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Discussion: "Die Schuldenfrage lösen und die Investitionsschwäche bekämpfen"



For the purpose of presenting  this dialogue, three different fonts are used:

  • Original text including the comments by Heinrich von Loesch
  • Comments by Gabriel Colletis et Jean-Philippe Robé
  • Replies by Heinrich von Loesch



Your paper "Die Schuldenfrage lösen und die Investitionsschwäche bekämpfen -- Ein Vorschlag zur Überwindung der (griechischen) Schuldenproblematik im Euro-Raum" constitutes a bold and very interesting proposal.  Please allow me to comment on some of the main arguments of your paper:

  • Did the unbalanced Greek economy create the debt or did the debt derail the economy?

   Frankly, I am not very concerned about the current level of the Greek sovereign debt. I think the creditors will delay repayment of the principal ad calendas graecas and the interest rates will be minimal; in the end it will be a semantic rather than an economic issue whether the debts remain on the books or be erased. This fact has not been fully understood in Athens and Washington [well, the IMF considers the debt to be unsustainable…]. The generous conditions [??] offered by the creditors have practically relieved Greece of its debt [??]. I tend to agree with German finance minister Schaeuble that debts are not among Greece's main problems.  After the next round of political elections, some Eurozone countries might be more prepared to consider a restructuring of Greece's nominal debt. [so it’s a problem after all…]

The IMF says the volume of the debt is unsustainable and demands a restructuring as a condition for participating in a third bailout deal. But according to agency news of July 30th, the Fund would also be satisfied if "the credit conditions be loosened" which is the line pursued by Chancellor Merkel. Most likely, the IMF will participate in bailout III. 

This third bail-out program currently being discussed would take care of the payments Greece needs to make in the near future. Therefore, temporarily, Greece would be relieved of its debt. Afterwards there will be, no doubt, the "restructuring" which in practical terms means that the debts will be forgiven.  

Everybody knows that Greece will never be able to repay its current debts but for this truth to sink in takes time (particularly in eastern and northern Europe). As regards the near future, the level of the debts is not likely to harm Greece's economic performance as Ugo Panizza and Andrea F Presbitero explained. Perhaps the IMF should take note of that and worry less. 

   I am more concerned with the present growth of the debts, especially the internal ones caused by delays of the Tsipras government in honoring its financial obligations. I think it will, even under favourable conditions, take considerable time to undo the economic contraction [that’s right] caused by the policies and actions of the Tsipras government [that’s debatable]. [Wich actions do you mean ? The government action has been MAINLY concentrated to “negociate” with the former Troïka]

Well, let us remember the actions to undo austerity actions by the preceding government: rehiring staff, reopening public TV, abolishing (at least temporarily) the real estate tax, undoing pension cuts etc. The Tsipras government was busy to live up to its pre-election promises.

Given the current distortion of the primary surplus by the rising level of domestic indebtedness. The institutions wisely refrained from setting a numeric target for the surplus [it is not exact; there is a target: 3,5% to be reached in 2018].

The official text (early July version) said: "The new fiscal path is premised on a primary surplus target of (1, 2, 3), and 3.5 percent of GDP in 2015, 2016, 2017 and 2018". However, Silvia Merler later reports  that "the preliminary agreement of July 13th does not include a precise numeric target for the primary surplus".

 Ein schwaches Produktionspotential - Die Produktion ist geringer als der Konsum (P<K) - Die Importe sind größer als die Exporte (M<X)  Eine extreme Abhängigkeit von externer Finanzierung - Die Verschuldung ist nicht die Ursache der Probleme Griechenlands, sie ist das Ergebnis dieser Probleme

   I am afraid, here I disagree. I believe Greece's current problems result from years of lavish deficit spending, resulting in a mountain of debts, public and private [it’s only half of the story; had the debt been used to build the economy, it would not be an issue].

