Cash-Strapped Greeks Stuck Between Rock and Hard Place

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When Dimitris Kalaitzes, a Greek restaurateur from the island of Patmos, was pulled over while driving on the Verrazano Bridge in New York earlier this year, the NYPD officer didn't ask him why he was going too fast. Instead, he wanted an answer to the question that has vexed politicians, bankers, economists and investors the world over since the fall of 2009.

"He said, 'Greece is this small little country,'" Kalaitzes recalled over a Greek coffee in his restaurant, Jimmy's Balcony. "'How is it possible that it could bring down the entire world economy?'"

In today's globalized system, where markets move faster than politicians do and nearly everyone has some kind of investment portfolio, the fate of Europe's ailing economies isn't just a matter for academics and economists to ponder. These days, almost anyone who's vulnerable to a shaky world economy that gets easily rattled by market jitters — which is just about everyone — is suddenly interested in what previously obscure technocrats in Greece, Spain and Italy have to say about their teetering economies.

These days, many of the voters in those struggling nations are also rebelling against the austerity measures necessitated by the European debt crisis, and a decade after the introduction of the euro, the common currency is grappling with an existential crisis, as the European Union wrestles with ways to prop up its sickest members.

"There's a growing sense here in Washington that the European debt crisis is causing a ripple effect across the global economy, and the weak job numbers for May here in the U.S. underscore the severity of the crisis," said Heather Conley, a senior fellow and director of the Europe Program at the D.C.-based Center for Strategic and International Studies and former deputy assistant secretary of state in the Bureau for European and Eurasian Affairs.

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Photo: Milos Bicanski / iStock
The headquarters of the Bank of Greece in Athens was vandalized following violent protests in February against the government's unpopular austerity plans. While the majority of Greeks say they want to remain in the euro, they also favor renegotiating the harsh terms of the bailout that's kept the country from bankruptcy.

How did the EU get itself into this mess? Many point to October 2009, when Georgios Papandreou, Greece's newly inaugurated prime minister, admitted that his predecessors had concealed huge deficits. Within months, Greece was effectively unable to borrow on the open markets, and a series of bailout packages was devised by the European Union, the International Monetary Fund and the European Central Bank, known as the troika. In return, Greece was required to adopt a raft of austerity measures to curb its bloated public sector spending.

Bailouts for Ireland and Portugal followed in 2010 and 2011, respectively, and by the middle of last year, fears had intensified that the larger economies of Spain and Italy would be the next dominos to crumble. Cyprus is already eyeing its own EU bailout, and Conley pointed to the recent Moody's downgrade of German and Austrian banks as proof that the contagion that started in Greece is now spreading even to Europe's healthier economies.

The euro zone's third-largest economy, Italy, will be the real test. It seems to have stabilized under its technocratic prime minister, Mario Monti — for now, at least — but that hasn't calmed nervous investors. A more immediate concern is Spain, the euro's fourth-largest economy, which has an unemployment rate of nearly 25 percent.

Despite a deal of up to $125 billion to help recapitalize Spain's debt-laden banks, the country's borrowing costs remain unsustainably high, breaching the threshold that forced nations like Greek to seek a bailout.

The Spanish arrangement also comes without the same strings that were attached to the Greek, Irish and Portuguese bailouts, and politicians in Athens and elsewhere immediately pounced on that disparity to demand that the EU cut them some slack as well. (Spain though has been much more diligent about cutting government spending and debt).

Much of anti-austerity ire has been directed squarely at Berlin. The only EU member with enough fiscal firepower to save the euro, Germany has gotten flak for its slow response to the eurozone crisis and its insistence on austerity and drastic spending cuts, without any economic stimulus.

Yet Germany's reluctance to throw money at the problem — at least not without first fixing the governance model that created the current fiasco — is understandable. Europe's strongest economy could easily be bled dry by bailing out mismanaged, deeply indebted nations like Greece, which would most likely fail to implement much-needed reforms if the financial pressure was eased. And the type of reforms Germany is demanding — eliminating red tape and regulations that discourage competition, uprooting entrenched labor protections that stifle growth — are long overdue.

