A catharsis long overdue

Rather than pray to speculation, Greece is a victim of its own structural weaknesses masked by Eurozone membership

During recent debates on their country’s debt cirsis, Greek politicians suggested that investors’ (or rahter speculators’) greed was the principal cause of the country’s plight. However, CDS-trading (even the notorious ’naked’ one) requires an imminent default against wich one can spekulate. And the default has been there, for roughly twenty years now. Ironically, it was the country’s Eurozone-membership that lubricated the Greek glide towards chronic intebtedness.

From the early 80’s (after two decades of rapid economic growth and the Greek EU-Accession Treaty signed) the Hellens’ economic policy started to fly in the face of the EU’s aspirations related to liberalization and the Single Market. The cause was Greece’s new middle-class craving higher welfare at the end of a 20 year-long high-growth period. Following the second oil-shock (prompting Europe to restructure its economies to make them more effecitve) Greece’s PASOK governments set out to redistribute the wealth of a slowing economy, and nationalized ailinompanies upon trade unions’ calls. To no surprise, in 1993 the Greek economy was sailing near to the brink with an inflation rate of 20.4 pct, public deficit nearing 16 pct and external debt hovering around 120 pct of the GDP.

Despite short-term doldrums in Greek politics (moments of wide-range consensus between political parties and unions) that led to the country’s accession to the Eurozone in 2001, structural problems remained unsolved. Between 1980 and 2007, Greek social spending rose form 11.5 pct to nearly 25 pct of the GDP. Apart form the mass of the spending, the structure of the social system has also been worriesome: pensions and healthcare now absorb nearly 80% of the social transfers, while family support schemes and unemployment benefits account for only 3-3.5 pct of total social spending.

Social expenditure by Function 2006

In contrast to conventional wisdom, families with less than four children are far less patronised in Greece than in other Southern European countries, as in terms of maternal and parental leave the Greek social system is not generous at all. As a result, Greece is one of the countries with a very low natality rate, a fact that amplifies the woes of spendthrift pension schemes and of burdens they will entail in the future. If recent estimations (see chart) prove true, pension schemes alone will eat up at least 20% of the country’s GDP) by 2020.

Percentage of the elderly (65+ years of Age) to total population

Moreover, ill-set pensions are transferred to benefifcaries through an incredibly fragmented structure. A plethora of pension providers (numbering 190 today) and categories make the Greek pension system a vespiary of colliding interests and political bargaining. Thus, beyond its complexity and its costs, it is its reform-resistence that makes the pension system even more remarkable (see last decades’ reform-attempts here and here).

Health care is the other costly reform-braker. It accounts for 23 pct of the social expenditures even with private clinics mushrooming (their turnover amounts to some 40 pct of the total health care expenses of citizens). In the early 2000s, the Simitis-government made the latest grand effort to change it, but the reform fizzled out, as rationalization (aiming to introuce a system of regional heatlh centres) was thwarted by doctors’ strikes.

High social security commitments are topped by the heavy load to finance a mini-cold war with Turkey. Greek military spending added up to €8.7 bn between 1997 and 2003, and had been increasing until 2009. Currently it accounts for 2.8 pct of the GDP, a figure well over the NATO average (1.7 pct). Only the United States spends more on guns and warships in realtive terms. Still, a crisis is a crisis: in its Canossa-march towards budgetary health, the Greek government has generously cut military spanding by around 6.6 pct a year on, outlining a military budget spending ’only’ €6.6 bn in 2010.

Greece is an example of a country that fails due to festering structural problems despite its steady economic growth and its Eurozone membership.

Greece’s annual growth rate (4.2 pct) between 2000 and 2007 helped to offset the bounces in indebtedness of the public and the private sectors. Robust economic growth was completed by the country’s Eurozone-membership securing access to cheaper credit until 2008 (see chart and deatiled analysis here).

However, as a Eurozone coutry can not resort to currency-devaluation to improve its competitiveness and its balance of payments, Greek exports were largely exeeded by imports (the gap tripled within seven years to near 3 pct). High growth and consumption went along with inflation 1.2-1.5 pct higher then Eurozone’s 2.2 pct average, leading to low (or even negative) real interest rates, making loans cheaper to households and private ventures. The respective indebtedness of these segments climbed to 46 and 49 pct of GDP by 2007. As a result, Greece, in the last eight years has borrowed up to 10 pct of its GDP from capital markets every year. When the crisis set in, loans went scarce and the EU was set to see what may happen to a currency area without close economic governance.

In a wider context, the Greek issue boils down to the old question of the Eurozone of how to coordinate 16 or more budgetary policies in a way that everyone prospers. Assimetrical shocks (currency areas’ biggest enemies) can only be averted if member states don’t (and can’t) hide their hazardous fiscal policies behind the common European varnish. In the latter case Greek politicians may also be relieved: ’speculators’ will temper their greed when lending to a boringly sound Greek economy.