Well, in a way, the economy has been built:  Svimez (Associazione per lo sviluppo dell’industria nel Mezzogiorno) says in its annual report 2015 that Greece's economy from 2000 to 2013 grew by 24 percent whereas the largely similar southern part of Italy grew only 13 percent. Although by 2013 part of the Greek bubble had disappeared, there was still considerable growth left over but largely of the unsustainable kind.

Let us look at history:

   Before WWII, Greece was a poor but self-sufficient agricultural community with 40 percent illiteracy (women 63% illiterate; 1939 statistics).  Low level self-sufficiency (poverty) continued until the collapse of the military regime in 1974.  From then on, Greece's economy and its modernization took off, unfortunately accompanied by increasing levels of corruption and clientelism or patronage. Even the supposedly "clean" Syriza administration soon showed the old vices. (I would not be surprised if future governments discovered that during Syriza's weeks of hectic efforts to stave off default, some millions went missing

The Greek industrial and even agricultural development till 1974 has been very low, indeed. This is due to the weak institutional setting. At the contrary of Germany or France, there is almost no industrial culture in Greece. The Greek “bourgeoisie” is a commercial one. This has led, as an illustration, to prefer to stimulate the importations instead of the national production.

It was not always like this. When Greece was still part of the Ottoman empire, Greek entrepreneurs dominated the world cigarette market, dominated in the restaurant business, not to speak of their global role in shipping.

Corruption and clientelism has been the thing of Nea Democratia and Pasok and this easily provable. About Syriza, we may speculate or think what we want. But for now there is no fact that would prove anything.

Sorry, there are a few facts:

  • A cousin of Alexis Tsipras is focal point for international economic relations in the Ministry of Foreign Affairs;
  • The Bureau Chief of Culture Minister Nikos Xydakis is Panagiotis Douros, brother of  Rena Dourou, Governor of Attica.
  • Iphigenia Kamtsidou was made head of the National Center for Public Adminstration. She is friend of Justice Minister Paraskevopoulos
  • Evangelos und Giorgos Kalpadakis, nephews of Interior Minister Nikos Voutsis got jobs in Tsipras' diplomatic division and as bureau chief of Deputy Premier Dragasakis, respectively. 
  • The weekly To Vima reported that the Minister for Administrative Reform Georgios Katrougalos' law firm concluded contracts with 300 former state employees obliging them to deliver 12 percent of their indemnity for former unemployment to the law firm if they are rehired. Etc. etc.

   In 1981, Greece joined the European Community and began being showered with funding from Brussels, inviting all kinds of skulduggery. Propped up by the EU, Greece's status in credit rating improved, offering successive governments the potential to sell bonds at favorable conditions. In 2001 Greece adopted the Euro currency, obtained access to the European and global financial markets and their low interest levels, thereby opening the floodgates for more debts to be contracted.

And all this, without any form of reaction from the European authorities, even though they knew very well what was happening As well as Goldman Sachs was not only fully aware, but was powerfully involved in the falsification of Greek government accounts.

Right, of course. In Italy the case was similar but not as extreme. Political and geopolitical considerations prevailed over economic rationale -- a lesson, the Eurozone has learnt, belatedly. It will cost their taxpayers hundreds of billions of euros to be written off, probably after the next round of elections. The issue now is how to stop Greece from contracting more debts.

   It was the availability of easy and cheap credit which derailed the Greek economy, not vice versa.  The following years of plenty, of economic miracle, elevated Greece to a level of public and private consumption equal to that of advanced European countries, and sometimes even beyond. Imported foodstuffs, school buses, air conditioning, domestic servants, swimming pools, studying fancy subjects abroad, collecting modern art, pensions for unwed daughters, vacation homes at the beach -- everything was possible. Greeks refused to perform menial work which was passed to scores of legal and illegal immigrants. During these years Greece seemed like a Gulf emirate with sudden affluence based not on revenue but on easy credit.
We agree, but only in part. All Greeks did not have domestic servants, swimming pools and so on. Just as all Greeks are not cheaters. But it may be more comfortable to think the “cicada way of life” is recorded in the Greek DNA…

Of course, not. Greece's Gini coefficient of wealth and income distribution is traditionally high and probably still rose during the boom years. Greek accounts in Switzerland, Greeks snapping up luxury flats in London -- the bourgeoisie took more of its share. Of course, not all Greeks are cheaters. Take any country, offer the people lucrative business deals and cheap and easy credit and you will get a boom similar to the past one in Greece. It's not a matter of DNA, it"s simply human.

