More lessons from Greece

Martin Henry, Contributor

There are more lessons to learn from the Greek debt crisis than that
government should seek to balance people's lives so they won't riot.

Prime Minister Portia Simpson Miller, addressing the American Chamber of Commerce of Jamaica (AmCham) in Montego Bay a couple of weeks ago, told her audience: "We are committed to balancing the books at the same time that we balance people's lives. Looking at the Eurozone, in particular Greece, it shows that people, whatever their income level, will react violently if it seems that government is not taking their interests into consideration. One of the best ways to do this is to put more people to work, enabling them to take care of their families and restore their dignity."

A paternalistic Greek state, like Jamaica and many other countries around the world, borrowed heavily to sustain an unaffordable lifestyle for the population and ended up in the current global recession, unable to generate enough revenue to service its debts - or to balance its people's lives. Greek debt now stands at around 160 per cent of GDP. The International Monetary Fund (IMF) thinks 120 per cent is the maximum sustainable ratio of debt to GDP. The Jamaican ratio of debt to GDP is now running at 131 per cent.

deficit-laden model

The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007, averaging a growth rate of 4.2 per cent per annum, driven by foreign direct investment. An apparently strong economy and falling bond yields allowed the government of Greece to run large deficits which have been part of the Greek social model since the restoration of democracy in 1974.

After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public-sector jobs, pensions and other social benefits.

Currency devaluation initially helped finance the borrowing. After the switch to the euro, the devaluation tool could no longer be used. But Greece was able to continue its high level of borrowing because of the lower interest rates government bonds in euro could command, in combination with a long series of strong GDP growth rates. Problems, however, started to rise, when the global financial crisis set in, starting in 2008. The crisis had a particularly large negative impact on GDP growth rate in Greece because two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn, with revenues falling 15 per cent in 2009.

Another consistent problem Greece has suffered from is the collection of taxes. Each year it is several times below the expected level because of widespread evasion.

To keep within the Eurozone monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees for arranging transactions that hid the actual level of borrowing.

The purpose of these deals, made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the European Union (EU). The cooked statistics revealed that Greece, from 2000-2010, had exceeded the euro's stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0 per cent of GDP, and also the debt level clearly exceeding the recommended limit at 60 per cent of GDP.

haunting magic

Earlier this month, the BBC ran an online story, 'How magic made Greek debt disappear before it joined the euro'.

The magic could make inflation and the deficit disappear. The case of the Greek state railway was cited in the story. It was losing a billion euros per year and had more employees than passengers. A former minister of transport publicly declared that it would be cheaper to send the passengers by taxi! But the authorities used a neat conjuring trick to make the problem of the railway losses disappear: The company would issue shares that the government would buy. So it was counted not as subsidy expenditure, but as a financial transaction. And it did not appear on the budget balance sheet.

When a new centre-right government took office in early 2004, the budget minister summoned senior staff of the ministry and asked them to give him details of the budget that had been passed just two and a half months before without any fear about victimisation. It turned out that the difference between the real deficit and the published one was huge, 8.3 per cent vs 1.5 per cent. But Greece was staging the Olympics that year and the government didn't want to upset the whole population and have strikes and protests. So the books remained unbalanced. Instead of reforming public finances, the country continued borrowing heavily to plug the deficit. And the banks were lining up to lend.

Then the bubble burst.

As The New York Times reported last Wednesday (February 22), the day after Greece got the most recent in a series of bailouts, "Over the last decade, Greece went on a debt binge that came crashing to an end in late 2009, provoking an economic crisis that has decimated the country's economy, unleashed increasing social unrest, and threatened both Europe's recovery and the future of the euro."

The price of the aid has been a series of austerity measures meant to cut the country's bloated deficit and restore investor confidence. Greece cut the pay of its public workers - a quarter of the workforce - by 10 per cent and laid off some 30,000, but continued to miss deficit targets as its economy sank deeper into recession, shrinking by an estimated 5.5 per cent in 2011. Taxes were increased, wage bargaining suspended, and pensions above 1,000 euros per month were shaved by 20 per cent. Privatisation of state holdings was demanded. And pampered public-sector workers and other citizens have reacted violently.

austerity plan

The new austerity plan includes:

22 per cent cut in minimum wage from the current €750 per month.

Holiday wage bonuses perma-nently cancelled (two extra months of full wage being paid each year).

150,000 jobs cut from state sector by 2015, of which 15,000 must be cut by the end of 2012.

Pension cuts worth €300 million in 2012.

Changes to laws to make it easier to lay off workers.

Health and defence spending cuts.

Industry sectors given the right to negotiate lower wages depending on economic development.

Opening up closed professions to allow for more competition, particularly in the health, tourism and real estate sectors.

Privatisations worth €15 billion by 2015.

During the parliamentary debate on the measures demanded by the troika of the European Commission, the European Central Bank and the IMF, massive protests again rocked the country, leaving stores looted and burned and 120 people injured.

Reminiscent of the Jamaica Debt Exchange programme, private creditors will be required to accept a reduction in the value of bonds by as much as 70 per cent to reduce Greece's debt stock by the targeted amount of €100 billion. And, in the face of murmurings about renegotiating the deal, written commitments have to be filed by the main political party leaders guaranteeing their continued support for the austerity programme both before and after the April elections.

CNN ran an online feature, 'Human cost of Greek crisis', in which nine professional workers and students told their tales of woe brought on by the debt crisis.

Some economists and the Greek trade unions are of the view that the rescue plan is doomed to fail. As Prime Minister Simpson Miller and her Government are likely to argue, these objectors argue that by making people poorer, the measures will simply shrink the Greek economy, reducing tax revenues even further and increasing the deficit. But the troika counters that there is no choice - spending needs to be cut, even if it hurts the economy in the short term. And increasing competitiveness by lowering wages, for example, and the cost of doing business will attract investment and, thereby, boost the economy and taxes.

are we comparable?

Jamaica is not Greece. The Greek economy is the 32nd largest in the world by GDP, or 37th largest by purchasing-power parity. The country, as a member of the Eurozone, as Prime Minister Simpson Miller noted in her AmCham speech, is locked into the euro currency and cannot readily be allowed to fail because of the potential dire consequences to the Eurozone, the EU and the global economy already staring down the prospects of a new recession.

The tiny, marginal Jamaican economy, which has made many of the Greek mistakes in fiscal management and public administration, is expendable to everyone else except Jamaicans. The new Government has given assurances of no major job cuts from the public service and of a new agreement with the IMF with less pain than the rather mild old agreement when compared to the bitter medicine poured down Greece's throat.

The Jamaican Government has made budget cuts in the most recent Supplementary Estimates, but at the same time is running JEEP. With so many elements of the Greek profile in our past and present administration of the country's affairs, it is left to be seen if we can magically avoid the Greek pain and quietly balance the books while balancing people's lives.

Martin Henry is a communication specialist. Email feedback to columns@gleanerjm.com and medhen@gmail.com.