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FALSITY MOST FOUL: Why Jean Claude Juncker is precisely, and inexcusably, wrong regarding the Greek crisis and its causes

07/07/2011

Jean Claude Juncker has, in the past, taken courageous positions that exuded far-sightedness.[1] However, his latest intervention regarding the Greek debt crisis reveals a serious inability to grasp the euro crisis in its entirety.

On 3rd July he told Focus Magazin that “[t]he sovereignty of Greece will be massively limited”, referring of course to the loss of control by Athens over its own affairs, primarily the privatisation process recently agreed to by Greece’s Parliament. While the Greek press made a great deal of this statement, no one can fault it in terms of its descriptive accuracy: Once the Greek government agreed to the logic of a massive new bailout on condition of unprecedented asset sales, cuts and tax hikes, it forfeited the last remnants of authority over its own policies. Greeks may lament this loss but no one can fault Mr Juncker for calling a spade a spade.

Had Mr Juncker stopped there, his interview would have been unremarkable. But he did not. He went on to make a recommendation of how Greece’s affairs ought to be run by the EU and, to boot, he continued with a diagnosis of the Greek calamity’s causes. I take these two points one at a time:

1. The Treuhandel Plan

Reflecting a widespread scepticism about the success of Greece’s privatisation program, Mr Juncker reportedly said: “For the upcoming wave of privatisation [the Greeks] need a solution modelled on the German Treuhandel.” The latter was a West German agency that was set up in order to privatise about 14,000 East German companies.

The first point to raise here is that one would have expected Luxemburg’s Prime Minister to press into service a successful parallel. Alas, the Treuhandel experience was one that can only be described as an unmitigated disaster.  Its remit was to smoothen the transition from public to private ownership with minimal job losses and at a reasonable cost both to taxpayers and to the formerly East German society. By these criteria, the Treuhandel experience failed hands down. It produced mass unemployment, led to the demise of potentially profitable firms, turned much of Eastern Germany into wastelands and, as  if that were not enough, the organisation went broke itself!

Of course, many Germans saw the Treuhandel experiment not as an exercise in transition under minimal economic and social costs but, rather, as a short sharp shock by which to destroy all remnants of East Germany’s industrial past and to start afresh. Either way, Mr Juncker’s use of the Treuhandel parallel seems inappropriate and deeply worrying. If he meant it as a  successful example of fast, large scale privatisation, one wonders how he would define a failed one – and what gargantuan price he expects Greek society to pay for the loans that it is currently receiving. On the other hand, if he thinks that the point is not to create a vivified Greek private sector out of the  remnants of Greece’s public assets, but instead to create a Hellenic wasteland as punishment for past profligacy, he errs in a most foul manner: For even if there is no moral issue with turning Greece into scorched  earth, such a ‘policy’ will turn back and bite savagely the Northern European hand that let it out of the bag. A scorched Greece, unlike Eastern Germany, will not receive the fiscal transfers of Eastern Germany after its very own Treuhandel. Interwoven as it is to the rest of the periphery and (through its banking sector) to the French banks, this means that the debt-banking crisis will get progressively worse and, therefore, at some point Germany will leave the euro. Mr Juncker, not being a politician who relishes the end of the euro, will then regret dearly his careless account of the Greek crisis.

2. Mis-diagnosing the Greek debt crisis

“[The Greek crisis was] largely self-made​​. Between 1999 and 2010, wages rose by 106.6 percent, even though the economy did not grow in equal measure. The wage policy went completely out of control, while productivity was not taken into consideration,” said Mr Juncker.

This is a typical case of mistaking a correlation for a causal relation. Yes, it is true that the extremely low average Greek wages of 1999 rose in nominal terms in the euro-decade that followed, leading to the debt crisis in 2010. But to argue that the rise in wages caused the debt crisis is akin to arguing that the frenzy of bird activity  prior to the sunrise causes the sunrise.

Looking at wages in Greece over that decade, the cool-headed observer observes two interesting phenomena: First, incomes from dividends and property rents rose four times as fast as wage incomes (in nominal terms). Secondly, inflation in Greece was always significantly higher than Germany’s, France’s  etc. Moreover, while the well to do Greeks faced negative inflation (as interest rates, mortgage rates, luxury good prices etc.) fell furiously, the low and middle  wage income  earners faced inflation rates approximating 10%. All in all, this explosion in inequality was like a time bomb in the foundations of the Greek social economy. To catch up with the all pervasive consumerism, where mainly German products were tempting them to accept the credit cards thrown at them, low to middle wage earners succumbed. Thus, the ever increasing inter-European balance of trade imbalances, accompanied by the easy access of the Greek government to cheap finance, gave rise to a borrowing bubble that, nevertheless, failed to raise the majority of Greek wage earners beyond the level of near-poverty.

It is in this sense that Mr Juncker’s diagnosis is precisely wrong: If anything, the real cause of Greece’s current woes were the seriously low real wages of most Greeks, in conjunction with the inability of firms (both private and public) to invest in fixed capital goods. Moreover, the almost tactless point must be made that the sectors which were dominated by German owned companies (following a series of takeovers) were the ones in which productivity gains were the lowest of the low.

Conclusion

Mr Juncker also said, in the same interview, that Greeks should not be “insulted” so much as encouraged, supported and looked after. This statement manages to pack three impossible contradictions: Creating a Greek wasteland that will, in the absence of analogous fiscal transfers, make post-Treuhandel East Germany look like heaven on Earth, is hardly a form of support nor an example of parental care. Moreover, to suggest that Greeks must be encouraged down that road packs the connotation that Greeks are mindless enough to be persuaded to book their own fare to hell.

[1] See his joint letter to the FT with G. Tremonti, the Italian finance minister, in which they adopt policy recommendations not too dissimilar to our very own Modest Proposal

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