Greece: Is Germany Trying to Kill It, or Trying to Save It?

Greece had long been required to pay a much higher rate of interest on borrowed money than Germany because of the perceived greater risk that Greece might have difficulty in paying its debts.  Greece applied for membership in the eurozone and, after providing false data, managed to be accepted.  Suddenly Greece was no longer the risky country it had been and easy credit was available.  It took advantage of that situation as once sane and sober financial institutions decided it was safe to pour money into the country.  However, Greece was consistently providing inaccurate financial figures and was underreporting budget deficits.  In 2009 a new government was in place that sought to assess the fiscal state-of-affairs and discovered that a reported budget deficit was not 3.5% of GDP, but 12.5% (eventually determined to be 15.7% of GDP).  Eurozone countries are required to keep deficits below 3% of GDP.

The European community was shocked by these numbers and the fact that Greece had used misleading fiscal data to gain entry to the eurozone and had been providing inaccurate numbers ever since.  When it became necessary for Greece to request loans from that community to meet its bills, Greece’s economy and business practices came under severe scrutiny.  Eventually loans were provided, but only if Greece agreed to a number of dictated austerity measures, and to surveillance by international observers.

The severe spending cuts put the country in a deep recession that lasted until 2014 when a small gain in GDP was attained.  Meanwhile, the ratio of debt to GDP grew from 129.7% of GDP in 2009 to 177.1% in 2014.  Unemployment has grown to about 26% and is still growing.  The unemployment rate for young people is much higher.

Greece has suffered mightily under this austerity program.  Germany, as the richest nation in Europe, was viewed as responsible for representing the other European nations.  The harshness of Greece’s treatment provided numerous opportunities be bring up the Nazi occupation during World War II for comparison. 

The people of Greece were naturally unhappy and resentful of these imposed measures.  Early in 2015 an election produced a new Prime minister, Alexis Tsipras of the Syriza Party, and a new finance minister, Yanis Varoufakis.  It was expected that these two would lead negotiations that would result in some relief from the austerity measures and/or some relief in the level of debt that must be repaid.  By this time sympathy for Greece’s plight had been generated in a number of areas.  From a pure economic perspective, even the IMF has agreed that under the existing fiscal constraints it would be impossible for the country to ever be able to repay its debts.  Nevertheless, the Greek negotiators failed, and an even more severe austerity package was imposed on the country than had previously been planned.  How could this possibly make sense?

Tariq Ali is sympathetic.  He provides some insight in a note published in the London Review of Books.  He begins with this assessment.

“In the early hours of 16 July, the Greek parliament voted overwhelmingly to give up its sovereignty and become a semi-colonial appendage of the EU.”

Tsipras and Varoufakis had very little leverage to bring to the negotiating table.  They could refuse to accept the terms they were offered, but they really needed the money.  They could threaten to leave the eurozone (Grexit) and cause financial havoc, but the Greek people preferred to keep the euro, and, as it turned out, Germany, at least, was quite willing to see them leave.

“It is now known that Schäuble [Germany’s Minister of finance] offered an amicable, organised Grexit and a cheque for 50 billion euros. This was refused on the grounds that it would seem to be a capitulation. This is bizarre logic. It would have preserved Greek sovereignty, and if Syriza had taken charge of the Greek banking system a recovery could have been planned on its terms. The offer was repeated later. ‘How much do you want to leave the Eurozone?’ Schäuble asked Varoufakis just before the referendum. Again Schäuble was snubbed. Of course the Germans made the offer for their own reasons, but a planned Grexit would have been far better for Greece than what has happened.”

Ali provides this explanation for the apparently vindictive attitude of the Germans and their allies.

“The German attitude to Greece, long before the rise of Syriza, was shaped by the discovery that Athens (helped by Goldman Sachs) had cooked its books in order to get into the Eurozone. This is indisputable. But isn’t it dangerous, as well as wrong, to punish the Greek people – and to carry on doing so even after they have rejected the political parties responsible for the lies?”

Interesting question!

Further insight into the negotiations with the other European finance ministers is provided by Ian Parker in an article for The New Yorker: The Greek Warrior: How a radical finance minister took on Europe—and failed.  Varoufakis was Parker’s subject and he was provided considerable access to him in the critical months when these events transpired.  Prior to becoming finance minister, Varoufakis was teaching economics at the University of Texas at Austin.  He had maintained a presence in Greece by publishing political comments on the internet.

