Money Alone Won’t Solve the Greek Crisis

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By Michael Liebig


In early May, a poll conducted for the magazine stern showed that 43% of the Germans polled oppose German financial aid to Greece, while 51% find it acceptable. On May 26, the Frankfurter Allgemeine Zeitung titled an article on the same subject “Swelling Disgruntlement”. However, the disgruntlement is the German population has not yet reached critical mass. The ambiguous findings of the stern poll show that there is no general emotional disposition against the peoples of the European “South”. Germans have to a significant degree been “Mediterraneanized” over the past decades; they know from their vacations (sic) there that Greeks, Spaniards, Portuguese or Italians – and equally so Turks – are not exactly “lazy”. And, Germans have some memories about being broke: after World War I, after World War II and in 1989 East Germany was bankrupt.

It seems that the latent frustration over financial aid to Greece has more to do with the way the political class has been handling the issue of euro currency system – which meant giving up the deutschemark. When the Euro replaced the DM in January 2002, Germans were told that the new currency was firmly based on the Bundesbank’s “stability philosophy”. And, they were told that the Maastricht Treaty prohibits transfer payments among Eurozone member countries.

Now, all this is being put in question. Consequently, Germans feel rather irritated about the dismissive attitude on previous assurances by the political and financial elites. A group of respectable economists, the Bavarian CSU parliamentarian Peter Gauweiler and a number of private citizens have filed suits at the Constitutional Court which aim at blocking German transfer payments to other Eurozone countries.

Collective Liability for a Homemade Problem?

The Maastricht Treaty does permit transfer payments in the case of unforeseeable emergencies like natural disasters. However, the fiscal and financial crisis in Greece (and other countries of the southern rim) was neither unforeseeable nor due to a natural disaster – and also not a consequence of the 2007-2009 international financial crisis. In a DLF radio interview on May 28, Johan Galtung, the brilliant, left-leaning Norwegian political scientist, said: “Greece thought it could get away with everything… No question, they have really milked the EU over the years.”

The crisis in Greece (and in other countries of the southern rim) is homemade: Joining the Eurozone currency union meant easy access to cheap credit which mostly went into real estate speculation and a mushrooming state sector, but not into the renewal and expansion of the manufacturing and technology base. And here, as we will see in a moment, lies the core problem.

Nevertheless, with the May 2010 “European Financial Stability Facility” – to be institutionalized as the “European Stability Mechanism” in 2013 – the Eurozone has unquestionably become a North-South “transfer union”. That means Eurozone countries with very high public debt, which can no longer (re-)finance this debt on (private) capital markets, receive fresh credit from the EU (and the IMF) plus the European Central Bank. In May 2010, Greece got a €110 billion credit line and will likely receive another one after the upcoming EU Summit June on June 23-24.

Jean-Claude Juncker, Luxembourg’s prime minister and head of the group of 17 Eurozone finance ministers, is technically correct, when emphasizing that so far European tax payers have not spent an eurocent for the financial aid to Greece. However, the word “sofar” is what matters here.

There is little doubt that sooner than later, the Greek sovereign debt has to be “restructured”: Either “softy” through extended maturities and lower interests or through a “haircut” – writing-off a percentage of the total debt.

Who would suffer what losses? The magazine Der Spiegel has listed Germany’s exposure to Greece’s sovereign: Private financial institutions – Commerzbank and Deutsche Bank – have roughly €4 billion in Greek securities on their books; a “haircut” would be ugly for their balance sheet, but no existential threat. The exposure of the big insurance companies to Greek debt is minimal. Public-cooperative banks have an exposure of roughly €3 billion; again an ugly loss, but no existential threat. However, the real big lending to Greece has come from state-owned banks or financial institutions for which the German state is liable: the KfW bank (€8,4 billion), the Hypo Real Estate “bad bank”(€7,4 billion), and the WestLB “bad bank”(€1,4 billion). What the exact costs of a “haircut” in Greek sovereign debt would be for the German state, is difficult to calculate, but it would certainly not be in the “peanuts” category – and increase Germany’s public debt.

Another question is the European Central Bank’s lending to Greece. According to a May 25 report in the Frankfurter Allgemeine Zeitung, the ECB has bought Greek (state) securities worth €40 billion and is holding another €50 billion in Greek securities as collateral for ECB credits to Greece. Again, it’s difficult to calculate what a Greek “haircut” would cost the ECB (in which the Bundesbank has a 25% stake), but it would certainly feed inflation as the ECB is “printing money” when buying or collateralizing sovereign debt.

The Eurozone being transformed into a North-South transfer union translates into two likely, if not inevitable consequences: increasing public debt levels in fiscally stable and economically stronger Eurozone countries and increasing inflation in the Eurozone as a whole.

Why the “Transfer Union” Is Here to Stay

Nevertheless, in my opinion, the Eurozone transfer union is a reality. The financial aid to fiscally and economically weak Eurozone countries will be permanently institutionalized with the “European Stability Mechanism”. And I doubt it very much that the German Constitutional Court will stop it. The main reason is what the Olli Rehn, the Finnish EU currency commissioner, told Der Spiegel: “The euro is more than a currency; it’s the central political project of our community.”

