The Greek Conundrum

Monday, 15 February 2010

Is there a win-win solution for Greece's economic woes?

Figure 1: The Greek Conundrum- how to resolve Greece’s social and economic tensions

Last week the EU leaders gathered urgently in an effort to address Greece's serious financial trouble. With a budget deficit of nearly 13%, or more than four times the allowed Eurozone threshold, and public debt of well over 100%, also in excess of the Eurozone 60% mark, the country finds it increasingly difficult to refinance its debt at affordable interest rates.

The roots of the problem

There are two main factors, an inherent and an external one, that analysts use to explain the causes of the Greek predicament. In a recent issue of the German magazine, Der Spiegel, the author argued that since 1999 Greece consistently applied "creative accounting" when reporting its budget deficit. To achieve this, the country got involved in the now infamous currency derivatives and swaps provided by the American investment bank Goldman Sachs. As a result, government borrowing of as much as € 1 billion was not reported in the official statistics. Most of these loans had a maturity of 10 to 15 years and the first payments already aggravate the existing economic chaos. The external factor is mentioned in a recent publication of the French newspaper Liberation, which argues that with the advent of the world financial crisis many countries let their deficits run to kick-start the choked engine of the economy. It is this combination of unsound accounting and world economic woes that brought Greece to the present economic predicament.

Who can help?

There are three major sources of help. First, the EU could intervene through the European Central Bank (ECB). However, this intervention is impossible because the European Treaties clearly forbid ECB involvement in national cases. Second, the International Monetary Fund (IMF) could provide financing for the Greek debt. The problem with this option is that it exposes the EU and the Euro countries as helpless to deal with their own problems. This is why the most likely option is the third one, where the EU member states will coordinate individual efforts to provide funding to Greece. France and Germany are seen as the leaders in this direction, not least because a good part of Greek debt is owed to German and French banks.

What is the price tag on help?

Without a doubt, help will come with strings attached. To guarantee fiscal discipline, Greece will have to cut a lot of pubic spending such as agricultural subsidies and public sector wages.

Can Greece pay?

Given that the country is already experiencing major problems with strikes from the agricultural sector, whose workers have most recently blocked the border with Bulgaria to protest against reduced subsidies, it is unlikely that the envisaged fiscal discipline will alleviate the social tension. On the contrary, it will probably worsen social protests (See Figure 1).

Conclusion

The most likely outcome of the present Greek economic dilemma is that a Franco-German sponsored package will assuage the deficit-ridden Greek economy. The tight fiscal discipline that comes with this package, however, may further destabilise the fragile economic tolerance in Greek society. This is why it is difficult to predict whether the problem will have a successful solution. The other troubled EU member states such as Spain, Portugal, and Ireland are now closely monitoring the Greek case to learn how to address similar problems at home.