“It was as if Christopher Hitchens had woken up one day as Secretary of State. Varoufakis was no longer writing elegantly prosecutorial blog posts about Christine Lagarde, the managing director of the I.M.F.; he was meeting with Lagarde. Within days of Greece’s election, an academic with Marxist roots, a shaved head, and a strong jaw had become one of the world’s most recognizable politicians. He showed a level of intellectual and rhetorical confidence—or, perhaps, unearned swagger—that lifted Greek hearts and infuriated Northern European politicians. His reluctance to wear a tie seemed to convey the impossibility of containing his manliness.”

The storyline that emerges from Parker’s article suggests that Tsipras and his flashy finance minister were ill-prepared for the task ahead of them, and too inexperienced, if not incompetent, to carry it out.  Parker’s conversations with representatives from the other side claimed that the Greeks had no credible proposals to present.  When asked for details little was provided.

“Once, Varoufakis was asked what Greece’s target surplus should be, if not 4.5 per cent of G.D.P. He ‘had to give a lecture’ about the variables that made the question unanswerable in that form. ‘They’re not economists,’ Varoufakis said. ‘Most of them are lawyers’.”

“According to troika officials, Greek negotiators barely engaged at the technical level. Initially, this appeared to reflect only incompetence, but later there seemed to be some strategy in it—an effort to force the conversation into the political realm.”

“When Greece did engage, I was told by another representative of a troika institution, ‘the stuff they sent us was extraordinarily naïve.’ He recalled a measure, submitted by Varoufakis in March, designed to boost sales-tax compliance by hiring amateur spies: people, including tourists, would be trained to wear hidden cameras. The troika representative said, ‘It was stunning to see something like this in a document of a minister of an E.U. country’.”

Varoufakis seemed to believe that there would be a number of countries who would be supportive of what he hoped to accomplish if only Germany was not so adamantly opposed.  However he could only mention France and Italy as perhaps being in the anti-austerity camp.  Other observers have noted that while Schäuble was the inevitable spokesperson, there was little evidence that Germany was acting alone.

Were Germany and the other countries being merely vindictive—or might they have had a loftier agenda.  It is not possible to appreciate the German view on how to conduct an economy without a little historical perspective.  Jan-Werner Müller provides necessary insight in an article in the London Review of Books: What do Germans think about when they think about Europe? 

“Germany differs from the other member states of the EU in the particular economic ideology that holds sway there, and is supported by the country’s elites – not just those on the right. Ordoliberalism isn’t exactly the same as Anglo-American neoliberalism – it sees more of a role for the state. Many Germans believe it was responsible for the economic miracle of the 1950s….Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making.”

“The German establishment – not just on the right – has long subscribed to the theory of ordoliberalism, which was first elaborated in the 1930s and 1940s and underpinned Germany’s ‘social market economy’ in the 1950s. Ordoliberals thought of themselves as the true neoliberals: they alone had learned from the failures of laissez-faire in the 1920s; they alone had formulated a new vision of liberalism in which a strong state provided the framework for economic competition (and price stability), as well as a social safety net (to prevent socialism). In their eyes, other so-called neoliberals, from the Austrian School or the Chicago School, were really ‘paleoliberals’ stuck in 19th-century orthodoxies about self-correcting markets.”

What is critical in Germany’s view is that sound economic policies be followed not by choice, but by law.  Ordoliberals also feared the corruption of the government by what we would refer to as lobbyists for special interests.  They emphasized the need for the constraints to be exercised on the free market economy to be canonized as a part of the constitution so that they could not be subverted by easily-influenced legislators.  In Germany’s view, there can be no negotiation when there are laws that must be obeyed.

“Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making.”

So Germany clearly thinks it is doing the right thing and there is no alternative.  However, the people of Greece are suffering.  Terms like “cruelty” and “brutality” are being bandied about.  Is there any way in which the terms imposed on Greece can be interpreted as “being in Greece’s best interests?”  Perhaps.

Yet another perspective on the situation is needed.  This one is provided by Michael Lewis in his book Boomerang: Travels in the New Third World (2011).  Lewis devoted a chapter to Greece titled “And They Invented Math.”  He presents the view of a Greece that is not just insolvent—it is a country that is politically corrupt and socially dysfunctional as well.  It is not a place anyone should want to pour a lot of money into in hope of ever getting it back.

