The Greek financial crisis in perspective By: Pieter Uiterlinden, LL.B., M.A., Drs. Jur.; July 7, 2015 (plus addenda July 15 & 20)

The “Greek financial crisis” for quite some time now has been a source of increasingly annoying

misinformation.

For some reason most, if not all, media reports on this crisis have been “a-historical” and at best two-

dimensional, in the sense that reported facts and factoids are never placed in context – let alone discussed in

a historical context surpassing a few weeks or months.

That lack of context unfortunately can lead to prognoses, conclusions and solutions that have little to do with

reality – and therefore are unhelpful and lead to views, proposals and policies that are destined to fail.

Understandable – maybe – for journalists who have to hop from one subject to the next at the drop of a hat,

but less so for people with expertise.

As it turns out, even smart people such as Paul Krugman seem to ignore facts and circumstances that have

been visible and glaringly obvious for decades1.

Disclosure:

As a member of the Dutch Foreign Service, I was posted to the Netherlands Embassy at Athens in the

summer of 1999, to head the Economic and Commercial Department.

At the request of the Dutch Finance Minister, I made a critical analysis of the Greek public finances in the fall

of 1999 – an analysis that has been fully vindicated by events in the past 16 years.

In 1999, everybody and their uncle – including the Dutch Ambassador and his Deputy – were serenading the

emergence of Greece, “within the next decade”, as a pre-eminent top-tier developed economy, usually citing

impressive GDP growth statistics. It was considered a “given” that as such a budding top-tier economy,

Greece would join the Euro-zone – seen by the then Greek government and population alike as the crowning

achievement of Greece’s coming of age.

Unfortunately, nobody took the trouble to take a dispassionate look at the numbers to see whether this

euphoria had a basis in reality.

Starting in 1998, the Greek government – in its pursuit of Euro-zone membership – engaged Goldman Sachs

(my Fall-1999 analysis mentioned “one of the large Wall Street Investment Banks” to protect my sources) to

cook the books – calling a spade a spade.

The change was eased in, and presented, as a technical change in the statistical reporting criteria.

However, when comparing the pre-1998 statistics to the post-1998 statistics, it was impossible to find the

continuum of reality in GDP growth.

Notwithstanding the lip service paid to the latest economic theories and governance criteria, the numbers in

the Greek government reports (aimed as they were at the Greek Euro-zone entry) simply did not add up.

Unsurprisingly, my conclusion in 1999 was critical: Greece was not ready, and would not be ready for a

considerable period of time, to join the Euro-zone.

As unsurprisingly, my superiors were “not amused”, declaring me “anti-Greek” in order to get around the

inconvenient fact that the Greek government numbers did not add up (see under points 7 & 8).

By 2005 the euphoria had died down, and institutions such as Eurostat, the EU Statistical Office – later

followed by the European Parliament – concluded that, indeed, Greece had cooked the books.

Context is everything

1. Where the Greek government claimed a sturdy GDP growth of 4% – 4.5%, reality more likely showed

a growth of 0% – 0.5%, roughly over-estimating growth by a factor 9 – 10.

After a decade, such an over-estimation (and its inherent and prejudicial divergence between

1 There are, however, exceptions to the rule – see, for instance, the BBC-America interview by Katty Kay of Harvard University Economics

Professor, Kenneth Rogoff, on July 7, 2015. (Also see addendum to note 2, and note 7.)

expectations and reality) causes serious trouble in the best of times – even without a “Great

Recession”.

2. Unsurprisingly, the “downsizing” of the Greek economy since 2010 is no more than a fairly abrupt

correction – bringing the virtual reality that took off in 1998 back to earth. The fact that this correction

is causing most ordinary Greeks a great deal of pain and discomfort is tragic, but does not change its

fundamentals or cause.

3. Nobody – least of all Greek governments – seems to acknowledge that from 1981 onwards (when the

post-junta democratic Hellenic Republic was rewarded with early entry into the “European

Communities / Union”) Greece has been the recipient under different programs of significant EU

subsidies, meant to equalize inter-European economic development by accelerating infrastructural

and economic growth. At times, this annual support reached up to 10% of Greek GDP2.

