+ Greece and its creditors The unsustainable debt dilemma J ACQUES S APIR Directeur d’études à l’EHESS Director CEMI-EHESS
+ I. Assessing the general situation
+ 1. The Greek debt has dramatically increased since the beginning of the 2000’s. But it was with the 2007 -2008 world financial crash that it became really unsustainable. By 2009 it was obvious that a massive restructuration was needed. The failure of doing so has damned EU policy since then. 2. So- called “Memorandum policies”, implemented not to the sake of helping Greece but of helping its creditors (as recently admitted by the IMF) created a disaster on massive scale when it came to evolution of the Greek GDP or the GDP per capita. 3. Average GDP per capita is now under 15 000 euros a year, something to be compared with the monthly wage of Mr. Pierre Moscovici as European commissioner (24 000 euros/month)
+ Evolution of Greece’s debt since 1989 (percent GDP) General� government� net� debt� in� percent� GDP� 180� 170� 160� 150� 140� 130� 120� 110� 100� 90� 80� 70� 60� 50� 1989� 1990� 1991� 1992� 1993� 1994� 1995� 1996� 1997� 1998� 1999� 2000� 2001� 2002� 2003� 2004� 2005� 2006� 2007� 2008� 2009� 2010� 2011� 2012� 2013� 2014�
+ Evolution of Greece’s debt since 1989 (Billions euros) General� government� net� debt� 320� 300� 280� 260� 240� 220� Euros� 200� Billions� 180� 160� 140� 120� 100� 80� 60� 1989�1990� 1991�1992�1993�1994� 1995�1996� 1997�1998�1999�2000� 2001�2002�2003�2004� 2005�2006� 2007�2008�2009�2010� 2011�2012�2013�2014�
+ Evolution of Greece GDP
+ Evolution of GDP per capita (Euros for one year)
+ 4. Quite clearly Greek debt is not sustainable. Haircuts implemented so far have been too limited.. A solution is to be found: (a) A massive restructuration but this has been refused by the German government with the support of French one. (b) Transformation into a perpetual rent whose interest would be indexed on the future nominal growth rate. (c) A default (non-organized restructuration) could also be contemplated. 5. To believe that things could be going on as they have been previously is a clear denial of reality.
+ II. The competitiveness issue and the effect of Memorandum austerity Had Memorandum austerity led to an actual improvement of Greece situation? How would Greece recover its lost competitiveness? What is alternative to internal devaluation?
+ Estimates of competitiveness Unit� Labor� Cost� -� Gap� with� Germany� 55%� 50%� 45%� 40%� 35%� France� 30%� Greece� 25%� Ireland� 20%� Italy� Portugal� 15%� Spain� 10%� 5%� 0%� -5%� Dec-1998� d é c.-99� d é c.-00� d é c.-01� d é c.-02� d é c.-03� d é c.-04� d é c.-05� d é c.-06� d é c.-07� d é c.-08� d é c.-09� d é c.-10� d é c.-11� d é c.-12� d é c.-13�
+ How have labour productivity evolved? Produc vity� gains� compared� to� Germany� 25,0%� 20,0%� Greece� 15,0%� Italy� Portugal� 10,0%� Spain� Ireland� 5,0%� 0,0%� -5,0%� -10,0%� -15,0%� 1999� 2000� 2001� 2002� 2003� 2004� 2005� 2006� 2007� 2008� 2009� 2010� 2011� 2012� 2013� 2014�
+ How have inflation evolved? Infla on� compared� to� Germany� since� 1999� 30%� 25%� 20%� Greece� Italy� 15%� Portugal� Spain� Ireland� 10%� 5%� 0%� 1999� 2000� 2001� 2002� 2003� 2004� 2005� 2006� 2007� 2008� 2009� 2010� 2011� 2012� 2013� 2014�
+ 1. Greek competitiveness, till the end of 2008, evolved in line with Southern European countries. Greece did not accumulated a massive lag with these countries. But for Germany, there would be not a specific problem of competitiveness. 2. It seems that policies implemented under the “Memorandum regime” have actually sharply degraded productivity, contributing then to further degradation of Greek competitiveness. The labour productivity trend is showing that Greece was till 2008 improving its position by comparison to Germany and other SE countries. 3. the so- called “internal devaluation” process, mimicking 1930’s ill - fated “deflation” policies has not solved Greek problems. This had to be expected if one remains of disastrous consequences of German Chancelor Brünning policies in 1930-1932.
+ Another estimates of competitiveness Compe veness� index� compared� to� Germany� 10%� 5%� 0%� -5%� Greece� Italy� -10%� Portugal� Spain� -15%� Ireland� -20%� -25%� -30%� 1999� 2000� 2001� 2002� 2003� 2004� 2005� 2006� 2007� 2008� 2009� 2010� 2011� 2012� 2013� 2014�
+ 4. If one adds inflation and productivity gains compared to Germany’s ones, we could devise and indicator of the general “Euro - competitiveness” of Southern Europe countries. Then we could see that all these countries are still in troubles. By comparison with Ireland, these countries need an adjustment going from around 12% for Portugal to 25% for Greece and Italy. Such an adjustment could either come from: (a) Another turn of “internal devaluation” but one implying a massive drop of nominal wages. For Greece it could imply lowering wages by at least 20%, in a country where unemployment is over 26%. (b) An exchange rate depreciation, but then implying an exit from the Eurozone or a dissolution of the Eurozone.
+ III. What is the actual situation for a possible exit from the Eurozone?.
+ The current account issue 2� 1989� 1990� 1991� 1992� 1993� 1994� 1995� 1996� 1997� 1998� 1999� 2000� 2001� 2002� 2003� 2004� 2005� 2006� 2007� 2008� 2009� 2010� 2011� 2012� 2013� 2014� 0� -2� -4� -6� -8� -10� -12� -14�
+ Investments and savings
+ Nevertheless, the situation has considerably evolved since 2010. To a large extent, Greece is now in a better shape for an “Exit” strategy. (a) Greece is now running a small primary budget surplus. (b) Greece have a balanced current account. (c) Internal savings are matching investments. But, such a strategy would imply defaulting on the debt. The debt is again on the forefront. Without a viable strategy from the Eurogroup on the Greek debt, the only solution could actually be what has been called “GREXIT”.
+ IV. Is GREXIT to be contemplated?
+ 1. The GREXIT solution is neither “against” or “pro” EU. It is a fact, which is to be objectively considered. 2. If a GREXIT is to happen the most serious problem will be the transitional period of time where the new currency (Drachma) is to be stabilized. This call for an agreement between Greece and other countries (either Eurozone ones of others like China or Russia) for a swap of around 20 USD billions. 3. The depreciation of the new currency compared to the Euro is to be between -15% / - 20%. 4. The impact on the current account balance and on internal production is to be very positive. 5. If no agreement could be reached for a dramatic change of Eurogroup toward Greece, then the GREXIT solution is to be seriously contemplated as a viable strategy for Greece.
Recommend
More recommend