Lewis provides us with some examples of how Greece has conducted business in its public sector.

“In the past twelve years the wage bill of the Greek public sector has doubled, in real terms—and that number does not take into account the bribes collected by public officials.  The average government job pays almost three times the average private-sector job.  The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses.  The average railroad employee earns 65,000 euros a year.”

“The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest ranked, Finland’s.”

And then there are the pensions.

“The retirement age for Greek jobs classified as ‘arduous’ is as early as fifty-five for men and fifty for women.  As this is also the moment when the state begins to shovel out generous pensions, more than six hundred Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”

Lewis learned the lengths Greek politicians will go to in order to remain in power in a discussion with an official of the tendency of government financial data to be false.

“....the finance minister stresses that this isn’t a simple matter of the government lying about its expenditures.  ‘This wasn’t all due to misreporting [of expenditures],’ he says.  ‘In 2009, tax collection disintegrated, because it was an election year.’

‘What?’

He smiles.

‘The first thing a government does in an election year is to pull the tax collectors off the streets.’

‘You’re kidding.’

Now he’s laughing at me.  I’m clearly naive.”

It is hard to run a country in which people don’t pay taxes.  Lewis obtained this insight from a Greek tax collector.

“…the only Greeks who paid their taxes were the ones who could not avoid doing so—the salaried employees of corporations, who had their taxes withheld from their paychecks.  The vast economy of self-employed workers—everyone from doctors to the guys who ran the kiosks that sold the International Herald Tribune—cheated (one big reason why Greece has the highest percentage of self-employed workers of any country).  ‘It’s become a cultural trait,’ he said, ‘The Greek people never learned to pay their taxes.  And they never did because no one is punished.  No one has ever been punished….’.”

“The scale of Greek tax cheating was at least as incredible as its scope: an estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year—which meant, because incomes below that amount weren’t taxable, that even plastic surgeons making millions a year paid no tax at all.”

Society depends on the vast majority of people being willing to “do the right thing.”  If a person believes his neighbors are following rules, he is likely to follow them as well.  As more and more people begin to cheat the behavior cascades and the entire social fabric can unravel with disastrous results.  Greece seems to have reached that state.

“The Greek state was not just corrupt but also corrupting.  Once you saw it work you could understand a phenomenon that otherwise made no sense at all: the difficulty Greek people have saying a kind word about one another.  Individual Greeks are delightful: funny, warm, smart, and good company.  I left two dozen interviews saying to myself, ‘What great people!’  They do not share the sentiment about one another: the hardest thing to do in Greece is to get one Greek to compliment another behind his back.  No success of any kind is regarded without suspicion.  Everyone is pretty sure that everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate.  And this total absence of faith in one another is self-reinforcing.  The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing.  Lacking faith in one another, they fall back on themselves and their families.”

Lewis concludes his unpleasant and unpromising assessment of Greece and its society with this comment.

“It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good.  There’s no question that the government is resolved to at least try to re-create Greek civic life.  The only question is: Can such a thing, once lost, ever be recreated?”

Even if Lewis’s description were a bit exaggerated, the facts still speak for themselves.  Is it surprising that when the agents of the European Union went into Greece to discover what had been going on they decided that no money could be loaned to a country in such a sorry state.  Enormous and quite painful changes would be required in order to make Greece look like a modern state, and the agents would have to remain in place in Greece to insure that the funds lent were used properly.  The time required to remake the country would be more than a few years.

Is Greece making progress?  One hopes so.  But a country tends to end up with the politicians they deserve.  The fact that Tsipras and Varoufakis displayed such incompetence in making their country’s case would support the notion that country is not yet ready to rule itself.

If the Germans and others are merely trying to protect their bankers and others who had foolishly invested in Greece, why would they encourage Greece to leave the eurozone and go it alone?  Such a course would surely involve a monetary devaluation and a loss of a significant fraction of those investments.  Given that governments act in their own self-interest, these countries may have decided that Greece was more trouble than it was worth.  But if Greece refuses to go away, the only recourse is to force it to behave—and that is what seems to be happening.

Ultimately, Greece must be released to run itself and be provided a huge reduction in debt if it is ever to regain its status as an independent nation of the European Union.  One hopes that the current treatment it is being subjected to is aimed at reaching such a time.  That is the only explanation of the current mess that makes any sense.