4. Although this structural support of Greece was supposed to end with the entry into the EU of the 10

new mostly Eastern European members on May 1st, 2004, Greece secured through stubborn and

unrelenting negotiation tactics the ongoing EU Structural and Cohesion Funds subventions at least

until 2020 (funds of $7 Billion annually that have been diverted from the new EU Member States).

5. Today, in 2015, the EU thus contributes more than 4% of GDP to the Greek government coffers

annually aside from any bailouts – arguably a very tangible show of solidarity which soundly

contradicts the current Syriza government’s insinuations to the contrary (PM Tsipras as much as ex-

Finance Minister Varoufakis).

Judging by World Bank statistics, countless poor countries across the globe would salivate at such

annual net inflows of development aid.

Ignoring this substantial net inflow of EU development aid into Greece, furthermore, illustrates the

disingenuous criticism of the EU regarding the requirement of Greece to run annual primary

surpluses of up to 3.5% GDP: it allows the country to run up to 1% GDP deficits when disregarding

the regular annual EU subsidies to Greece.

If that is “harsh” – it is only harsh on the contributing EU Member States and their taxpayers – NOT

on the Greek governments and electorates (!) over the last 35 years, feeling that these EU subsidies

was nothing more than easy money at their free disposal (airily disregarding the corresponding legal

and moral obligations).

Calling a spade a spade, it is time to explicitly recognize that for three and a half decades the Greeks

have fundamentally been mooching off the other EU Member States3.

Calling requirements to put an end to all this “irresponsible” only serves to confuse reality with fiction.

2 To put things in perspective for Canadians: imagine receiving from a group of countries that you belong to (e.g. NAFTA) 5% of your GDP

every year (irrespective of any additional bailouts, that is), free of any constraints other than the freely undertaken agreement to use the money to strengthen your economy. In Canada, that would mean NAFTA was blessing the country with a bountiful donation of US$ 90 Billion – annually. Now, imagine that the Canadian government for 35 years straight – irrespective of political stripe – would use only a small part of that bounty (cumulatively amounting to between $2 Trillion and $3 Trillion!) for the purposes it had been given for, using the bulk for “consumptive” or frivolous expenditures – just imagine the kind of revulsion that type of systemic corruption would cause in the donor nations and their taxpayers who had been funding this annual bounty! Acting as if the EU, ECB and IMF are the villains in this tragedy is tantamount to absolving Greece and its successive governments and electorates from any responsibility whatsoever – a notion as grotesque as it is unwarranted. Interestingly enough, these kinds of practical and relevant considerations never enter into the admonitions of Paul Krugman and Joseph Stiglitz. Addendum, July 21, 2015: Paul Krugman has now admitted – without actually “admitting” his faux pas – that he got it wrong to CNN’s Fareed Zakaria GPS (emphasis added): Krugman on assuming that Greece had an exit plan from the Euro: “…it didn’t even occur to me that they

would be prepared to make a stand without having done any contingency planning ... amazingly - they thought they could simply demand better terms without having any backup plan. So certainly this is a shock. But, you know, in some sense, it’s hopeless in any case. …it’s not as if the terms that they were being offered before were feasible. I mean, the new terms are even worse, but the terms they were being offered before were still not going to work. So I, you know, I may have overestimated the competence of the Greek government.”

Somehow, I do not remember Krugman elaborating on these assumptions when he made his remarks in June – it would actually behove Krugman to admit that he was caught with his pants down because he skipped doing any serious research on this subject (repeating Tsipras’ mistake, by the way) – in the process doing significant damage to reasonable “anti-austerity” arguments. 3 Expressions of fierce pride in national independence and/or sovereignty only serve to obscure facts such as these until it is too late.

Interestingly, Great Britain is currently at a similar juncture in its history – within the “United Kingdom” as well as within the EU. It remains to be seen whether British voters will act with more discretion than their Greek counterparts did in January, 2015 and on July 5

th, 2015.

