A Hopeless Case?

The IMF has just released its most recent assessment of the 'progress' of its austerity program in Greece. As a reminder, Greece currently 'enjoys' an economic depression that is more and more reminiscent of the downturn of the early 1930's.  Its GDP has been in contraction for 12 quarters running, most recently at an annualized rate of 5.5%. The rate of unemployment oscillates around the 18% mark – official unemployment, that is. Consumer confidence has collapsed, industrial production has been in decline at double digit rates since early 2008. The stock market is down by 90% from its 2007 highs and the government's one year note yields an absurd 330%. The banking system is de facto bankrupt and subject to an accelerating flight of deposits. 

You get the picture – these are the kind of economic data that normally indicate that the society concerned is only a small step away from major social upheaval and a descent into conditions of chaos. At the very extreme end of such a process it could experience what is essentially a collapse of civilization, with the division of labor increasingly breaking down and society transmogrifying into a collection of small islands of autarkic, primitive hand-to-mouth economic units that no longer even trade with each other.

To everybody's vast surprise, the IMF has just concluded that Greece once again 'failed to meet its targets' as per the austerity program imposed on it by its bailout lenders.

As Reuters reports:

“Reforms are running behind schedule in most areas, this is the main reason in our view why the economy is continuing to trend down," Poul Thomsen told a conference in Athens. "We need more structural reforms in the public sector to achieve deficit reduction."

He added that the international bailout plan had overestimated the capacity of the Greek administration to reform and must be adjusted in a number of areas.

(emphasis added)


Greece's GDP, annualized growth rate – click chart for better resolution.


Mr. Thomsen may need to take a look at the most recent OECD report on Greece. Anyone reading this report will come away with the firm impression that the country is an utterly hopeless basket case. Thomsen is correct that reforms are running behind schedule and the reason for that is that the country is at the moment simply incapable of implementing what its lenders want it to do. 

As Der Spiegel reported in connection with the OECD's in-depth analysis:

The need for deep structural reforms in Greece is well-known. But a new OECD report indicates that Athens may be incapable of such far-reaching changes. Ministries don't communicate, officials don't keep records and oversight is virtually nonexistent. The only thing that might help, it says, is a "big bang."


Going by the rather bland title "Greece: Review of the Central Administration," the 127-page report can be quickly summed up: The government apparatus in Athens is virtually unable to implement reform.

"It is not clear how existing and new entities of (the government) will work together in order to secure the leadership needed for reform, including the necessary strategic vision, accountability, strategic planning, policy coherence and collective commitment, and communication," reads the damning report.


“It found that communication among the country's 14 ministries was appallingly paltry. Furthermore, the huge number of departments within ministries — many of them consisting solely of a department head and others with just one or two subordinates — results in widespread inefficiency and lack of oversight.

"Administrative work is fragmented and compartmentalized within ministries," the report writes. "Ministries are not able to prioritize … and are handicapped by coordination problems. In cases where coordination does happen, it is ad hoc, based on personal initiative and knowledge, and not supported by structures."

Were such coordination even to take place, the report indicates that administrators do not have access to the necessary data, nor does such data exist in many cases. "The administration does not have the habit of keeping records or the ability to extract information from data (where available), nor generally of managing organizational knowledge," the report found.

The problems found in Greece's central administration, says the OECD, are the result of decades of clientelism and the sheer volume of the laws and regulations that govern competencies within the ministries. The report found 17,000 such laws, decrees and edicts.”

(emphasis added)

In other words, Greece has broken down under the weight of its statism and bureaucracy. “17,000 laws, decrees and edicts” merely for 'regulating competencies' within the ministries? Not even Brussels can hold a candle to that.

Naturally this vast bureaucratic labyrinth is an excellent breeding ground for corruption on a grand scale. One striking example was the discovery that a state-owned hospital in Athens had 45 gardeners on its payroll, but actually had no garden. The state-owned railway system has become like a black hole that attracts and destroys money at an astonishing rate. It was once calculated that if the government were to simply shut down the railway and instead pay the taxi fares of every single train commuter, it would actually save money.


Greece's official unemployment rate has soared – click chart for better resolution.


Raising Taxes Just Might Be Bad for Growth … Recognition Brings A Small Ray of Hope

In another one of those rather frequent 'you couldn't make this up' moments, the IMF's envoy to Greece apparently noticed that raising taxes in an economy in depression may actually hamper its chances of recovery and thus be counterproductive. Well, duh.

According to Ekathimerini:


“As government officials continued talks on a second rescue package for Greece with visiting foreign auditors Tuesday, the top envoy to Athens from the International Monetary Fund said that cuts to public spending were crucial, noting that there was no more scope for taxation on an austerity-weary public.

