Restructure to Recover

I am not an expert on the Greek debt crisis and have very little knowledge on the actual Greek economy itself. But that said, one really doesn’t have to be an expert here and with even a little understanding of the Greek economy and its debt crisis, it is abundantly clear that the Greek economy cannot survive on its own feet without a massive debt restructuring. And that massive debt restructuring definitely has to involve a significant amount of debt write-off.

I know how annoyed and angry I would be if someone borrowed my money and asks me to write that loan off. So I completely understand the anger amongst many Europeans by the talk of any debt write-off. But there is simply is no other way. Anything short of a debt relief and restructuring is only going to kick the can down the road. Again, a simple look into Greece’s economic data, the reforms implemented, the unemployment numbers, the under-employment numbers, the tax codes, pension promises, exports, imports, demographics etc. will easily make it clear to anyone with an objective mind that there is simply no way here without a massive debt restructuring.

In the current crisis, I am neither a fan of the EU nor Greece. Both have horrible proposals. Both have clearly different visions of a Greek recovery and both those visions are blinded by ideologies and politics. In all this, it is the people of Greece who are suffering the most.

Let me give you a simple example of one of the horrible reforms implemented by Greece under pressure from EU: Before the crisis, anyone who earned less than 12,000 euros annually paid $0% in income taxes. After the reforms, that number was reduced to 5000 euros. In an economy that is in deep recession, I don’t know how anyone can come with a plan to increase taxes on the very low-income people, without expecting that economy to plunge into depression. And this is just one example of the austerity madness. Greece’s economy depends 80% on its services industry. Anyone with a little knowledge of economics can point out that all the reforms implemented point to one thing – demand suppression. And so there is no surprise here that from a 9% unemployment in 2011 during the recession, it has now gone up to more than 25%, with the economy plunging from a recession to a depression.

Now, I understand that to be a member of the Eurozone, there are some rules. And those rules point to a very strict limit on the budget deficit a country can run and the debt path that the country can take. And I understand that the reforms demanded by the IMF, EC and the ECB in return for the bailout money were to steer Greece towards those rules. But one has to also look at how steering towards those rules during a recession would work for an economy. I am sure everyone at the table would have known that the internal demand would be drastically suppressed by those reforms. Fine, let the demand go down internally so as to reduce the debt and deficit. But then, what does one do in this situation to propel growth in the economy? They start to look for demand elsewhere and cater to that external demand, thereby putting the economy on a growth path again. But how can Greece cater to external demand when their currency has the same purchasing power as that of the currency that the extremely efficient Germans use. In effect, to cater to that external demand, Greece has to compete with Germany, France and other top-tier European countries with the same purchasing power and production cost. And how is this even possible for Greece, given their structural situation.

If there was a way for Greece to have devalued their currency, then all the reforms asked out of them by the IMF, EC and the ECB would have worked. Without devaluation, it should have been pretty clear that Greece would lead to a path of disaster. And that’s exactly what happened.

Now, currently, on the other side, Mr.Tsipras, the Greek prime minister, has not been very impressive in his proposals too. I never understood why, in a country where pensions consume 16% of the GDP, would he want to reinstate the Christmas bonus to low-income pensioners that was eliminated as part of the reforms that were already implemented (though he later dropped this proposal). And why would he even initially resist to phase out provisions to eliminate early retirement options immediately, rather than over the course of many years, as he had wanted, is a mystery to me (he later dropped this proposal too). One could only hope that these were negotiating tactics and not serious proposals - because these proposals are doomed to fail the economy, rather than propel it to higher trajectory.

Now, what if Greece leaves the euro and adopts its old national currency, the drachma? In my opinion, it’s too late and Greece is not ready for it. Manufacturing (cement is a main example), construction, shipping and tourism are the major industries in Greece today. There was a time not long ago, in fact, just a few years ago, when China and other major countries went on a public spending binge, which would have helped Greece to cater to these demands, all the while also restructuring its economy. But that time has now passed. In fact, I am afraid that all these industries that Greece is dominant in is about to go through a period of slow growth worldwide.

Greece also imports a lot more than it exports. 100% of its oil demands are met through imports. By some estimates, 40% of the food Greeks consume is imported. And a lot of medical supplies are imported.  Furthermore, barring the shipping industry, Greek exports are mainly to other European countries – from which I wouldn’t expect a lot of demand growth in the coming years. And remember, from a productivity standpoint, Greece is in many respects an aging population - more than 20% of the Greek citizens are 65 years or older and many younger, educated Greeks have already left the country. If Greece returns to drachma, we can be assured that it will be shut out of the global financial system for years to come, with inflation running sky high and capital controls sucking the economic blood out of the most vulnerable people. And in many respects, Greece will still have to depend on European money - this time only classified as a "humanitarian aid".  

So the bottom line is that – irrespective of which road is taken – more austerity by staying in the Eurozone or returning to drachma, Greece has a tough road ahead with unimaginable economic pain. Given this painful situation, and considering the larger political and economic benefits of a unified Europe, the best that can be done now is a massive debt restructuring with a significant debt write-off. I hope Europe’s leaders will find the political will to do the right thing. And if Greece gets such a deal, I hope they don’t mess it up again!