In addition, there are weighty geo-economic and geopolitical factors involved. Germany is the main net “paymaster” for the European Union and the Eurozone, but Germany is also the net profiteer of the European Union and the Eurozone. In a way, Germany is to EU what China is to the United States. Both export capital to heavily indebted and economically fragile countries – so that they may buy their respective goods and services. What is happening within the EU is indicated by the current account balance: the difference between export of goods, services (including revenues from tourism), financial earnings and remittances on the one side and corresponding imports on the other side. Within the Eurozone, Germany, the Netherlands, Luxembourg, Austria, Finland and the three Baltic states have a positive current account. The rest, including notably big countries like France, Italy, Britain or Spain have – rather enormous – current account deficits. For the EU as whole the current account balance is roughly even. Sofar, for Germany, this contradictory configuration has worked well.

One should also consider that, if there is a North-South divide in Europe, there is also a North-South divide within Germany. Bavaria, Baden-Württemberg and Hessen are – in economic and fiscal terms – significantly stronger than the Northern states. And the Western states as a whole are significantly stronger than the Eastern states, the former DDR. In a way, Germany is a transfer union: the South is subsidizing the North and the West the East.

So, it’s basic geo-economics: Germany needs Europe as a cohesive economic space. And preserving this cohesive economic space has a price tag: the transfer union. In addition, there is a global geopolitical/geo-economic dimension: Only a cohesive Europe can remain competitive with respect to the other big actors on the world stage: “continental” powers like China, India, Brazil and the United States.

Let’s take the Greek example. In October 2010, The Chinese Prime Minister Wen Jiabao visited Athens. An agreement on “strategic cooperation” was signed, and in front of the Greek parliament Wen said: “We are sure that Greece will overcome the present crisis. And we are ready to help unselfishly.” China has bought Greek securities and offered investments in Greece, for example in the port of Piraeus. Obviously, China views Greece as a key economic entry point for South Eastern and Eastern Europe. What the Chinese are doing here is perfectly legitimate, but of course it is not exactly “unselfish”. And the EU surely does know that – which should help to explain why, equally so, the transfer of EU aid to Greece is not exactly “altruistic”, but dictated by geopolitical and geo-economic realities.

What Really Matters: The Real Economy

However, I think, that the North-South transfer union – as presently designed – is dysfunctional. Financial aid as such, even if very tough conditionalities are attached – vis-a-vis clientele politics, corruption, bureaucratism, tax evasion and shadow economy – will not work. The real problem in Europe’s South is the deficiency of its manufacturing base and technological competitiveness. The pillars of the Greek economy are agriculture, shipping and tourism. These are important economic assets in the global(ized) economy, but the potential for high-technology manufacturing and services, logistics, the IT field, or wind and solar power is evidently underdeveloped.

The way to stabilize Greece financially, is to upgrade its real economy. And, Greece’s economic modernization would obviously have to focus on small and medium-sized enterprises (SMEs).

The concept that the way out of the Greek crisis is the modernization of its real economy, seems to gain traction in the German political debate. Michael Diekmann is the CEO of the world’s largest insurance firm – Allianz. In an interview with the German daily Bild on May 23, Diekmann said: “Europe must help the weak countries. The consequences of a Greek default would be uncontrollable… [But] money alone cannot solve the Greek problem. We need an industrialization plan for Greece, a kind of Marshall Plan… That would really help the Greeks to get back on their feet.”

Matthias Kollatz-Ahnen, Vice President of the European Investment Bank (EIB) in Luxembourg, told the Süddeutsche Zeitung on May 21 that Greece cannot rely just on tourism but needs to develop and manufacture “new and competitive products”. He also referred to the Marshall Plan as model for revitalizing the Greek economy. Similar assessments have been made by several leading economists and economic research institutes in Germany.

Wolfgang Schäuble, the CDU Finance Minister, said in a May 26 interview with Handelsblatt that a Marshall Plan is not exactly applicable to the current situation in Greece. Certainly a true observation: WWII and the Greek Civil War ended more than 50 years ago. But Schäuble added that in respect to “catalyzing economic growth” in Greece, “we in the EU have to be more creative. It’s true, financial measures alone won’t solve Greece’s problems – we need a medium to long-term growth perspective. One element could be Greece’s energy policy focusing more on solar energy which could be backed by the EU.”

It seems that the issue is not whether or not to help Greece, but how the assistance can be shaped so that a technologically competitive Greek economy will emerge that can stand on its own feet. Ultimately, financial and fiscal crises are the consequence of a “sick” real economy. And, equally so, a “healthy” real economy is the way to get out of financial and fiscal crises. In order to get there, the Greek people will have to tighten the belt. Irrespective of blatant social inequalities, the current productivity of the Greek economy simply cannot sustain the established standard of living. Afterall, in recent years we had grave financial and fiscal crises in several European countries – and a lot of belt-tightening along with it. None of these countries perished, nor did the EU.

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