And what about Greece? Is the Greek crisis quite separate from that of the rest of the eurozone? A meltdown of our own making?

17/04/2011 by

Regular commentator Jerry Goldstein sent me a comment on yesterady’s post, the one entitled It’s the (German) Banks, stupid! His main point is that, whatever Europe does to sort out its mess (regarding public debt and banking troubles), Greece finds itself in a different ball game. The country, Jerry, argues is in a state of collapse and nothing short of a miracle, or a revolution, can stabilise it and put it back on the straight and narrow. After copying Jerry’s communication (for your benefit dear reader), I offer my reply:

Jerry Goldstein: Yani…I agree with almost everything you have said here, albeit I find your statement that “the recapitalisation of banks by the EFSF in a manner that allows Europe, once and for all, to cleanse its banks of worthless titles and, soon, to return them to the private sector squeaky clean and ready to do business” is Panglossian to the extreme. But my main issue is that while the crisis may be a housing and banking crisis in Spain and Ireland, and a budget crisis in Portugal, in Greece we are witnessing something far more profound, in effect the final collapse of a dysfunctional and corrupt state. There is basically civil war in Keratea with the police (unfairly) called upon to perform military duties, ministers of state are physically attacked with impunity, tax evasion remains rampant, and the ruling party is in complete disarray and basically seems to be capable of nothing more than putting out press releases. With the economy crumbling, we will soon be witnessing the first cruise vessels in the decabotage program, being turned away by the unions. The issue in Greece is how to construct a functioning, quasi modern state with the consent of the electorate. Without that, rescheduling is like giving vitamins to a dying patient. That is the “political” side of “political economics” and what really needs discussing.

My reply: 

Jerry, let me start with Greece. We are in meltdown mode, undoubtedly. As always, there is a silver lining to this crisis: the end of, as you put it, a corrupt equilibrium that has been propped up for many, many decades (since at least the fifties) by an unholy alliance between a corrupt public sector and an equally crooked private sector. What will follow the violent destruction of this equilibrium is anyone’s guess. The future, as seen from within an historical rupture (like the one we find ourselves in), is unknowable.

Having acknowledged your main point, let me press on with my own ‘obsession’: Greece is not as much of a special case as you seem to believe. Greek exceptionalism is grossly overrated. Take Italy for instance. It is not terribly different to Greece in terms of the said equilibrium between a rent seeking private sector and a rentier state sector. The only difference between Greece and Italy is the latter’s industrial north which has so far prevented Italy’s spreads from exploding simply by giving markets a modicum of hope that some surpluses can be channelled toward the state’s coffers. I could go on with further analogies with parts of France, Spain, Portugal and, indeed, Ireland. But I won’t. Instead I shall confine myself to a simple point: The structural reforms that Greece needs will never happen while the country is in a tailspin, a freefall that it cannot arrest in the (admittedly painful) manner in which economies possessing their own currencies can (e.g. sharp devaluation etc.).

In this sense, as I often say, I distinguish between necessary and sufficient conditions for Greece’s recovery. A change of direction by the eurozone as a whole is what I define as the necessary condition that will give the whole of the  eurozone, and Greece in particular, the requisite breathing space. Of course this necessary condition for overcoming the crisis is by no means sufficient. Europe could restructure our problematic currency union, put in place the missing institutions, sort out the banking crisis etc. and Greece could still end up a failed state. To save itself, the Greek nation must effect deep, uncompromising reforms in the way we do things. What reforms? I have had a chance to think about this pressing question and have put together my suggestions here (sorry about the Greek but it was addressed to an exclusively Greek audience). To give you an idea of the gist of these suggestions, let me sum them up as follows:

  1. Cutting the Gordian knot of bureaucracy by legislating a complete ban on any public sector agency requesting from citizens information that some other public sector agency possesses.
  2. A two tier public sector system: Without firing public sector workers (a criminal error during a vicious recession), ring-fence the eager and better skilled public sector workers and create within each department a first class taskforce – complete with incentives for the rest to join it after re-training and proper evaluation.
  3. Legislating that all discussions between taxpayers and tax authorities are recorded (just like police interviews are in the UK) and the recordings be made available in court at the request of either party.
  4. Large cuts in tax rates. In particular, a drop in VAT from 23% to 15% and of corporate tax from 24% to 15% (for SMEs with up to €100 thousand annual revenues) accompanied by a large scale publicity drive to make the point that the state is doing its bit and that now it is the citizens’ turn to do theirs.

These are just snippets of the kind of reform that comes to mind as part of a new drive to capitalise on the crisis and bring Greece out of its slumber. They are hopelessly incomplete but give a flavour of what might work.

Lastly, let me take up your comment that of my ‘Panglossian’ description of how the EFSF’s forced recapitalisation of the banks (which we propose in the Modest Proposal Version 2.2). There is, I grant you, an element of exaggeration in my description; especially the part where I predict that the banks would come out of this process squeaky clean. You know better than me that squeaky clean banks are a contradiction in terms. Clearly, I exaggerated to make the point that their recapitalisation and ownership shake up would create a far more palatable banking sector – just as the similar process in Sweden in the 1990s did.

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