Friday, 24 February 2012

So, what is the real truth about the Greek catastrophe?


In late 2009, Europe and the world discovered that Greece was a “fraud” and a “deceiver” that had never stopped forging its economic performance in order to enjoy the benefits of membership of a privileged club, at the expense of its partners and the euro.
But how accurate is this really? Due to the advancing international economic crisis at the time, the majority of European governments were inaccurate in their deficit estimations. For example, in their Stability Programmes, at the beginning of 2009, Britain had predicted a deficit of 8.2% that finally reached 11.4%, the Netherlands predicted a surplus of 1.2% that turned out to be a deficit of 5.4% and Portugal predicted a deficit of 3.9% that rose to 9.3%.

Why was Greece alone in the dock?

Also, in the years 2008-2009, the deficit in Spain extended to 11.1% and in the United States to 12.9%. In April 2010, Ireland predicted a deficit of 11.7% for 2009 and 11.6% for 2010, while the latter finally reached 32%. However, it was only Greece who was accused of falsifying its data and being unreliable. And that by its own government! One wonders what caused this sudden and precipitous self-criticism.
At a time of global economic crisis, the newly elected government in Greece had structured its entire electoral campaign around the motto 'There is money', in order to topple the governing party’s campaign that highlighted the need for painful measures. In line with its election commitments, the budget drafted by the new government for the year 2010 included a whole set of allocations, such as wage and pension increases, public expenditure increases, a solidarity allowance and pledges for not imposing additional taxes.
Furthermore, the previous government had estimated that the 2009 deficit figure could finally reach 6-8%, because of the escalation of the crisis, and therefore, in an already turbulent internal political environment, it called for elections, in order that the next government should take such measures. 
The new government’s estimation at the end of the year that the deficit had finally reached 12.7% reveals a considerable difference between estimations. However, this difference takes into account a number of expenditures made by the new government in the last few months of the year totalling around €9 billion, among which was €1.5bn worth of  tax refunds, €500 million for the solidarity allowance, €1.2bn for contestable hospital debts, €2bn from withdrawing regulations of the previous government and €1.7bn in revenue shortfalls. 
Not 'irregularities' but 'reclassification'
Moreover, as the head of the Eurogroup Jean-Claude Juncker  observed, any revision of the deficit by Eurostat, the European union’s statistics office, was not the result of irregularities, but of the reclassification of certain public expenditures, namely the inclusion of the deficits of the wider public sector and public utility companies. 
The former secretary-general of the national statistical service of Greece, Manolis Kontopirakis, accused the finance ministry of seeking to exert undue political influence over the statistics office, in order to revise the final 2008 deficit figure as well as the projected deficit figure for 2009, as it seemed that they wanted to discredit the previous government. Similar accusations were made later by other members of the service. The issue is of much importance considering that an Athenian public prosecutor is conducting an official inquiry into these allegations.

greek 10year bond spreads
(the red line indicates the date that Mr Papandreou took over)

At the end of 2009, Greek and EU officials had repeatedly warned the Greek government that the deficit could be withheld to a single digit number, if measures were taken in this direction. The head of the European Central Bank (ECB), Jean-Claude Trichet, has held the then-government responsible for postponing the necessary measures despite the bank’s warnings, while the director of the International Monetary Fund (IMF), Dominique Strauss-Kahn, was convinced that, had the measures been taken earlier, the solution to the problem would have been less expensive. 

Talking the country down

At the same time, the government almost transferred to the international markets it needed to borrow from, the idea that Greece was a bankrupt country with a “huge systemic corruption, clientelism, parasitic economy, enormous iniquity and arbitrariness”, even by comparing it to a sinking Titanic, thus skyrocketing spreads! Hence, she managed to transform a deficit issue common to most EU members into a borrowing issue, leading Greece to the IMF.
The truth is that the previous government constantly pointed to the need to take measures on time. It repeatedly sought a wider consensus with the opposition, given its thin parliamentary majority of 151 MPs out of 300. In March 2009, the-then prime minister Kostas Karamanlis warned that the international crisis, and the country’s excessive debt, posed serious threats and made a futile effort to reach consensus on the basis of cutting expenditure and of restraint by parties and syndicates.
Finally, he went to the polls, after the opposition made clear that it would vote against the re-election of the president in March 2010, in order to provoke elections and despite pledging to vote for him after coming to power, this being a decision that was going to lead the country to an extended pre-election period that would torpedo any possibility for taking measures. 
It is also true that despite upcoming elections, both national in October, and European in June, the previous government announced a comprehensive set of measures in three different occasions, in February, March and June 2009, meeting criticism by the opposition that, at a time of crisis, there should be increases in expenditure instead of cuts. Part of these measures was a €28bn support package for the banking sector, the first approved in Europe, for which Greece was congratulated by its EU partners, but fiercely attacked by the opposition.
Meanwhile, in March 2009, despite the global crisis reaching its peak and the images of a rioting Greece beamed around the world in December, Greece went to the markets convincingly enough not only to cover its borrowing needs  at a reasonable rate, but also securing a reserve as a safety net for the remaining of the year.
No one can deny the immense systemic problems faced by Greece over the past decades that ought to have been resolved before they became uncontrollable.
The public sector in Greece has long been excessive and counterproductive with bureaucracy, low efficiency, over-regulation and para-economy becoming endemic. The excessive public sector, and also increased armament procurements, account for a big part of the huge public debt. Greece, together with the USA and Turkey, is at the top of the list of NATO members’ spending on armaments as a percentage of their GDP, that costs almost €6bn or more annually.
However, it is worth noting that, in the years 2004-2009, €50bn was spent only to service the interests of past debts. It is also true that Eurostat has concluded that, before 2004, the Greek government falsified statistics in eleven different sectors, accounting for deficit deviations of more than 3%. According to its revision for the year 2008, after the 2009 elections in Greece and 'revelations' from the new government, of the 2% deviation professed by the latter, Eurostat acknowledged one of only 0.6%, while it expressed serious reservations for the rest. For the year 2009, Eurostat declined to make any revision, since there were only the estimations of the previous government,  and one could not speak of falsification on that basis.

Self-accusations, but why?

And here comes an obvious question. Why was Greece accused of forgery, corruption and all the rest by its own government? Why did it evidently inflate its own deficit at the end of 2009? Clearly, despite being briefed by both Greek and foreign officials on the situation before elections, it had created expectations and it had given promises, on which it could not deliver. The former secretary-general of the national statistical service of Greece has noted that the huge discrepancy between the initial forecast for the 2009 deficit and the final figure was the product of two factors: the excessive optimism of the previous government and the new government’s desire to put the blame on its predecessor and make any economic rebound seem more impressive.
Unfortunately, the latter failed to anticipate the impact the new figure, and her allegations, would have on world financial markets, their reaction, and the disaster it would provoke for Greece and the EU.

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