Greece: How do you save an economy from going bust?


The answer is, as in the old music hall joke, "I wouldn't start from here". But this is exactly the question the Greek finance minister, Evangelos Venizelos, is having to fight over today, as are the European Union leaders, the Greek centre-right opposition and (in a weak echo) UK Chancellor George Osborne and his shadow Ed Balls.

Looking at the Greek "Medium Term Fiscal Strategy" here are the obvious problems:

• the size of the fiscal contraction is 12% of GDP between 2011 and 2015

• it is front-loaded, triggering an immediate further V-shaped recession

• it is heavily reliant on tax measures: half of the 28bn euros is raised through increased tax take

• it is also heavily reliant on privatisation - they need at least 30bn euros, possibly 50bn, to plug the gap

If Greece were able to devalue this would be mitigated by a growth spurt as exports and tourism came back, but there is more than one obstacle to this.

First it is in the euro so it can't. But even if it could, the relatively closed nature of the Greek economy, and the large amount of business off-shoring that has gone on, mean a simple devaluation will not have the same benign impact as for example the UK's sterling devaluation did after 2009.

And there are other problems. The IMF-peddled solution to this is "internal devaluation" - wages fall, prices fall, asset prices fall. But while this works in Latvia, a relatively marketised economy, in Greece there is a lot of friction - and not just because of organised labour resistance.

People react to austerity by falling back on their family and village networks. Many Greeks are going back to the villages to sit this out; many families are becoming like extended families. So the formal and informal parts of the economy do not mesh - you don't get a pure market reaction to falling wages and prices.

In any case it is all theoretical until they leave the euro, and here several other problems kick in: first with privatisation. If you are China, and you are about to buy the railways, motorways, ports and airports, why buy them in euros only to face instant asset price devaluation?

Also, of course, if you leave the euro, suddenly all debts are denominated in euros, but all income is in relatively less valuable drachmas: you get an instant debt spiral.

The problem is Greece cannot compete or trade or produce its way out of this crisis during the Medium Term Fiscal Strategy: you get structural reform, but at the end a country that cannot borrow or pay its debts, only now its debts are bigger.

To solve this problem the Greek right proposes the following: to combine the spending cuts with bigger privatisation and less tightening in terms of tax. Indeed they would cut taxes to give an instant boost to the economy.

Seeing the New Democracy MPs storm out of the Greek parliament on Friday, and refuse to back the MTFS, has got their leader Antonis Samaras instantly crossed off the Christmas card list of every centre-right party in Europe.

Hearing them talk of tax cuts in a country whose tax take is among the lowest in the Western world likewise has not gone down well under the dour skies of north Europe.

However the Greek right's reasoning is similar to that of the UK government - you can survive austerity if you pump prime business investment with tax cuts aimed at stimulating it.

Of course there is also a cui bono issue here: the small business class and the poverty stricken consumer benefits if VAT is cut, and that is where New Democracy's electoral base lies.

However, right now it is hard to find middle class supporters of the austerity package, because of the size of the hit they are taking both through one-off tax measures and through the crackdown on tax dodging.

So the centre-right's answer is: you rip up the current austerity plan and demand forbearance from the EU; in return the EU gets a lot of cheap assets in a knockdown privatisation sale, assuming the Chinese and the Arab monarchies don't buy it all with cash.

I only bring Osborne and Balls into it for illustration: having emphasised the need to soften spending cuts, Ed Balls last week tried to outflank the UK government by calling for immediate tax cuts.

So even Social Democrats can embrace the tax route to growth within austerity, and there is no reason why Greek Prime Minister George Papandreou, inside a national unity coalition, might not do the same.

What's the alternative?

If you want to pull out of the euro you have to start thinking of the practicalities. During the Irish crisis there was a fabled visit to the Mint by cabinet ministers which provoked rumours that they were there to view what the new Irish punts might look like.

