Monday, 3 October 2011


Greece is now a symbol of everything that has gone wrong with the political economy of finance capitalism in the early 21st century. That it receives so much press around the world, considering that it was almost never in the news, is indicative of its exaggerated importance that is in essence symbolic, psychological for investors and politicians alike. Why are markets throughout the world rattled by news from Greece, why is the euro falling and gold rising, why is the world economy so impacted considering that this tiny Balkan country represents about 2% of the EU's GDP?

How can there be a rational explanation that a $300 billion Greek economy in a world whose GDP totals about $60 trillion account for massive and chronic problems and lingering uncertainty about global economic recovery? The answer may be that the world economy is integrated very tightly, but consider $300 billion economy impacting $60 trillion. Does this seem rational? Greece is a mere symbol, the ugly wart on the sick elephant producing the wart. Even if the ugly wart is removed, would the elephant produce more warts, would it remain sickly, and could it be that everyone knows the problem is the elephant and the wart only a symptom more easily treated than shooting the sick elephant?

It is true that in the course of the 1980s Greece had a rise in per capita GDP of about $3000, in the 1990's $4000, but in the first decade of the 21st century, per capita GDP skyrocketed to more than $10,000. This would have been otherwise a great development, if the rise in per capita GDP represented a commensurate rise in productivity and steady current account deficit. However, Greece was raising its per capita income through massive borrowing amid a low-interest rate environment. 

Banks were throwing money around without imposing tough conditions and asking about collateral either of individual or institutional borrowers, private or public. Greece was importing about 20% more than it was exporting, thus accumulating large current account deficits that it could never service. In short, Greece became a consumer society that over-consumed and under-produced, with capital concentrated in the top 25-20 percent of the population, despite a middle class expansion.

Interestingly, this is a trend across many Western and Eastern countries. Greece has a much weaker and monocultural productivity base - tourism, shipping and housing construction accounted for the bulk of GDP - while other countries relied on more diversified productive sectors such as mining, agriculture, energy, and manufacturing. Add the fact that Greeks have a culture of 'baksheesh capitalism' (one of the most corrupt economies on the planet) and doing everything not a minute before mid-night, but a few hours if not days after midnight, and you have a prescription for disaster.

Why did the EU permit Greece to sink so deep in debt, to swim in current account deficits and public debt that can never be serviced, to continue with a regime of tax evasion and one of the worst cases of official and private sector corruption in Europe? Why did EU and Europeans banks give money to an addicted gambler who blatantly and repeatedly lies and cheats so he can keep on gambling?

The latest news from Greece goes from bad to worse and this is just the beginning. That it has missed the deficit reduction target for 2011 and it will do so again in 2012 is the least of the country's problem. I have been saying from more than a year that the numbers do not add up for this country of an estimated GDP at 220 billion euros and debt of about twice that amount will entail that either there is a massive debt restructuring - in essence 50-70 percent of debt written off - new roll-over debt to be paid by long-term bonds (30 to 50 years), and a massive dose of investment and development capital to create jobs and growth that would permit the government to service debt.

The other option for Greece is exit from the eurozone and revert to its national currency the drachma, with the promise that at a later date it can rejoin the eurozone once its finances are in order. This is the scenario that some financial institutions and private economists and journalists see as the most likely one. But even if this scenario comes to pass, would the world economy celebrate the joys of the 1990s? If not, why the pessimism about Greece when the world economy itself is ailing in the face of a double-dip recession owing to slow growth?

Greece is a tiny country with a GDP lower than some fortune 500 corporations, a country that really does not matter nearly as much as many governments, banks and economists give it credit.  However, Greece, like Lehman Brothers, is now the symbol of everything that has wrong with finance capitalism and the state's role in (mis) managing the political economy. Many people outside and inside Greece want to see an end to the endless cycle of downward spiraling austerity measures, because they fear the elephant's ugly wart is now spreading to infect the entire elephant. At this juncture, those in the private and public sector with vested interest in finance capitalism need  morale booster that an exodus of Greece from the eurozone can provide. The psychology of the markets and perhaps the 'real economy' can change if that Greek wart on the global elephant were removed.

Greece will probably remain in the eurozone and it will continue cutting deals with France and Germany, while trying to lure Arab and Chinese investment and frantically introducing new austerity measures that bring living standards closer to those of the Northern Balkans. Greece leaving the eurozone will result in an estimated 20-30 percent losses in market values around the world once it takes place, but there will be a quick recovery thereafter as EU focuses on saving the rest of its members, especially, Italy and Spain, given that Portugal and Ireland are small enough to manage. For political and economic symbolic reasons, Greece is damaged goods beyond repair to the degree that even the most ardent defenders of EU solidarity will tire of its chaotic financial and economic situation that they will demand wart removal to save the elephant. The real question is whether the elephant can be saved.

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