6. While it seems quite fashionable to paint the Troika demands and treatment of Greece as “harsh”, if

not worse, what are the facts?

Taking just the major items:

a. Pensions: in 1981 the newly elected Pasok government introduced an old age pension

(OAP) in Greece, on par with the EU average but without a similar fiscal backing.

Women, after working 20 years, could retire on a full OAP – meaning that women as young

as 35, without contributing to the system, could retire on a full OAP. For men, the OAP was

slightly less generous. However “social” this measure was meant to be, it was anything but

sustainable4 – significantly adding to already heavy public debt burdens.

Calling significant cuts to such programs “irresponsible” only serves to confuse reality with

fiction.

b. Tax base: since Lord Byron and his friends accelerated Greek independence from the

Ottomans, the Greek government has handled the most prosperous Greeks with kid gloves.

In what boils down to a quid-pro-quo for their support to the independence movement the

Greek shipping magnates have been exempted from paying taxes – curtesy of a unique

clause in the Greek constitution.

Other non-salaried Greeks have followed their example by simply under-reporting or non-

reporting significant income and investment.

As for property taxes: many Greeks never finish the outsides of their homes (hence all the

bare concrete columns and forests of rebar poking holes in the blue Greek skies), in order to

limit or evade property taxes.

Calling requirements to increase the tax base “irresponsible” only serves to confuse reality

with fiction.

c. Aftermath of Euro-introduction: Once Greece joined the Euro-zone in 2002 Greeks

suddenly discovered what the oodles of zeros in Drachma amounts had shrouded from view.

Compared to their German counterparts (somehow the Germans are very important to the

Greek psyche) Greek carpenters, masons, plumbers and many other trades and

professionals were earning a rather small fraction of the German going rate.

In Greece, this was universally declared “unacceptable”, or “unfair”, or even “insulting” – after

all, Greeks were no less “worthy” than Germans.

Lost in the fog of this emotional debate was a simple economic fact: if you, for whatever

reason as a tradesman or a professional, are many times as productive as somebody else,

you can (expect to) earn a significantly higher salary.

Irrespective of the merits of this debate, salaries in Greece were raised abruptly in order to

emulate EU levels – without addressing the productivity aspects5.

Under these circumstances calling significant cuts to salaries “irresponsible” only serves to

confuse reality with fiction.

d. High unemployment: The suggestion that the Troika is to blame for the current high

unemployment in Greece is preposterous in light of the past 100 – 200 years.

Granted, high unemployment damages the social fabric and cohesion of a country, and thus

spurs most governments, parliaments and electorates to put a high priority on aggressively

battling it.

Unfortunately for the Greeks, their instinctive general distrust of anything governmental – a

result of centuries of Ottoman rule, in which it was felt to be imperative to do anything that

might in any way weaken the state – precludes effective unemployment mitigation by society.

As long as a significant majority of Greeks refuses to consider the regular payment of taxes

4 Even with 20 years of premium pay-in, this Greek OAP means that women can enjoy 50 or more years’ worth of pension pay-out, based

on 20 years’ of premium pay-in. By contrast, the western & northern European OAP systems were initially based on 40 years of premium pay-in for up to 20 years of pension pay-out – which makes the Greek OAP 5 – 10 times more generous than the western & northern European ones. Calling cuts to such largesse “harsh” simply is trite nonsense, and consequently seen as such in most EU countries. 5 Another aspect of the Greek labour market was also ignored: the practice to pay 15 months’ worth of salary for every 12 months worked

– monthly salary plus 3 monthly pay’s worth annually, as Christmas and Holiday bonuses, in addition to a legally mandated severance payment of 1 months’ worth of salary for every year worked. If there is reason for amazement, it should be that the Greek economy did not collapse much sooner – a testament for Greeks’ continuous ingenuity as well as EU largesse over the past 35 years.

as a “membership fee” that accompanies and supports the mutual assistance association

which we refer to as “civil(ized) society”, there is little hope for a speedy solution to the

damaging and corrosive scourge of unemployment6.