Costas Lapavitsas, the left-wing Soas economics professor who has been pushing inside Greece for the "default and leave" strategy, says there are three problems you need to solve if you leave the euro:

First monetary: you have to shut the banks and ATMs for a week, impose capital controls, and re-open them with new currency.

Second, you have to avoid a simultaneous banking crisis or bank run: so you need to nationalise and rationalise the banks. This of course can only be done with some help from the EU or IMF, or some other body, and they are not currently in a mood to do that. On the morrow of a default and amidst a euro-wide banking crisis they may feel differently.

Finally there is a trade problem. What you want is a massive boost to trade from the devaluation, but short term you have no reserves of your own currency and no liquidity so you have to design measures to keep trade alive; meanwhile you probably have to impose price and supply controls on food, energy and gasoline.

Putting it like this, what a default/euro exit looks like is really bad: closed banks and ATMs, price controls and rationing, outright bank nationalisation. And that is before we even discuss contagion.

That's why everybody is trying to avoid it.

We'll see today what the Pasok version of Plan B is: Minister Venizelos is to introduce his "changes" to the plan on Thursday afternoon. With a five seat majority in the Greek parliament, the unspoken assumption in Europe is that whatever the parliament approves cannot be executed this side of a big crisis and a national unity government.

Contemplation of some of the facts above is what's making some EU politicians, above all Manuel Barrosso, begin talking about a "Marshall Plan" for Greece. It is getting harder and harder to see how it survives without one; but also hard to see who pays for a Marshall Plan.

Paul Mason Article written by Paul Mason Paul Mason Former economics editor, Newsnight

End of an era

After 12 years on Newsnight, Economics editor Paul Mason has moved on to pastures new and this blog is now closed.

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  • rate this

    Comment number 61.

    47 GG

    All roads lead to banks failing to function correctly, poor regulation, naive consumers. Now the debt is here and it has to be dealt with. Politicians are warping policy to suit ideology. Benefit on the up cycle favours top, pain on the down cycle hits lower social groups. Governmt expenditure difficult to use to energise things as ramped up following the private debt boom. 400ch useless.

  • rate this

    Comment number 60.


    I want to add that your article on the Greek crisis is one of the best I have read among a variety of Greek and foreign media. You are one of the few foreigne journalists really familiar with our country.

  • rate this

    Comment number 59.

    See Steve Keen's work on debt:

    "The only sure road to recovery is (private) debt abolition—but that will require defeating the political power of the finance sector, and ending the influence of neoclassical economists on economic policy. That day is still a long way off."

    PRIVATE debt is the elephant in the room - Keen has the answer!

  • rate this

    Comment number 58.

    47 GG

    Started with massive private debt on the back of banks manipulating housing market. Nothing much to do with government debt. The credit crunch nothing to do with government debt. The downturn then raised gvnmt debt as an issue. We are not likely to see growth until new private debt is taken on & we have inflation, low wage rises, overpriced house values supported by low interest rates 400ch

  • rate this

    Comment number 57.

    In the past countries used Colonies. Britain, France etc. The US turned the South into an internal colony, Tsarist Russia the same with Siberia. Colonialism no longer possible, but the EU is proposing a protectorate in Libya if they get rid of Gaddafi, and they already have their technicians acting in a similar way in Greece. An EU wide economy possibly COULD adopt Protectionism thereon.

  • rate this

    Comment number 56.

    If an EU state issued Bonds they would be priced virtually as Bunds. That means a European restructuring is possible, the threat of Bank failures goes away. A Marshall Plan then facilitates growth in peripheral Europe. The EU has been drawing MENA into its orbit for the last 20 years. Hence the US backseat in Libya. A Marshall Plan for MENA fits nicely with that.

  • rate this

    Comment number 55.

