar?

How much more will it take before people rise up and say to the elite: "You fooled us and bribed us with our own money. We have had enough."?

Proposition Joe said...

The austerity measures foisted on Greece stand in sharp contrast to the reflationary measures adopted all across the Euro Area, and led by Germany (with the stark exception of Ireland). German reflation has amounted to 4% of GDP.

You might as well have said that Germany's fiscal prudence & honesty stands in sharp Greece's long history of falsifying their numbers while running unsustainably large deficits.

The point is that reflation was effectively removed from the Greek menu of a policy options by the dissipation of the recent past.

Proposition Joe said...

typo ... stands in sharp contrast to Greece's long history ...

Michael Burke said...

@ Prop Joe

Contrasting saints and sinners is entirely subjective and therefore meaningless; Mrs Merkel stood on a platform of 'traditional fiscal prudence', then promptly announced the biggest reflationary package in Europe almost before the votes were counted.

The argument that a certain size of fiscal deficit precludes reflation would be valid if stimulus were an additional burden on the excheqeur. It isn't. Instead they is the surest way to actually reduce the deficit.

For some strange reason, mention of fiscal multipliers in Ireland is often regarded as bad form at best, or worse, delusional. This is despite the fact that that there are literally dozens of analyses calculating the size of the multipliers here, from Philip Lane, the DoF, the ESRI, the EU, IMF, etc.

The 'multiplier' is no more than the return on investment from a given fiscal stimulus. This investment return is of the type that businesses expect to achieve every day, but which they currently refuse to engage in. Combined with this increased output is the increased value of taxation that arises from it plus the reduction in welfare spending. In this way, the return to the Exchequer exceeds the initial outlay and so reduces the deficit.

Of course, the multipliers work in reverse too. That is why German reflation is expeced to lower its deficit, Greek inaction was (until last week) expected to stabilise the deficit and Ireland's unique experiment in contraction as led to rising deficits.

The bigger the deficit, the greater the imperative to reflate.

Rory O'Farrell said...

Regarding multipliers:

It is true that in Ireland there would be a smaller multiplier effect than in a larger country but it still exists.

Also the multiplier is stronger when it affects those on lower incomes (who spend more). The effect of the multiplier can be mitigated by 'crowding out' effects. These effects are very weak at the moment as the economy has a huge amount of slack, so estimates of the multiplier taken during good times would actually underestimate the multiplier that we have in a recession.