The final chapter in the Greek bailout tragedy is supposed to play out over the summer. After joining the EU and subsequently the Euro, Greece had been living beyond its means for years, with politicians rewarding their constituencies with generous pensions and benefits and borrowing the money at cheap rates from complacent capital markets. The debt-to-GDP ratio had been hovering around 100% for well over a decade by 2010, when it was revealed that economic statistics had been routinely misreported, creating a false impression of rude financial health. The country saw its credit rating cut to junk status. Consecutive bailouts followed as deep recession hit. Profiting from public dissatisfaction with steep budget cuts imposed by the EU as condition for a bailout, the radical left Syriza coalition gained power in 2014. Not much changed. After a humbling negotiation process – which included a largely ignored referendum on the terms and prompted the resignation of high-profile finance minister Yanis Varoufakis – Prime Minister Alex Tsipras agreed to the Third Economic Adjustment Programme in 2015: EUR 86bn in instalments of which the last will be paid in June this year. After that, Greece is supposed to stand on its own feet and meet its financing needs by issuing debt in the capital markets.
Superficially, the bailout seems to have worked. Greece is returning to economic health. The primary surplus (before debt payments) is forecast to beat the target of 3.5% in 2018 and the economy is growing at a speed of almost 2% year-on-year (Q4 17). The employment picture is improving, though still bleak: unemployment is running at over 20%, down from highs of almost 28%, and youth unemployment is a staggering 42.3%, down from 60%.
But the debt-to-GDP ratio stands at almost 180% and without some sort of debt relief it is not clear if the nation can regain the confidence of financial markets. The ECB has joined calls from the IMF for automatic debt relief measures, tying repayment to the country’s economic performance. The German position has long been that any debt relief will have to be subject to oversight and dependent on implementation of economic reforms.
Syriza was always reluctant to implement reforms but has made some progress. Greece has achieved its budgetary improvements through steep budget cuts and tax increases. Some privatizations stipulated in the bailout agreement have been pushed through parliament. The drop in unemployment has largely been facilitated by cuts in the minimum wage (which used to be 50% higher than Portugal’s). Other labour market reforms have made flexible hiring easier and the economy has responded with an increase in part time and shift work. These reforms should be welcomed; a more flexible labour market is in the interest of both workers and employers. But other reforms are lagging.
Many anecdotes have been told about inefficiencies, public sector non-jobs and government profligacy in the lead-up to the crisis, but the main ill of the Greek economy was the hindrances put in the way of private business. And the economy is still suffering from those same problems: a vast bureaucracy, a jungle of red tape, cronyism, occupational licensing and powerful vested interests and unions all conspire to create a stifling environment for private investment. Total investment as a percentage of GDP, at just over 10%, significantly lags other European economies, though it is forecast to catch up over the coming years.
Total Investment (% of GDP) – actual and forecast by IMF
Source: IMF World Economic Outlook
Tsipraz’s Syriza coalition is now trailing the conservative New Democracy in the polls. Caving in to EU demands of tax hikes, labour market reforms and cuts to certain benefits and pensions have not endeared them to their left-wing base. But though these reforms were necessary, other reforms are needed to unleash private enterprise. However, this often runs counter to the interest of the political and business establishment, who for years have been in cahoots: cronyism is entrenched in the Greek political system. The traditional parties of PaSok and New Democracy were in thrall to vested interests and Syriza has not managed to stay above the fray; it has in many ways become the new defender of the status quo.
What is needed is to confront the corrupt state itself. Greece is a classic example of how corruption leads to wealth being funnelled to special interests at the expense of those without political connections. It is the text-book example of how crony capitalism and real, unfettered capitalism are as different as night and day. Indeed, the corrupt Greek state shares many common traits with totalitarian socialist states and only few with the ideal of a free market, capitalist economy.
Prosperity is always a result of the forces of capitalism and private enterprise in a free market. Trying to engineer outcomes by way of a powerful state not only is economically naïve (we refer to the economic calculation problem as laid out by Mises and Hayek), but the system inevitably falls victim to waste, corruption and cronyism. Greece bet on the state as a guarantor of prosperity and predictable failed. But they were not alone. Living beyond one’s means, banking on sending the bill to future generations, is a mistake repeated all over the Western world. The governments of Italy, Spain, Portugal and others owe their financial health to the ECB and Mario Draghi’s 2012 promise to do ‘whatever it takes’ to keep the currency union intact. Without a guarantee underwritten by the more prudent and productive Germans, others would have joined Greece in collapse. The next months and years will show if Greece’s attempts at reform has done enough to restore capitalism and allow it to escape this self-inflicted Greek tragedy.