The Greek Fiscal Crisis: Is there a way Out?

A personal opinion piece by Nikolaos Salavrakos,

Member of the European Parliament / LAOS Party

Over the last six months across the globe an immense debate is occurring about the problematic members of the Euro-zone. Various policy makers, academics, journalists, politicians, economists, high profile bankers are regarding Portugal, Ireland, Greece and Spain (PIGS) as the countries which create immense problems to the EMU. All of them are characterized by high debts, as well as fiscal deficits. However, Greece is considered as the most problematic economy of the Euro-zone. Thus in the end of March 2010 (25-3-2010) the leaders of the European Union decided that a support mechanism for Greece should be established. This mechanism will become operational only if Greece fails to attract funds from the international financial markets, or if the interest rate of (the market) becomes extremely high thus forcing Greece to ask for alternative sources of finance.

Is there really a Greek economic tragedy? Prima facie the numbers create this impression. At this point I shall briefly demonstrate the evolution of the Greek public debt from 1974 until nowadays. It is true that the Greek public debt soared throughout the period. To illustrate in 1974 Greek public debt was just 22.5% of GNP, and in 1979, when Greece signed its entry in the EEC, it was 31.7%. This by 1981 was increased to 36.1% and by 1989 it was 85.3%.[1] The public debt continued to rise and thus by 1993 it had reached the astonishing level of 110.1% of GNP. This was slightly reduced to 106.6% in 2001 and to 102.4% by 2003.[2] Thus, even with the official statistics of the 2000-2003 period, the Greek debt was still high. However, Greece entered the EMU from January 1st 2001 as its twelfth member state. It is obvious that everyone (markets, politicians, EU Commission) knew that a country was becoming a member of the EMU with a debt above 100% of its GNP. The question is simple why there were no reservations regarding the Greek debt at that time? Perhaps the Olympic Games of the 2004 can explain partially the Greek EMU entry.

However, I have no intention to comment on economic history issues. I shall simply point out that the new Greek government after the 2004 elections recalculated the public debt (by adjusting the figures for defence spending) and thus according to the new data the public debt in 2001 was 114.7% of GNP (as opposed to the previous figure of 106.6%), whereas in 2003 it was 109.9% of GNP (as opposed to the previous figure of 102.4%).  I point out that in both cases the public debt has been above the figure of 100% of GNP. Nowadays, the estimate about Greece ’s public debt is €300-320 billion which is equal to 115% of GNP. Thus we can conclude that in spite of the different statistical- valuation techniques the level of Greek debt as a percentage of GNP remained above 100% throughout the 1993-2009 period. At this point another question is rising: Since everyone was aware that Greek debt has been above 100% of GNP for the past sixteen years, why suddenly the fears about Greek default have emerged? The answer to this question is that since the debt remained high for such a long time period (including the years after the EMU entry) the markets as well as the European partners of Greece started to realise that the country had failed to materialise the necessary structural reforms in order to reduce the level of the debt. Furthermore the time parameter has become critical. Greece will need over the next two years (2011 and 2012) the staggering amount of €130-160 billion for debt repayment. Under the pressure of the international financial crisis, which already cost trillions to the global economy, the above sum is too high for a small open economy.

However the question is if Greece can avoid default? I shall try to document that the Greek economy is not as problematic as the initial figures portray.

The level of private savings is high. To illustrate, according to the Bank of Greece, by February 2010 the level of savings across the Greek banking sector was €229.5 billion.[3] The figure although slightly smaller compared to January 2010, demonstrate that adequate funds are in Greek banks.  I understand that part of this wealth is deposited by foreigners living in Greece, however it is obvious that the domestic banking system is healthy and can certainly absorb part of the bonds which the government issues.

The second point which I shall make is the level of state wealth. The Greek state controls domestically or abroad 71,000 real estate assets. The book value of the above properties by the end of 2008 was calculated at €272 billion.[4] It is obvious that if a modest privatization programme occurs, the Greek state will be able to collect some funds which can be channelled for debt repayment purposes.