“One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” IMF mission chief Poul Thomsen told reporters in a conference call. Referring to the Fund’s latest report on Greece, Thomsen said reform efforts had fallen “well short” of expectations but that it was too early to to confirm whether new austerity measures would have to be taken in 2012. He stressed however that any additional measures should “be on the expenditure side.”

We could have told Mr. Thomsen that a long time ago.

What we see here is how politicians tend to instinctively react to the EU's demands for the implementation of austerity programs – and readers should take note here that Italy's case is very similar in this respect.

The State and its proponents, from the political class to its vast bureaucracies, do not want to see their ability to distribute wealth curtailed. Hence the first reaction when the need to plug holes in one's budget arises is normally to print money – which amounts to a silent, seemingly unobtrusive theft of resources from their rightful owners.

Since the euro area's construction as a currency union with a supra-national central bank that is expressly forbidden from financing governments has made this surreptitious theft impossible, the next best thing is resorted to: tax increases.

It is quite obvious that raising taxes will destroy the incentive of people to create wealth. This is aggravated further when people are in effect asked to pay for the evident inefficiency and corruption of the parasitic classes. However, what is less obvious to most people – and in fact flies into the face of the current widely accepted economic orthodoxy – is that government spending is just as big a burden on the economy as tax hikes are.

Most people tend to think of government spending as a net positive for the economy – indeed, it is even portrayed as such in the one economic statistic that purportedly best represents the economy's overall rate of growth, namely GDP.

However, this view presupposes that government somehow exists outside the ambit of the market economy – that it possesses a mysterious stash of economic resources that can be added to the existing pie and actually make it bigger. This is however not the case.

Every cent the government spends must be taken from the private sector. It does not matter if it is taken by borrowing, taxation or inflation (although the latter method is clearly the most harmful). In the end, the extent to which the government is spending is the very same extent to which the private sector's ability to spend and invest is curtailed. The pool of real economic resources – capital goods and the pool of real funding (final goods saved for the purpose of investment) – is strictly limited and subject to scarcity. Government spending directly competes with the creators of wealth for this pool of scarce resources.

It follows therefore that government spending is not a boon for the economy, but a burden.

What we see in the types of austerity plans implemented across Europe is that the economies concerned are subjected to impositions that make it impossible for their economies to escape their downward spiral. Not only are new taxes imposed on top of the already onerous amount of taxation that is the hallmark of most European welfare states, but government spending is maintained and in some cases even increased (at least as a percentage of total economic activity), burdening the economies concerned even further. 

It is a small hopeful sign of progress that the IMF has now recognized in Greece's case that it is fruitless to pursue this course.



Greek consumer confidence has evaporated – click chart for better resolution.

In this context, Greek finance minister Evangelos Venizelos has summed up the problem well, while still exhibiting confusion over the priorities:

“Talks with visiting European Commissioner for Regional Policy Johannes Hahn focused on “the sector of public investment, the sector of structural programs,” Venizelos said, adding that his aim was to “unite these in a common approach that gives hope and prospects, because the great problem of the Greek economy is disappointment.” Greece’s greatest need, he said, was “to see that there is a future ahead of us, that there are prospects. This will mobilize efforts and will mobilize capital.”

(emphasis added)

We agree with Venizelos that it is extremely important that Greece's population finally see some light at the end of the tunnel. Unless conditions are created that provide a positive foundation for renewed wealth creation, the despair will only increase and the economy will contract further, until it finally descends to the point where the division of labor is threatening to break down.

However, the way to go about this is not an increase in 'public investment'. Although Venizelos has not spelled out what exactly he means by that, it sounds like he is dreaming of some kind of 'public works' program. Those have never worked and never will.

What needs to be done is to create the conditions required for the market economy to regain its footing. Surely a lot of malinvested capital has by now been liquidated in Greece. The government should not think about 'redirecting' its spending, but about cutting it, otherwise it risks that even more scarce capital will end up malinvested and ultimately wasted. Evidently, the bloated and utterly inefficient public sector should be the main target of these cuts.

Greece's private sector – the only fountain of wealth creation that exists – must be assured that it won't be the constant target of financial repression. Aside from cutting spending, regulatory reform should be the top priority. The absurd plethora of licensing laws and decrees and ordinances that are attempting to regulate every corner of human existence must simply be struck down as fast as possible.

One should never underestimate the market economy's inherent ability to create a large amount of wealth in fairly short order if it is only free to do so.

Greece's industrial production – an ongoing disaster – click chart for better resolution.


Yes, Greece's citizens must be given hope – but it is important that one go about in the right manner.

Finally, we agree with the IMF envoy's remark that writing down the mountain of unpayable Greek debt is essential.

“Thomsen added that a voluntary bond swap — dubbed “private sector involvement” (PSI) and currently being discussed between government officials and private holders of Greek debt — was also crucial for fiscal recovery.”


