Daniel Lacalle

The Greek Drama

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Contributor View written by Daniel Lacalle. Mr. Lacalle is an economist, fund manager and author of Life In The Financial Markets (Wiley) and The Energy World Is Flat (Wiley). You can follow him on Twitter at @dlacalle. 

“You can check out any time you like but you can never leave.” -Hotel California

 The Greek drama continues to unfold and puts pressure on European markets despite the fact that Draghi´s “monetary laughing gas” continues to pump €60bn per month into the slowly recovering European economy.

 The call by the ruling party, the communist Syriza, for a referéndum in Greece, is the last episode of a soap opera that´s starting to be sadly comical.

 For once, Syriza is calling a referéndum on State fiscal policy, something that the Greek constitution specifically forbids. It is simply a measure to try to make citizens forget the atrocious negotiating tactics of their government, who could have reached a benefitial agreement much earlier without putting the country on the verge of a bank run.

 Additionally, the government is trying to show to the citizens that the Troika proposals are unacceptable when the difference between the document presented by Syriza and the EU´s suggestions are minimal (0.5% of GDP).

 The real drama is that none of the measures announced will solve Greece´s real issues. No, it´s not the euro, or the austerity plans. It´s not the cost or maturity of debt. Greece pays less than 2.6% of GDP in interest and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.

Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.

Greece´s challenge is and has always been one of competitiveness and bureaucratic impediments to create businesses and jobs.

 Greece ranks number 81 in the Global Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact it has the levels of competitiveness of Algeria or Iran, not of an OECD country. On top of that, Greece has one of the worst fiscal systems and limits job creation with a combination of agressive taxation on SMEs and high bureaucracy. Greece ranks among the poorest countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.

 Greece´s average annual déficit in the decade before it entered the euro was already 6%, and in the period it still grew significantly below the average of the EU countries and peripheral Europe.

 Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 59%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.

 One thing is sure, the Greek crisis will not finish by raising VAT – impacting consumption – and increasing taxes to businesses, nor making small adjustments to a pension system that remains outdated and miles away from those of other European countries. A new 12% “one-off” tax on companies generating profits of more than 500,000 euro will not help job creation and will likely incentivise more tax fraud.

 The inefficacy of subsequent Greek governments and Troika proposals is that they never tackle competitiveness and help job creation, they simply dig the hole deeper raising taxes and allowing wasteful spend to go on.

 From a market perspective the risk is undeniably contained, but not inexistent. Less than 15% of Greek debt is in the hands of private investors. Most of the country´s debt is in the IMF, ECB and EU countries’ hands. The most impacted by a Greek default would be Germany, which holds bonds of the hellenic republic equivalent to 2.4% of its GDP, and Spain, at 2.8% of GDP, small in relative terms.

 Additionally, the ECB prints “one Greece” every three months.

 However, the main risk for the Eurozone comes from a prolongued period of no-solutions. Not a Grexit but a “Gredrag,” dragging on for months with half baked attempts to sort the liquidity crisis.

 This prolongued agony is unlikely to help investors´confidence. And it might raise questions of the possibility of similar illogical behavior from other fringe parties close to Syriza´s views in the Eurozone, particularly in Spain and France. Because behind this all what lies is an ideological agenda, not the best financial deal for the country. Syriza could be looking to do something similar to what Nestor Kirchner did in Argentina in 2005, cut ties with the IMF and agree to alternative financing with Venezuela at double the cost just for ideological reasons.

 Greece exiting the euro remains a distant possibility, despite the headlines. The much publicised “Russian solution” forgets that Russia is not stupid and doesn´t lend at better terms or with easier conditions – think of Syria and Ukraine.

 A Grexit would not solve Greece´s challenges, as the country spent decades unsuccesfully trying to solve structural imbalances before joining the euro with competitive devaluations and failed keynesian bets on public spending.

 Greece doesn´t need to be a failed state. But governments seem to be inclined to prefer a bank-run and capital controls than to reduce unnecessary spending. The fact that Syriza´s first measure was to re-open the public TV network – undoubtedly a “priority” in a debt crisis- shows how little they care about the “social urgency”.

 Greece should stay in the euro, open its economy to business, attract capital, privatize inefficient public sectors, incentivize high productivity sectors with tax deductions, and reduce wasteful spend, not feed the government machine with ever rising taxes to get a few crumbles left by the survivors of the disaster.

 If not, in three years time we will be talking of the “Greek crisis” again.



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