   When in 2008 and 2009 the crunch came, the Greek banks discovered themselves saddled with toxic loans, and the state faced a sovereign debt well beyond 100 percent of GDP.  When the banks faced default they gambled like the Italian banks: they bought billions of government bonds which offered high interest rates, trusting that the Eurozone would prevent a Grexit and someone (the Greek state?) would eventually repay them. 

  • Die griechische Wirtschaft ist todkrank, sie ist nicht mehr in der Lage, genügend Einkommen zu generieren, um die menschliche Not zu lindern, die Produktionsfaktoren zu entlohnen und den Schuldendienst zu leisten\

    Well, this is a question of perspective. True, Greece's economy is currently generating a positive primary surplus because government expenditure shrank even faster than tax revenue [that shows the level of effort for the poorest segment of the population!]. 

germanpages.de wrote on this subject: "At a time when the world's tax haven countries are gradually losing their secrets, Greece seems ready to replace them. Not only are tax cheaters treated with generosity; the government is also shielding bank debtors by blocking foreclosures of properties under half a million euros' worth. Overall, Syriza's so-called reform agenda creates the impression of a party fighting for the well-to-do middle and upper classes. The poor among the Greeks can only dream of owning assets to the tune of 300,000 euros and their homes, if they own one, are certainly worth less than half a million euros."

An awful situation: citizens dodge taxes, the state shirks its obligations (see Silvia Merler's excellent piece).  Greek payments due to creditors had to be funded by the creditors themselves by shifting funds from one account to another [with no real money going to Greece; so where are the “generous conditions” ??].

The bail-outs are not intended to provide Greece with money. They aim at postponing debt payments or paying debts that cannot be postponed, in order to satisfy lenders (including hedge funds) and saving endangered banks considered too big to fail. For Greece to get money, it must seek new loans, as it recently did by again applying to the IMF.  

   Still, I don't consider the Greek economy moribund [it’s not a matter of opinion, but of facts]. It is only out of tune with the new post-crunch reality.  Once the dust settles, Greece will shift from a luxury-oriented, import-centered economy to a frugal, import substituting, export- and tourism-oriented economy. It will take time, investments and technical advice. But I am sure, the keen and well connected Greek business people will meet the challenge it they are offered a modern and efficient institutional framework.
    Das Schuldenproblem kann nicht durch einen im wesentlichen finanzpolitischen Ansatz gelöst werden. Denn die Schulden sind im Wesentlichen ein Problem der Wirtschaftsstruktur Griechenlands. Die größte Herausforderung für Griechenland -- Unverzüglich ein Modell zur Entwicklung seiner Produktion auf den Weg bringen -- Was aber ohne eine tragfähige Lösung für die Schuldenlast nicht möglich ist.
   As stated above, I think the debt problem has largely been solved through extremely long time horizons, generous debt servicing holidays and micro-level interest rates. If more action is needed to reduce the weight of the debts, even more favorable terms could be offered by the creditors, the German chancellor, Ms. Merkel, announced.  Although, in my view, the debts were neither caused by Greece's economic structure, nor should they be seen as a problem in itself,  I do agree that a model to develop domestic production is urgently needed and constitutes a major challenge for the country.
Here (in italics) is the core point, which has to be addressed without any moralizing considerations.