After reunification and the adoption of the euro, Germans also undertook harsh belt-tightening reforms to make their economy the competitive giant it is today. Greeks, on the other hand, squandered the cheap credit that entrance to the eurozone afforded them, racking up debt while refusing to modernize their dilapidated economic infrastructure.

At the same time, German voters, whose cheap exports benefited greatly from converting to the euro, are stuck in the same boat as other EU members if the currency sinks. And so far, citizens in Greece are drowning in the tonic prescribed for their pain — austerity — without any relief in sight.

I've spent the last month in Greece and have seen the devastating impact of the crisis in every facet of Greek life. Banks are failing because Greeks have moved some $12 billion out of the country. Pharmacists are striking because the government isn't reimbursing them for the prescriptions they dispense.

Schoolchildren in parts of the country haven't received their workbooks because there's no money for photocopying. Tourism offices in some of Greece's most popular islands are closed, as there's no money to staff them. Likewise, ancient monuments such as the Parthenon in Athens open to tourists haphazardly, depending on staffing. Graffiti warning of a pending economic apocalypse is the backdrop for growing homelessness, drug use and hopelessness in the Greek capital and elsewhere.

Pensioners and public sector workers have had their income slashed dramatically, and private sector workers have seen their incomes decrease as well, as their bosses struggle to cope with higher taxes, weak sales and more vigilant tax collection.

It's a crippling cycle of spending cuts and tax increases that are exacerbating the recession — battering wages, raising unemployment, and in turn lowering the revenue the government brings in, forcing it to pile on more debt. The country is about to buckle and it's doubtful any new Greek government could push ahead with an austerity-only agenda.

Most Greeks understand how they ended up in their current predicament. Greece's political leadership allowed public spending to mushroom while the country's oligarchs were allowed to avoid paying taxes on a flagrant scale. According to the Organization for Economic Cooperation and Development, Greeks work longer hours than any other country in Europe, but the country's huge cadre of civil servants were allowed to retire young with extremely generous pensions.

Greeks repudiated the two political parties that were mostly responsible for the debacle, and voters were initially seduced by Syriza, a coalition of left-wing parties led by 37-year-old Alexis Tsipras, a charismatic politician who had promised to renegotiate Greece's 130 billion euro bailout deal with the troika. But after the May 6 election failed to produce a coalition government, Greeks appeared to have a slight change of heart in the June 17 election, giving the pro-Europe center-right New Democracy party a slight edge over Syriza, which will remain a formidable opposition bloc in Parliament.

If Syriza had won and indeed reneged on Greece's commitments, the IMF would have suspended aid payments, prompting the government to default over the summer or by September.

Despite worldwide relief that Greeks will remain in the eurozone, for now, markets quickly slumped after a brief bump — a reflection of the lingering doubts that Greece and other indebted euro economies will be able to climb out of their fiscal morass.

The June election proved that many Greeks fear venturing into the unknown by abandoning the euro, though they probably fear the bloc's austerity just as much.

Kostas Lavdas, head of the Department of Political Science at the University of Crete, believes that many Greeks are wrong to fault the bailout agreement itself.

"Without this agreement, our recession would be even more pronounced than it is now," he said. "So there's a misunderstanding, I think, on the part of Greek society about the agreement. People blame the agreement itself rather than the measures taken and the way the agreement has been implemented, and this creates a negative feeling among many Greeks because they think the agreement is the cause that led to recession."

Opinions run the gamut, however, and many Greeks resent the austerity straitjacket being imposed on them.

"There is a quiet, peaceful revolution happening in Greece," said Anna Avgouli, the editor in chief of Stathmos, a newspaper on the island of Kos. "The world wants Greece to be subdued."

Avgouli opined that 99 percent of the bailout money went to the banks, many of them German, and not to Greeks, a claim that I heard over and over again in my travels around the country.

Yet others point out that Greeks want their cake and eat it too — remaining in the euro but not having to curb the profligate spending that got them into trouble.

"The continued failure of the Greek government to take responsibility for its actions is salt in the wounds for every German who is being asked to pay for this," says Alexei Monsarrat, director of the Global Business and Economics Program at the Atlantic Council. "There are all kinds of reasons why Germany should do this, all of them based on Germany's interest, but it's hard to do that when the people you're bailing out are sticking their finger in your eye and telling you you should let them off the hook."