The third point which I have to make is associated with broader investments made by the Greek state (ministries, public sector enterprises, municipalities etc). The level of investments, by the public sector (both portfolio as well as real investments), are calculated to 30-33% of GNP thus around €35 billion (again figures for the end of 2008).[5]

From the above it is obvious that the assets of the state (real estate and portfolio investments and direct investments inward or outward) are around €300 billion. I shall make (the oversimplification) that the state will continue to remain a problematic manager, thus not much is expected to come as state revenue from the above assets.

Let me turn my attention to the Greek private sector. It is well known that the global financial crisis has triggered austerity programmes across most EU countries. Social unrest can be expected. Greece however, may be a different place when compared with the other EU states. Private household ownership is much more developed in Greece than in other EU countries. The explanation of the above phenomenon is simple. The majority of Greek labour is not as mobile as in other EU countries (thus a small number of workers will travel from one location to another). Furthermore, the family links are stronger in Greece than in other EU countries. Thus in 2001 private household ownership in Greece was achieved by the 80.1% of the population. For comparative reasons we point out that the figure for Austria in 2002 was just 56.9%, for Germany was 43% (again for 2002), for France was 56% (again in 2002). The UK figure was 69% (for 2001), for Ireland was 77.4% (for 2003), for Belgium was 68% (for 2001), for Denmark was 50.6% (for 2003). It is true that Greek wages are smaller nominally compared to other EMU countries, however the Greeks with a high figure of private home ownership can adjust to crises perhaps better compared to their Western European partners. An individual, acting ashomo economicus, is more secure when he or she has a place to live instead of renting a property. Thus austerity measures can have a greater harmful effect in other Western economies compared to the Greek case.

The citizen who has to pay rent, or mortgages will certainly disapprove high taxes, or lower salaries because of its fragile economic situation. However, the citizen who possesses a house and this is the minimum guarantee for the security of the family will be able to pay higher taxes or he or she will be willing to accept a lower salary. Under the light of the above argument the fact that the Greek government is trying to make savings of €5 billion in the current fiscal year (50% will come from government spending cuts, and the other 50% will accrue from increased tax revenues) looks attainable for the current fiscal year. (Of course no individual on the planet will tolerate for ever decreasing salaries or higher taxes).

The second point related to the Greek private sector is the level of Greek FDI (foreign direct investment). The Greek FDI has been developed in the Black Sea Economic Co-operation (BSEC) region, in the Middle East and North Africa regions (Israel, Egypt, Syria, Libya, etc), in the EU, USA and it starts to emerge in China. A modest estimate is around €15 billion (although exact figures are extremely difficult to obtain).

The third point is related to Greek shipping. This may sound odd. Under the global financial crisis the level of international trade is shrinking. This has a harmful effect on shipping freights (oil tankers and cargo ships) and services. However, throughout the 2004-2008 period, more than 7% of Greek GNP was generated from shipping activities.[6] The total number of Greek vessels of all kinds (cargo ships, VLCCs, passenger ships etc) was 4,161 vessels (data for February 2009).[7] The Greek merchant shipping is one of the most important wealth creators.

Let me summarise the argument. The Greek debt has been high (above 100% of GNP) for the last sixteen years, thus the markets, the other member states of the EU and the policy makers knew that a severe fiscal problem existed. Obviously the high growth rates of the economy -due to the investments for the Olympics of 2004- initially could have made optimistic expectations for the economy. However as growth rates gradually fallen, the debt remained high and the international crisis occurred the early optimistic expectations were replaced by pessimistic ones.

The situation is certainly difficult; however, we can have some optimism due to the factors that I have expressed. The total value of various assets (real estates, FDI, savings, public investments etc) exceeds the level of central government’s debt.

Furthermore private wealth is adequate enough in order to guarantee that the current austerity economic measures will be tolerated by the majority of the society (although additional measures cannot be taken easily). Instead of full pessimism I propose cautious optimism… After all, default will be risky not only for the Greeks, but also for their lenders.