EXORBITANT THE GREEK?

As the Greek tragedy of the eurozone crisis plays out with Angela Merkel as Electra and  Nicholas Sarkozy as Orestes in pursuit of revenge for the death of Agemenon (you can choose which object or subject is appropriate in the current re-run of the play by Sophocles), the recent death of the director of the film, Zorba the Greek, Michalis Kakogiannis, reminds of the complexity that is Greece.

The romantic response by the British  to this 1964 film led to the rise of visitors from the UK and elsewhere in Northern Europe and the growth of a full-blown tourist industry. Yet this early 1960s rose-tinted view of one of the world’s oldest civilisations should not blind us to the country’s troubled history and politics. And, in the current economic reporting of the position of Greece in the eurozone crisis, this  is overlooked.

The entry of Greece into the European Union in 1981, like that of Spain in 1986, was an act of political modernisation in order to maintain a democratic bulwark against  the return of military dictatorships. For both countries joining the eurozone at its onset appeared to be a one way economic bet by which complete democratic modernisation would be complete.

A better cinematic reference point to modern Greek political history is Z made in 1969 and directed by Costas-Gravas. It is an account based on the assassination of the politician Grigoris Lambrakis in Thessaloniki in 1963. This tragic event paved the way for the military coup by the “Regime of the Colonels” in 1967 which lasted until 1974.  The current combination of tragedy and farce that is the contemporary position has to be understood in the context of recent modern history.  The final title at the end of the film, the Greek word Zi (he lives) appears, referring to Lambrakis. 

The politics of the eurozone, in respect of Greece and the other troubled economies is the biggest challenge. As Adam Posen, the academic economist who is a member of the Bank of England’s Monetary Policy Committee, recently stated that the economic solution to the eurozone crisis is fairly straightforward – it’s the politics and accompanying will that is the problem.  This may be a little sanguine given the fundamental design flaw in the eurozone, That is, it is not an optimal currency area (like the UK and the US) because there is not a system of fiscal transfers to compensate for the immobility of labour and capital across national boundaries.

According to the US-based economist, Ronald Mackinnon, the lack of a fiscal system should not matter if a comprehensive and  integrated financial system exists.  In the case of the EU, the Single European Market (SEM) and the Financial Services Directive (FSD), full integration and comprehensive coverage are some way from being complete . The essential issue for the troubled economies in the eurozone is that the trade-off of the benefits of membership are unequal. In the case of the eurozone, the trade-off is between productivity convergence and price level convergence. In the graphic below, the peripheral economies have tended to converge on rising price levels but not on increasing productivity gains.

The relative position of the wealthy “North” compared to the poorer “South” shown above reflects the gains and losses in competitiveness. This representation is reinforced by evidence of the index of Germany’s relative unit labour costs against the periphery (the year 2000 = 100).  In other words, the South is actually bearing the costs of the benefits of the North. This view flies in the face of that often held by “The Markets”.

The paradox in the eurozone crisis is that “The Markets”  have become a hierarchy that seeks to appropriate sole authority and do not operate as conventional markets . But that authority is undermined by it acting like a sea world theme park Orca that flips and flops according to who is feeding its frenzy.  In respect of Greece, the Orca’s response is puzzling at one level, given the actual scale of the problem. Greece accounts for 1.7% of EU GDP and its total public debt is 2.88% of EU GDP. So, that if a tsunami swept away one of Europe’s oldest civilisations, the eurozone would not ultimately suffer much in the future. The problem is that the Greek pinhead is bending under the weight of the elephant that is the leveraged debt of the creditor European banks.  It is estimated by the IMF that the exposure of European banks to Greek debt is €300bn (around  2.4% of EU GDP). So the citizens of the EU’s periphery are effectively paying for a banking crisis through a fiscal crisis that was beget by a financial crisis in the first place with banks as prime culprits.

As Posen also noted, you can’t get blood out of a stone as the citizens of Greece are being impoverished by an ideology that sees public debt and deficits as the problem and cutting them the  solution to economic growth. Furthermore, the intervention into the sovereignty of Member States by an unelected body, through the public hectoring of the head of the eurozone’s central bank is reinforcing the democratic deficit that is part of the visceral fault line in the EU.

Returning to Greece, it is squeezed between the many headed monster (Scylla) of the  “Troika” of the International Monetary Fund, the European Central Bank and the European Commission and the  whirlpool  (Charybdis) of the Orca’s flipping and flopping. The common view is that the Greeks have been profligate and have living off the fat of the North’s benefactors : Zorba the Greek has become Exorbitant the Greek -  a Trojan horse threatening the economic well-being of their  neighbours. Yet the objection to the eurozone being  a transfer union that German politicians and public express is otiose: the EU and the eurozone are  de facto and de jure transfer unions.

On a recent visit to Crete, it was interesting to observe  that below the apparently calm surface there are palpable signs of decline. Many shops are empty and derelict, especially family-run mini-markets, there is road less traffic and a severely reduced ferry services: the lifeblood of any sparsely populated Archipelago that is analogous to the condition of the eurozone itself. If one part becomes isolated, the rest will follow with estimated costs for Germany of 25% to 30% of GDP if the eurozone collapsed and consequently ended the Single European Market and brought down the EU itself.   The cost to the Greek populace would be too great to estimate.

The romance of Zorba the Greek has given way to blaming the victim as Exorbitant the Greek.  The commentariat overlook the modern political history of Europe at its peril. The economic solutions, including a Greek debt default within the eurozone, exist but unless there is the political will and authority to implement them, then future generations may look back at the events like those that followed the assassination of Grigoris Lambrakis.  The governing elites of Europe’s polity need to embrace Zi and stop smashing the plates that serve the food of  the economic welfare of their citizens.