As we always stress, there is no point in propping up unsound credit. We would however add that the so-called 'troika' of public bailout lenders – the EU, ECB and IMF – should also own up to the fact that they have made a bad investment decision when they decided to finance the giant bailout. They should bear the consequences.

It is a huge mistake to demand that only private sector creditors write down their exposure to Greece. The 'troika' should bite the bullet and contribute to the same extent by writing down its loans as well and participating in the debt exchange. This would likely greatly enhance economic confidence in Greece, as the private sector's fears regarding future increases in taxation would be commensurately diminished.


Via Zerohedge – the flight of deposits from Greece's insolvent banking system – click chart for better resolution.

Charts by: Tradingeconomics.com, Zerohedge



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5 Responses to “The Greek Tragedy – Chaos Beckons”

  • Murray44:

    Response to jchan.
    I respectfully disagree about the proper course of action for Greece. Why do you think that some sort of gradual relaxation of burdensome regulation and confiscatory taxation systems is what Greece needs? Is it because you think the Greeks just won’t tolerate any wholesale reforms of the kind that need to be implemented? My opinion is that what’s desperately needed in Greece are sweeping and immediate reforms (sort of akin to Erhard’s German policies when the allies left after WW2). Anything else risks death by one million interest groups. I say dismantle the bureauracracy, slash taxes, slash public spending, open up the economy to free entry to the trades and competition, default on government debt across the board by 60 -70%, exit the EU, return to the drachma at a realistic value and see what happens. Any gradualist solution just won’t work. I agree that Greece needs rule of law but with a vastly diminished number of laws. It’s time for bold recommendations, for policies that we know will work, not gradualism, compromise, and accommodation with the statists who engineered this mess 100% of the way.

    • jchan:

      It’s just that I think you have to take culture into account also. Radical change can be difficult even in the US, where we value change, improvement, progress. The Greeks are much more traditionalist, much more resistant to any central authority. In fact, if they were more statist in spirit, a process like the one you describe would actually be easier to impose. The problem has been that the Greeks are not very devoted to the state. You can see this in their so-called bureaucracy, which is really largely a job source for family and friends. That isn’t really statism. In the end, it isn’t helpful to think of the Greeks as would-be Germans.

      • mc:

        I could not survey enough Germans to get statistical significance, but none agreed that Greeks are would-be Germans. A simple measure (particularly in a currency union) is savings-rate: how much in aggregate is not consumed but instead set aside for investment or as a buffer for possible future negative events? Germany vs the US is very illustrative: http://www.wikinvest.com/images/thumb/4/41/Savings01-640.png/450px-Savings01-640.png

        Compare this to Greece: “Greece is unique in the eurozone in that its net national savings – after adjusting for capital consumption – have been negative for almost a decade, reaching minus 5.1 per cent of GDP in 2008 (only Portugal did worse). By contrast, the euro area average is (plus) 6 per cent of GDP. Even the Baltic states, which relied on foreign capital to finance a construction binge, are in a better position with net savings safely in positive territory.”

        Pro-statism or not is irrelevant on this matter, because the capital flows between North and South are in imbalance due to the propensity to save/invest/spend/borrow in these countries. Until this metric, among others, converges between Germany and Greece, the structural imbalances will remain.

        • At present the imbalance is ‘vendor-financed’ by the Bundesbank via the TARGET-2 system – with the BuBa’s claims on the remainder of the euro system growing by €100 bilion per quarter at present. An unsustainable trajectory.

  • jchan:

    The problem for Greece is also private sector corruption. You don’t arrive at that level of public inefficiency without private cooperation. The problem isn’t regulations per se, but bad regulations, unjust regulations, and unhelpful regulations. Likewise, the problem isn’t bureaucracy per se. Insofar as Greece has a bulging, disorganized, and incompetent bureaucracy, they don’t effectively have a bureaucracy at all. What they need are stronger civil institutions, better record keeping, coordination of activities, clearer laws, and so forth. All of that calls for a bureaucracy — but ideally something more British and less Greek.

    It seems possible to imagine two outcomes that would restore Greece (or a nominal “Greece”) as a functional state. One would begin with default and a move back to the drachma. This move would enable Greece to make money again by serving as the inexpensive Mediterranean island holiday destination that it is so well made to become once again. The second, uglier but possibly very efficient fate for Greece would be as a source of cheap labor and lovely property for northern Europeans — in effect, as the Florida of Europe. Workers would migrate from “Greece” (now, more and more, Greek in name only) to jobs in the north, and developers and retirees would move south. But knowing Greeks as I do, I’d have to say that this option could only come about through a bloody war. For all kinds of reasons, it is better to hope that Greece remains Greek, that it resuscitates the weak drachma, that it resumes the vital role of helping northern Europeans to relax in the sun, and that it becomes modestly more efficient economically and less corrupt through mild and gradual reform.

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