Monsarrat likened Tsipras's pledge to keep Greece in the eurozone while renegotiating the bailout deal — a promise New Democracy has made as well — to a "sixth-grade election promise to have recess all day long."

"They're pointing at the troika and Germany and saying, 'Isn't it horrible you're making us do all these things,' but you borrowed the money — you do actually have to pay that back."

But he concedes that ordinary Greeks are just as outraged by their leaders' poor stewardship of the country's finances as the rest of the world.

As Greek politicians bicker over how to get out of a no-win situation, the possibility of a "Grexit" from the eurozone, considered taboo just a few months ago, is now entirely conceivable.

Some economists have argued that Greece might actually be better off reverting to the drachma because countries tethered to the euro currently lack one of the biggest tools to ward off recession: currency depreciation. If Greeks returned to the drachma, exports would be cheap and tourism, which accounts for one-fifth of Greece's GDP, might increase as prices go down. Moreover, most international banks have limited their exposure to Greek debt, which could staunch a potential panic in the markets and limit the damage to the EU.

Despite the cacophony of speculation, however, no one really knows how a Grexit would play out, and many think that Greece is better off in the eurozone.

"The immediate consequences for Greece — or other countries — of leaving the euro would be dire," wrote the Washington Post's Robert J. Samuelson. "Some companies, unable to repay euro-denominated debts, would go bankrupt. Inflation would shoot up. Banks might suffer large withdrawals. Worse, if Greece dropped the euro, it might trigger a chain reaction. Depositors in Spain, Italy or Ireland might stage runs on their banks, trying to withdraw euros before they were replaced by less valuable national currencies."

The cost of a Greek exit from the eurozone would be $1.25 trillion, according to the Institute of International Finance, so the ripple effect across the global economy would be tremendous.

Either way for Greeks, whether in or out of the eurozone, they face a tough road ahead littered with severe sacrifices.

Professor Lavdas puts the odds of a Grexit at only 25 to 30 percent within the next year, and most Greeks I've spoken to think that it's highly unlikely the country will leave or be kicked out. Many still believe that they can have it both ways, staying in the eurozone, but managing to renegotiate the bailout deal more favorably.

"This is the diplomatic equivalent to holding a gun to your own head and threatening to pull the trigger if they don't let you out of the trap," warned Monsarrat. "It is a serious miscalculation on the part of the Greeks."

The troika is treading carefully with Greece because their reaction to the crisis will establish a precedent that other ailing economies could then try to draw on. If Greece is allowed to renegotiate its deal or leaves the euro altogether, what happens when other countries want to do the same?

"Europe's preferred methodology is to muddle through, but at some point there's going to have to be some decisions taken," said Conley. "If we see a full run on Spanish and Greek banks, they'll need to take more decisive action."

But decisive action might be unlikely given France's recent election of Socialist François Hollande to replace Nicolas Sarkozy as president in May. Sarkozy worked closely with German Chancellor Angela Merkel to engineer the euro's various bailouts, which helped contribute to his downfall at home. Hollande has spoken out in favor of bold moves to spur growth, putting him at odds with Merkel's austerity approach.

Their collaboration will be put to the test at the end of June, as leaders meet for an EU summit amid rumors of a "grand bargain" of deeper integration, whereby Germany has indicated some willingness to pool the bloc's bad debt into a single fund that would be paid off over some 25 years. In return, however, Berlin would demand greater centralized control of economic matters to ensure fiscal discipline, forcing members states to answer to Brussels, a tough pill for them to swallow. Any plan to fundamentally alter the unwieldy bloc would also involve lengthy treaty modifications and require time, consensus and cooperation — none of which the EU has at the moment.

Conley believes the future of the European experiment is at stake, but fears that Europeans may cling to sovereignty at a time when they need further integration.

"We're going to see a new Europe," she said. "We're either going to see a Europe that has taken a quantum leap toward greater integration, or we may have to deal with a Europe moving toward disintegration."


About the Author

Dave Seminara is a contributing writer for The Washington Diplomat and a former diplomat based in Northern Virginia.

Last Edited on June 28, 2012