Blaming the outside world for Greek intransigence only serves to confuse reality with fiction.

e. Greek track record: In the western world we more or less follow a fairly basic pattern of

negotiations. We put our respective requirements, wishes and offers on the table and then

start the horse-trading, ending up with an agreement (verbal or in writing) of what each

participant will subsequently do.

Greek governments, however, have so far followed a fundamentally different approach by

viewing the written and ratified outcome of negotiations as nothing other than “just a new

potential input” in negotiations aimed at reaching the original goals, and then some7.

Ignoring (from the outside) or denying (from inside Greece) this unfortunate habit only serves

to confuse reality with fiction.

f. Cleaning up the European Union act: Most Anglo-Saxon commentaries on the purportedly

harsh treatment of the Greeks suffer from a critical ‘blind spot’: they ignore the fact that the

European Commission and the other EU institutions8 are hard at work at boosting

governance across the board in all 28 EU Member-States in order to secure a sustainable

future for the EU and its residents. This means that EU Member-States are increasingly

6 If there is an important lesson in the Greek tragedy of the past many years, it is this one:

If a population choses to follow the siren song of “tax cuts” and thereby starving its governmental institutions of sensible, workable funds (by paying reasonable and appropriate levels of taxes), then their societies will slowly disintegrate into chaos. Unfortunately, the linkages between these causes and effects are so slow that people can usually only identify them after the fact – when there is no more remedy available to correct these mistakes. It remains to be seen whether Greece will act as the proverbial canary in the mine – the harshness rhetoric bouncing around on the airwaves sounds rather unpromising. 7 The latest round of public calls for German war reparations payments to Greece is yet another symptom of this malaise: every time

Greek governments find themselves in a financial bind, they firmly grasp the “outstanding German reparations payments” issue – always conveniently arriving at a number for satisfactory reparations that exceeds the financial needs of the day. The French economist Thomas Piketty – who seems to skim over the troublesome history of the Treaty of Versailles-based German war reparations dictated by the French government – clearly ignores these facts (Germany “cleared” its war debts with Greece in a 1960 treaty, when it was not yet such an economic powerhouse) as well as Greek habits (never stop negotiating irrespective of what has been agreed upon previously). Piketty’s blind spot is actually quite interesting, when one takes history into account: The legal basis of all German reparations payments to Allied nations after World War I had been modeled after the French reparations payments exacted by Germany after the Franco-Prussian War of 1870–71 which had been triggered by France: indemnity of 5 billion gold francs payable within 5 years, plus payment of the costs for the German occupation force in Northern France until fulfillment of the indemnity, plus loss of Alsace and half of Lorraine, including Metz. (The Prussian King was crowned Kaiser Wilhelm I of the united German Reich at Versailles on January 18, 1871, adding insult to injury.)

The total of the Versailles-based reparations payments of 226 Billion GoldMarks (circa $846 Billion in 2015-dollars) would have stretched well into the 21

st century (the 1921 London Schedule of Payments – valued at 132 Billion GoldMarks or circa $436 billion 2015-dollars –

mentioned the first possible pay-up year: 1988!), drawing attention to a major cause of pan-German resentment regarding the severity of the extracted payments, as well as obfuscating the source of the French lust for revenge under the leadership of Clémenceau in 1919. Interestingly enough, in April of 2015 the Greek Syriza government of Alexis Tsipras – who continues his “creative ambiguity” tightrope act to this day – conjured up an “outstanding” German war reparations debt of €279 Billion – no less than $303 Billion in 2015 US dollars – nearly 36% of the original Versailles-based German war reparations to all Allies, or nearly 70% of the adapted 1921 London Schedule of Payments! This comparison clearly highlights the Greek government’s hubris-borne folly – as well as the pundits’ ill-advised rush and eagerness to accommodate it. Like statistics, history can be enlightening, but it can also be abused for nefarious designs or foolish ideas.

