The recent election in Greece which resulted in the Syriza Party being swept into power has once again put the spotlight on the struggling Eurozone. In isolation, the election of a left wing anti-austerity party in Greece would appear to be no more than a nuisance for markets beyond Europe. But I believe that there is a lot more at stake than just simply a stand-off between the new Greek Prime Minister Alexis Tsipras and the ECB, IMF and EU which are collectively known as the Troika creditors.
Firstly let’s not pretend that Greece’s economic woes were were caused solely by the Germans or the Euro. Corruption, low productivity, poorly managed state utilities (including the ports), a bloated public sector and a woefully inefficient tax system all played a significant part in getting the Greek economy to the point where it effectively collapsed.
Even Greeks who bitterly opposed the former government and austerity measures would admit after a few glasses of Tsipouro that most of the problems with the economy were home grown.
So for a variety of reasons the Greek government essentially ran out of money and needed help which came via billions of Euro’s in loans. In return for getting this money the Trokia creditors tied these loans to reforms such as improving the tax system and privatising state owned enterprises. In addition the Greek government had to reign in spending and this included slashing the number of public sector employees and public sector pay cuts.
But it is wrong to suggest that the financial bailout conditions simply included austerity measures and without the economic reforms insisted upon by the Troika there was little chance the debt could be repaid.
As a result of the Greek economic crisis which was largely triggered by the global financial crisis the Greek economy entered a period of painful adjustment which included a recession lasting from 2008 until later 2014. Even now the unemployment rate in Greece is around 25% with youth employment around 50%.
Greece Unemployment Rate 2014
The impact of the recession is visible – most of the Olympic Games sites have fallen into disrepair, many shops are vacant and roads & public facilities are clearly not well maintained. However there are glimpses of the days before 2008 in places like Glyfada – where at night you would hardly believe there had been a recession at all.
So perhaps the new Greek government is justified in arguing that the conditions attached to the loans from the Trokia were too severe and that some debt should be written-off and the loan terms re-negotiated?
But if the Trokia were to do this then other EU nations that received bailout funds (such as Spain & Portugal) would probably also ask for some debt relief which means in the end, some nation(s) or organisation(s) have to take a loss. Because at the end of the day the money has to come from somewhere and not remembering that is precisely how various countries in the EU got into the trouble in the first place.
I doubt that the debate regarding the effectiveness of economic austerity measures/reforms will ever be settled although it’s pretty easy for economists who have no skin the game to casually suggest debt should be written off. But from an investors point of view the stand-off between the new Greek Government and the Troika is worrying.
Firstly it undermines foreign investor confidence in Greece which make no mistake, is bad for the Greek economy. Investor confidence has been further shaken by the halt in privatising public assets – although I can appreciate that a new government may want to review the conditions for the sale of these assets. Having said that, public utilities in Greece have generally not been managed well and a good example of how badly the government managed assets in the past is the case of Olympic Airways.
Secondly it sets a precedent in regards to how EU nations deal with debt and their loan obligations. Why for example should other countries comply with their loan obligations towards the EU, ECB & IMF if Greece doesn’t? Why should smaller economies even worry too much about debt if their political leaders believe that in the event of a crisis they will get the financial assistance they require on terms that can be rejected later?
Thirdly the focus on the loan conditions has taken the focus off why the Greek economy got into trouble in the first place. As I mentioned earlier, Greece itself is responsible for mismanaging the economy and burdening itself with debt it could not manage.
Blaming the Germans is a popular theme in much of southern Europe but the reality is that the German export machine is very efficient and churns out products that the world wants plus the government has managed the economy (and debt) fairly well.
Lastly and what seems to have been almost totally forgotten, is the the Greek economy returned to growth in late 2014 and exited 6 years of recession. In other words there was light at the end of the tunnel and foreign investors were lining up to take stakes in government owned utilities.
Yes the conditions attached to the financial assistance provide by the Troika caused much hardship but perhaps the reforms they insisted on were working? Perhaps this year could have seen the Greek economy enjoy a full year of economic growth? However I now fear that this will not be the case.
Worse still the Greek stand-off with the Troika could trigger major divisions within the EU which could derail the ECB’s efforts to stave off deflation.
The EU economic bloc is China’s biggest trade partner and if the Eurozone economy struggles then this will impact economic growth in China which will in turn, have a knock on impact on the Australian economy.
I have business interests in Greece and when I visit Athens I see a city which could be a major global business hub and a country which has so much potential. Greece has much to benefit from being part of the European Union and the European Union has much to gain from a member state located close to markets located in the Middle East, North Africa as well as having a port (Piraeus) which could be a major centre for sea trade between Asia and Europe.
I sincerely hope wise-heads will prevail and that better times lay ahead for Greece, however at this stage I fear the Greeks have elected a government led by a political party that has made promises that it will not be able to keep.
I hope I am wrong, because it would indeed be a modern day Greek Tragedy if the significant progress made during six years of recession was to be squandered and the county slipped back into recession again.
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp