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Germany imposes harsh terms on Greece as Europe defiles the word “Union”

“Zeus, having fallen in love with Europa, a daughter of Agenor, king of Tyre in Phoenicia, assumed the form of a beautiful white bull. He seemed so gentle, the girl was enchanted by him and was eventually persuaded to climb on his back. Before she knew what was happening, she was riding out to sea, on the way to Crete. He brought her to Gortyn, where they became lovers. One of their three sons was Minos, [legendary king of the ancient Minoan palace at Knossos]. Crete then, not only gave Europe its name, it was where Europe began, a truth Cretans have always known.”
From ‘Crete’ by Barry Unsworth, pub. 2004, National Geographic Society

symi town viewSymi Town from the top of the Kalistrata

I have just returned from the Greek island of Symi in the Dodecanese after a tense but beautiful week watching European ministers talk dirty about what to do about the Greek situation. The last time I was in Symi in 2008, the US investment bank Lehman Brothers collapsed leaving fellow tourists huddled around laptops in coffeeshops trying to asses the risk posed to their investments and the whole economic system entered the eye of the storm.

 

The fall-out from 2008 didn’t seem to have much effect on island life. The Greek’s didn’t seem to register the crisis. This time round, the half smile and casual shrug of the shoulders was a thin veneer only a few displayed. Protecting the island economy at all costs is the primary goal. At a glance it is hard to see how these few thousand Symiot’s can be effected by the crisis except that they themselves cannot draw out more than €50 per day (officially it is €60 but the ATM’s only have 50 notes in them) and card payments are politely declined in favour of cash.

The island is literally abuzz with thousands of euros changing hands seemingly in every direction. I expect if a few of the pleasure yachts that are lined up along the harbour front were sold, the previously missed instalment to the IMF could have been paid amply.

Many people we spoke to voted ‘no’ in the referendum last week. It felt that the middle ground between what Greece needs and what the Euromasters are willing to concede is shrinking. This is a great shame because faced with the prospect of a “Grexit”, or more bailout loans in exchange for unworkable austerity measures, Greece as a nation amounts to what we normally refer to as “a friend in need”.

bank of greeceBank of Greece in Symi - A Brit inside jokes with a Greek: "Don't worry, I wont take all the money!"

Debt cause and (compounding) bail-out effect?

It is no secret that all things that relate to the public purse in Greece are completely out of balance. This is recognised by everyone including Greeks and needs to be the focus of any way forward for the nation. The examples that keep cropping up such as people retiring with full pay at 35 years old, amount to little more than a Gordian knot that can only be broken with a sharp sword. Though many Greeks go crazy when these changes are proposed, many others want the state to sort out the burdens that are being passed onto businesses in the form of higher taxes and thus inhibiting innovation and the ability to sustain a good business.

But Greece is not the only one to blame. Everywhere we turn we see that unnecessary spending has been taking place. Every taxi on the island of Rhodes arrives in the shape of a brand new executive Mercedes. We rode in one from the airport to the old town and back again. Even the army jeeps in Symi parked up by the waterfront are brand new Mercedes. Huge debts have been created buying the products proffered from countries such as, ironically, Germany. Years of buying products from northern Europe with little or no means to repay mean that the banks that loaned the money should have assessed the credit worthiness better in advance. Yet, despite bad decisions being made, the banks who loaned to Greece have seen themselves let off the hook as matter in Greece go from very bad to completely dire.

EU ministers that talk tough to conceal “political cowardice”

When it was revealed that the banks who had loaned money to Greece may collapse from the defaults (failure to repay loans), the European Central Bank (ECB), International Monetary Fund (IMF) and European Union (EU) member states stepped in to loan the Greeks more money to pay their creditors. This may have seemed like an act of good will but really it was simply to avoid an embarrassing collapse of their own careless banking systems. However, such a collapse would probably have been the surest way to ensure that lessons were learned and future losses curtailed.

As Adam S. Posen, who heads the Peterson Institute for International Economics was quoted in the New York Times: “it has more to do with political cowardice…. There’s an incredibly strong incentive not to recognise losses… Governments will do things that are more costly as long as they don’t appear as a line item on the budget.”

Posen is highlighting that governments are more likely to kick the can down the road by issuing bail-outs that increase a countries debt and interest payments, whilst passing the debts from the private banks to the public sector. If a debtor does not pay at least they can pretend to be angry and present themselves as innocent to their own voters. The point is that they knew all along what the outcome would be but had not the guts to do the right thing.

The IMF report EU ministers tried to suppress

Just before the referendum was called the IMF actually released a report that analysed Greek debts and showed that the "debt dynamics" were "unsustainable" and more bail-out loans would not work in getting the nation back on its feet, no matter how much austerity was imposed.

EU ministers did what they could to suppress this report because ultimately it states that they are wrong. Austerity wont work. The cheapest and least painful solution for all concerned is to reduce the amount of debt that Greece owes significantly (known in media jargon as a “haircut”). This is the same as a default and sounds terribly unpopular but it is proven to be the only way out of the mess. The best known examples involve the biggest debt defaulters of the last one hundred years: the Germans!

Should Germany be more understanding?

Germany have defaulted on debts 3 times in the last century and for sums that are vastly more significant than Greece’s. Greek debts are small change to Europe but still the German Finance minister appears to relish relish in disparaging the Greeks as no-good untrustworthy spendthrifts.

This is sad when we consider that in the 1950’s America insisted that Germany would not have to make reparations to the countries to whom it had committed its worst atrocities and destruction. European nations literally waived the bill.

Greece was one of those countries and hence there is a tone of disgust from many, who see that Germany’s current fortunes exist largely to the beneficence and magnanimity of their former enemies. The interview with Albrecht Ritschl in Der Spiegel Online (http://www.spiegel.de/international/germany/economic-historian-germany-was-biggest-debt-transgressor-of-20th-century-a-769703.html) is worth reading for a fuller account of the Germany’s recent debt history.

Despite good advice, Euromaster’s whip Tsipras like a naughty child

The Greeks went into the talks last week seeking the one solution that would enable their economy to grow: a debt “haircut” or, in normal terms, a reduction of the amount owed. The IMF report stated that this was the best option. History tells us that is the best option (See more on this in this NY Times piece) and yet European ministers are set on imposing humiliating terms on the Greeks that are destined to cause this whole charade to recur.

€50 Billion asset fund?

If the Greeks agree to demands that call for a fund to be created and 50 billion euros worth of assets earmarked as collateral, then there is almost certainly going to be hell to pay down the road. This grim “solution” is destined to fail as Greek debt is more than twice the amount that is deemed repayable within a steady percentage of national economic growth. The words “economic growth” are themselves not even realistic right now as the Greek economy is contracting day by day due to recent events.

This looks to be one of the most crudest and mistaken judgements yet by the Euromasters as they seek to teach Greece a lesson. It is a shame that the one they are trying to teach is not the one they were beholden to themselves.

If the Greek parliament rejects this deal then a Grexit is likely to occur and could, quite likely, be the best of the two options. Even so, it must be said that after such a development, the word “Union” must be dropped from the title “European Union” as union implies unity and to cut your friends-in-need adrift after sucking the life and soul out of them is in no way associated with the definition of the word.

 

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