As for the German reparations payments, things worked out differently: Although Germany did pay substantial reparations while its economy was not doing well (another Piketty oversight) – circa 16.8 Billion Gold Marks (circa 7.5% of the “Versailles-debt”), from 1919 to 1932 – the practical reality was that Germany enjoyed net capital inflow of, all told, circa 18 Billion Gold Marks (circa US$300 billion in today’s currency, circa 8% of the total “Versailles debt”).

Because Hitler cancelled all debt payments after coming to power, the foreign loans that were used to (a) finance Germany’s war efforts 1914–1918 (an interesting parallel between German Kaiser Wilhelm II and US President George W. Bush, by the way), (b) part of the war reparations payments, and (c) extensive investments in the German economy and German society (e.g. Autobahne, swimming pools), the mostly Allied foreigners actually supported the German economy by a factor 4 compared to the post-World War II Marshall Plan aid (in yet another divergence from Piketty’s apparent world view).

All too often, Shakespeare’s dictum “There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy” also reflects the reality of Peace and many other Treaties. One should never take anything for granted or on face value alone. 8 No doubt these European institutions were galvanized into action by the 2008 economic crisis and the consequential decrease in funds

available to government programs.

penalized for aberrant or deviant behaviour that is contrary to EU law.

The fact that Greece has been an outlier regarding the frequency, amount, and vehement

tone of its protests against this EU discipline9 in comparison with the other 27 EU Member-

States (some of which are significantly less well off than Greece today) should not be seen as

proof of harsh treatment of Greece, but as an indication of the dire need for transformation of

Greek policies and politics.

Blaming the EU and Troika for Greek intransigence only serves to confuse reality with fiction.

g. Tail wagging the dog: Aiding the past permissive approach vis-à-vis Greece was the minute

size of the Greek economy: about 1.5% of the Euro-zone total, and less than 1% of the EU

total.

Consequently, generations of European leaders opted to buy off Greek obstructions – often

modelled on Margaret Thatcher’s disruptive example – rather than rationally deconstruct and

counteract them.

Unfortunately for PM Tsipras and his Syriza government, this MO has outlived its

sustainability.

Unfortunately for the EU, Tsipras and his government do not seem to have prepared a plan-B

for the event that their long-established tactics would lose traction with their European

counterparts.

The tragedy of this approach is that it is subject to the laws of diminishing returns – with a

twist: in cauda venenum.

In this case the diminishing returns have turned totally negative in the form of a huge and

exploding loss of trust.

While “street smart” in the local Greek context, the July 5th referendum could end up being

the nail in the coffin of economic EU solidarity with Greece by putting an end to the West’s

fascination with plucky Greek freedom fighters and democracy that Lord Byron started nearly

200 years ago.

h. The LATEST GREEK “ΟΧΙ”: Especially in an EU context, Greek governments have been prolific

“Οχι”-sayers.

The convoluted referendum question has rightfully been condemned by many – how can an

unclear question ever lead to a clear answer?

There may be more to this in the Greek referendum, though, and it may actually be wise to

contemplate the following hypothesis.

Normally governments frame referendum ballots to insinuate a desired-for answer as “YES”.

It is quite possible that PM Tsipras formatted his question towards a “NO” in order to

capitalize on the widespread Greek pride going back to 1940, when Greek dictator Metaxas

purportedly answered Mussolini’s ultimatum to surrender territory to Italy with a single word:

“Οχι!” Every year, on October 28, Greece celebrates this defiance to an Italian (or is it now

“European”?) ultimatum with a public holiday.

The Greek government’s consistent “creative ambiguity” and its endless stream of “Οχι’s”

within the framework of the European Union and European Communities has led some

observers to believe that PM Tsipras actually wants to exit the Euro-zone, if not also the EU,

now that the European party is over for Greece10

and the bills have to be paid.