    Doubts have been expressed that the new Finance Minister, Evangelos Venizelos has a strong enough background for the post. So what? The brilliant French Finance Minister is a lawyer. The importance for Greece is Venizelos is likely to be a tougher negotiator with the arrogant Troika team than his rather wimpy predecessor was. Greece has some strong cards yet to play.

  • rate this

    Comment number 54.

    The vote next week is irrelevant. It could be the background message from Brussels is - "Vote this package through even if you have no intention of implementing it, then we can give you the money." In the end Germany and France have to push through a Federal EU State. Then they write off Greek, Portuguese, Irish probably Spanish debt. Then issue EU Bonds to cover the cost.

  • rate this

    Comment number 53.

    One way of keeping wages down would be to allow the housing market to collapse. Steph Flanders had a piece on that from Fathom Computing a while ago.

    The OECD say UK house prices are 40% overvaulued - Deutsche Bank. That means an 80% price fall is actually required for the mean to be restored.

  • rate this

    Comment number 52.

    Hawkeye, I missed your point about Protectionism. No that couldn't work. The only reason wages in UK have been kept down to this level is because cost of wage goods has been slashed by cheap Chinese imports. How would you stop off-shoring. Dirigiste economies do not have a good record of promoting innovation and development.

  • rate this

    Comment number 51.

    #50 conny

    Are you sure that you really understand the consequences of your convictions? Do you not understand the concept of irresponsible or incompetent lending?

    P.S. The banks are very good at helping Gvt's to cook the books. Now I wonder where they developed that little trick?

  • rate this

    Comment number 50.

    The Greeks are behaving like their debts are odious when
    they're not. was it really corruption that caused all this?
    or just cooking the books. it can't be solved until they
    change their polititians.

    but what's really odious is living off borrowed money.

  • rate this

    Comment number 49.

    Economics aint simply what the banksters demand/threaten people with. Its also peoples actions. To avoid Greece going bust one has to give work to people, take 1.5million of the banks blacklist, stop all repossesions and inaugurate border controls in capital, labour and goods. A freeforall has allowed the country to go to the wall. What the politicians wont do, the 'indignados' will....

  • rate this

    Comment number 48.

    The IMF-PASOK govt isn't interested in keeping Greece from going bust.
    If it was it would boot out the IMF, impose controls on the export of money and cancel the 'foreign debt' overnight. Since 1985 Greece has paid back $865billion in foreign debt. German war reparations alone are around $500billion. Greece was always a cashcow for the West. This time it aint no different...

  • rate this

    Comment number 47.

    @40 Arthur Daley

    "Government debt is a different problem It is future tax burden/services"

    If only you knew how wrong that is.

  • rate this

    Comment number 46.

    Keeping giving them plenty of money , why should the Greeks pay tax's its ridiculous ....

  • rate this

    Comment number 45.

    I am afraid Greec will default sooner or later. I believe Greece should be asked to leave as they have been living beyond their means for a long time.
    1. Most of the rich and professionals generally pay little or no tax.
    2. Greece had be receiving EU payment for long time.
    3. Pensions payments are far too high (as in spain)
    4. next defaulters will be portugal then Ireland and lastly spain.

  • rate this

    Comment number 44.

    It is so easy!
    Stop messing around in North Africa or any where else in the world and concentrate on European domestic economy. At least we will have spare money for the poor Greek.

  • rate this

    Comment number 43.

    Its all been said really - this is a problem with no viable solution. The EU/IMF/ECB 'bullying' Greece into even more (unworkable) austerity measures is simply grandstanding by EU ministers who want to be seen to be in control of the situation.
    Kicking the can down the road is simply delaying the inevitable - Greece will default.

  • rate this

    Comment number 42.

    There are many conspirators on the internet saying that the Greek crises is being orchestrated by a secret shadow government or know as the illuminati also one of the visionaries who claims to receive messages from the Blessed Virgin Mary is warning us that there is a secret plan to bring about a one world bank & a cashless society after I read the prophecies I had trouble sleeping for a few nites


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