   It does not really matter who draws up the blueprint for Greece's industrial and agricultural revival: the Greeks themselves or the troika, or both together. No doubt, Greece has excellent economists and planners at its disposal and could very well draw up a plan. The issue is not the plan [we disagree: unfortunately, it is an issue]: it's the implementation [of course that is important too].
   This is the point where the troika needs to get active again.  I am afraid, the Greeks of Hellas, the patriate Greeks as it were, cannot be trusted to correctly implement a development plan. Too weak is their understanding of the state as a common venture. Too engrained is the urge to pursue clientele and even personal interests at the expense of the common good.

We do not think that the Troika is concerned with a plan for Greece's development. Concerning the Greek elites or “bourgeoisie”, we agree. But as regards the “Greeks of Hellas", the “patriate Greeks”: again a thing of DNA? We think one has to be very careful with such “arguments” or ways of thinking…

It's not a question of DNA. It is simply a result of centuries under Ottoman rule, of failed German-inspired monarchies, of a civil war which saw a minority win over what was probably the majority, of decades of unashamed cleptocracy -- how could in such a country grow any identification with the state? 

Any plan would be fragmented and possibly loaded with pork in parliament.
We do not understand what is meant here (in italics)???

Sorry, an American idiom. It means that any draft legislation presented in parliament will be used by lobbies or individuals to include benefits or exceptions for special groups.

Even if it passed parliament in recognizable shape, it could be manipulated by the administration, and some of its funding would evaporate before reaching its destination.
   I am sorry for sounding so negative. I believe the patriate Hellenes are not yet up to such an exercise. Fortunately, there are an estimated 10 million expatriate Greeks plus 840,000 Cypriot Greeks who could help. The Cypriots, as a heritage from their days as a British crown colony, have a much better developed concept of the state and could advise their brethren.  Many diaspora Greeks would even consider it a duty and an honor to be called to help Hellas at a crucial time.
   And then, there are the creditors. In their own best interest they are willing to provide Athens with qualified advisers. These advisers on the payroll of the troika are a major gift to the Greek government.  However, these advisers should also have executive powers [do you really think that this complete loss of sovereignty is THE solution for Greece?] to ensure that the plan is not sabotaged or misused in the jungle of the Greek bureaucracy.

Yes, unfortunately, today's Greek politicians and their top bureaucrats, not only Syriza's, have lost their credibility.

The bureaucracy

   Without slashing and re-qualifying the administration at all levels, Greece will not be able to enter the 21st century and develop its economy.  In addition to the existing unemployment among those who studied fancy subjects for which domestic demand has vanished; in addition to those who practiced rich-country professions which disappeared with the riches, there will be hundreds of thousands of state employees slated to lose their jobs. In recent years, many if not most of those who lost their government jobs used the emergency exit of early retirement: this way of substituting pension for payroll (and continuing to live at state expense) is now being abolished due to troika pressure.
   The problem is not only that redundant bureaucrats -- many of them political appointees without qualification and interest in their job -- will be fired. Many more must leave to create vacancies for the new, better qualified staff needed to render the administration and its public utilities efficient.  Some of the old staff might be willing learn new skills (for instance use of computers [is there hard evidence they do not know how to use one and refuse to learn?]) through training; others will refuse to change their old ways. In any case, the unions, the old parties and the political Left will put up stiff resistance and the troika will have to exert utmost pressure to see the reforms implemented.

There is no hard evidence available but there is anecdotal material about the size and performance of the Greek bureaucracy.

We do not intend to justify the real existing bureaucracy and its ways to behave. But the real problem is wider: the lack of institutions. The French administration is quite strong and professional (at least in our opinion) but it works mainly because the French State is a very old one, having been built together with the French Nation (see the concept of “Etat/Nation”). Nothing similar happened in Greece. No chance for the Greek State to exist but only as a toy in foreign hands

I agree that the concept of the state is weak in Greece due to historical reasons. Also, the state has often been manipulated from abroad. British influence after WWII and during the civil war, American influence thereafter. The current salvaging operation is another case of foreign manipulation but this time many European countries are jointly involved and we should trust them that they are trying to find a solid and durable place for Greece in the Euro community.