9 Notwithstanding the fact that Greece more than any other EU Member-State has been the recipient of huge, serial, bail-outs – and that

mostly at the expense of other EU Member-States and their taxpayers. 10

This actually should not surprise Canadians who lived through the 1995 Quebec Independence referendum: as became clear later, then-Quebec premier Parizeau intended to use a “YES” majority – given to a convoluted question by Quebec voters, many of whom were under the impression that they would never lose important attributes such as Canadian currency and passports, yet would lose Quebec’s share of the Canadian public debt – to immediately secede from Canada. Parizeau’s hubris led him to tape a to-be-broadcasted message to this effect before the results were in, proving beyond a shadow of doubt his real intentions with the referendum.

Addendum, July 15, 2015: The reports from Brussels regarding a showdown between Tsipras on the one hand and EU leaders such as Angela Merkel and Jean-Claude Juncker – Tsipras reportedly threatening to “go it alone”, capitalizing on Greece’s purported geopolitical and geostrategic importance (basically “playing the Putin card”) – indicates how single-mindedly monomaniacal and “uni-directional” Syriza is and how far removed the Tsipras government is and has been from the reality of government and governance. Obligations that have been freely (however

7. Matthew Yglesias, on Vox Business & Finance (http://www.vox.com/2015/6/28/8858727/greece-gdp-chart) hit

the nail on the head when he published his adapted World Bank data on Greek per capita GDP on

June 28th under the heading “This chart explains why Greece and Europe can’t agree”:

The triangle formed by the red, yellow and magenta lines represents the virtual reality that Greece

lived after 2000 by borrowing profusely against the dependability of the other Euro-zone economies.

Unfortunately for the Greeks, (as with the EU subsidies since 1981) their governments spent most of

these loans on consumptive items rather than on structural economic improvements.

8. As such, Yglesias’ chart perfectly illustrates with the advantage of 20/20 hindsight my retort in 1999

to the purportedly “pro-Greek” Ambassador and his deputy (see page 1):

Paying close attention to the real numbers instead of hyped PR and spin was not “anti-Greek”, but

actually serving the Greeks’ interests by advising a course (gradual fact-based modest growth slowly

ushering in economic improvements) that would likely prevent a dramatic crash of the economy once

reality established its predominance over hype.

As reported in 1999 and borne out in fact, an eventual Greek crash would not only have severe

repercussions for Greece, but outside its borders as well.

9. As for the bankers who lent Greece so much money so irresponsibly: nobody should shed any tears

for them. They either knew exactly what they were getting into (vide Goldman Sachs), or at the very

least should have known exactly what they were getting into.

As with the “triple-A-status-asset-based-derivative-junk-mortgages” in the US, the evidence was

clearly visible for everyone and anyone who took the trouble to look and see.

10. Who humiliated whom? Consensus seems to have it that ‘the Germans humiliated the Greeks’.

The facts of the past decades, however, suggest that the Greeks humiliated themselves by acting as

if they were above all laws, legal and moral obligations and agreements. ‘Being on the EU dole’ is

indeed humiliating – especially when not using donated funds of annually up to 10% of your GDP to

shore up your own economy and the socio-economic wellbeing of your own population.

The ease and eagerness with which the proverbial messenger has been shot – at the behest of the

whining, liberally insulting and continuously prevaricating Syriza/Tsipras government which could not

(and still cannot) bear to own up to the message – is mindboggling.

Without saying as much, Thomas Piketty hints that harsh measures can only be called for by those

that do not shirk their own obligations and tough love.

With this “tough love litmus test” in mind, the Greeks have been the EU Member State with the

least credibility to require others to adhere to principles which they themselves shirk consistently.

reluctantly) entered into need to be fully honoured – if not, they quickly turn into a serious and aggressive cancer, destroying everything within reach. The current Greek tragedy shows that there is no such thing as “too big to fail” – another crucial lesson that should be gained from the Greek population’s plight.

This triangle represents

roughly € 250 – 300 Billion

borrowed and spent on

pompous national pride and

unnecessary and fleeting

consumptive expenditures.

What a waste ……..

The post-2008 correction

The projected regular

pre-1998 growth pattern