Jim Stewart: One puzzling aspect of the Greek crisis is that the greater the aid promised the worse the crisis seems to become. Commentators, while noting this effect, ascribe it to scepticism in the financial markets as to whether the bailout will work (Ian Traynor, Guardian Newspaper, 6 May, 2010). Other views expressed in the Financial Times (see David Shellock, May 5) are that it is not enough, that it addresses liquidity rather than solvency issues, and that is provides finance without addressing the underlying structural issues.
Such comment misses the point that the Memorandum of Understanding agreed with Greece is unworkable. For example a levy on illegal buildings is proposed to raise €1.5 billion over the period 2011-2013 and it is also stated a levy on unauthorised establishments will raise “at least €800 million per annum” (p. 5). It is fantasy to consider that these targets can be met.
Proposed measures to foster growth will probably impede growth, such as introducing competition amongst providers of railway services, and in the wholesale electricity market. Other measures to increase competition in particular sectors are likely to be growth enhancing, but are unlikely to be implemented. Many will be familiar with the particular sectors from our own experience – such as the legal profession, pharmacists, auditors, etc.
The proposal to introduce “a strong audit program to defeat pervasive evasion by high wealth individuals and high income self employed” (p. 5) is highly desirable but, as in many other countries, difficult to achieve. At least the proposals to extend the age of retirement will ensure that trained professionals in tax administration will continue at work to the benefit of the Greek state's finances, in contrast to the position in Ireland where many of these individuals have been encouraged and given incentives to retire early!
Some proposals will help economic recovery, for example improve the “absorption rates” of Structural and Cohesion funds, but even here the requirement that, in consultation with the Commission, there is a rapid implementation of a “financial engineering instrument” has the potential for great harm.
Take the recent case of the use of Credit Default Swap (CDS) instruments on trading in Greek government debt. James Rickards (The Financial Times 11/2/2010) had a particularly clear account of the role of CDS trading in the value of Greek Government debt. Essentially, the problem with these instruments is that they allow insurance but with no insurable interest (one analogy is with rival criminal gang members taking out life insurance on their opponents). Furthermore, Goldman Sachs was one of the central parties in developing innovate financing that enabled Greece to massage its true borrowing, and at considerable cost in terms of fees to the Greek State (see “The eurozone: Athenian arrangers” by Kerin Hope, Megan Murphy and Gillian Tett, Financial Times 17/2/2010).
A key part of the Memorandum of Understanding is the establishment of a Financial Stability Fund of €10 billion, financed from the aid package, with key officers appointed by the Governor of the Bank of Greece, but with no control or influence by the Greek State. This fund is designed to ensure the stability of the Greek banking system, and to reduce risks to banks and the banking system in other countries.
The program requires a great deal of data provision in order to allow quarterly disbursements. This data and compliance reports will be provided to the European Commission, the ECB and IMF. The program will involve new laws, changes in the tax system, pension system and wholesale reorganization of public administration, including a review of official macroeconomic forecasts by “external experts”. If Greece had difficulty in implementing existing laws and regulation prior to this intervention, how can they conceivably implement drastic change now - even without political opposition?
The whole program is unlikely to be implemented for a number of reasons: for example, administrative difficulties (there is an extensive and complex legislative program); or because it is irrational; or because of political opposition. It is also likely that the tax-raising measures will reduce economic growth, while the measures designed to improve economic performance will be insufficient, resulting in no deficit reduction.
In a recent speech by German Chancellor Angela Merkel, reported in The Guardian 6 May), the commitment of Germany to the Euro was emphasized. The German Finance Minister Schaeuble has been quoted as stating "it would be disastrous to risk ... a member of the European currency union, Greece, now becoming insolvent." (New York Times May 7). Some have argued (Wolfgang Munchau in the Financial Times) that the decision by the last German Government to pass an amendment to the constitution limiting the federal budget deficit to 0.35% of GDP by 2016 will cause the breakup of the Euro (See also Adam Tooze, Financial Times, May 5). It is more likely that a further constitutional amendment will be introduced, although reluctantly, to allow for a deficit that is consistent with maintaining services at the German State and local level, as well as meeting commitments consistent with membership of the Eurozone.
A central issue is - will enough of the program be implemented to satisfy donors and if not what are the effects? This will be the subject of my next post.