   It is a good idea to convert sovereign debt into investment certificates, provided the primary surplus is positive and will not be syphoned off for other purposes (for instance military expenditure).

The Greek government has proposed, on his own initiative, to reduce military investment. This proposal has been refused by some institutions. We wonder why.

Well, that's a somewhat complicated issue. Jean-Claude Juncker proposed to drop a 400 million euro pension cut demanded by the troika if Greece cut military expenditure by the same amount. The IMF was said to be opposed to such swapping deals but later denied its stance. Yannis Bournous of Syriza, not Greece, spoke of a possible 200 million euro cut of military expenditure. Defense Minister Panos Kammenos of the "Indipendent Greeks" party is opposed to cuts. 

   At present, no investment is taking place.  Once the current crisis is overcome and the outlines of a new, stable and more efficient Greece appear on the horizon, potential investors will surface. Small scale, very small scale ventures would line up for investment certificate funding. Import substitution will become profitable for a wide range of goods ranging from feta cheese to mechanical spare parts. Since the government cannot  protect fledgling industries by introducing customs duties, the new import substituting industries will have to be extremely competitive, which means low wages for Greeks, legal and illegal migrants [that’s where they are now]. Once they have established themselves in Greece they could probably also be competitive in neighboring Italy and elsewhere.
 The question of price competitiveness is no relevant here. To develop Greek agriculture and industry, the matter is to organize networks, to think long term strategies, to conceive and produce goods and services the population needs, which would respect the environment.

Please see my postcript

Some thoughts about the economic revival needed in Greece  

to our preceding discussion.


   To sum up: I suppose the Greek GDP has already shrunk to the level it had attained before the euro was adopted. The bubble is gone. Wages are low enough not to pose a cost problem for future investments.  The big hurdle for any investor remains the bureaucracy. Here, a revolution is needed, both quantitatively and qualitatively.
   Contrary to an opinion shared by Finance Minister Schaeuble, German economist Hans-Werner Sinn and many others, I don't think a Grexit would help Greece. All impetus to reform the country would instantly be lost. Greece would simply continue practicing its oriental ways of life with no prospect of returning to the Eurozone any time soon. Agriculture would by necessity be revived and import substitution would become the main objective of new industries, but at an overall income level not much different from that of neighboring Turkey or Romania. The Tsipras government has recognized these dire prospects and therefore decided to fight for continued membership in the Eurozone.

We do not comment further the cultural “arguments”.

The "oriental way of life" is no "cultural argument" possibly to be excluded from an economic discussion. Here is why:

Until the mid-1950s, the Greek economy was embedded in the Middle Eastern economy. Greek and Lebanese companies dominated the economy of Arab countries in the Fertile Crescent and Egypt. A few thousand Greeks still lived in Turkey. Even in the deep South, the catering company of the East African Railroad was Greek. Egypt's only wine was produced by a Greek firm, Gianaclis, the cigarettes were labeled Maspero and Toccos. 

In April 1955, the Cypriot Greek assault on the Cyprus Turks created an opportunity for embattled Turkish President Adnan Menderes to provoke the anti-Greek pogrom of 6/7 September 1955 in Constantinople, Smyrna and Ankara which forced the last Greeks to flee. Around the same time, rising Nasserist nationalism in Arab countries convinced the ethnic Greeks to leave the respective country. 

As Greece gradually lost the Middle East, European tourism offered new chances. Greece tried to move toward the West and North, and was later embraced by the European Union. However, the new orientation takes time to trickle through the society and change its time honored oriental ways of life. 

Unfortunately, the decline of productive activities is not Greece specificity. This is why, we (in this case, Gabriel Colletis) have written in 2012 “L’urgence industrielle!”. We think that Germany’s situation is less bad than that of many other countries in Europe; this not because German administration is better organized or more professional, but because the German industry, at least for the moment, performs better.
However structural problems in Germany should not be denied.

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