News & Events

Network News - 18/06/2015

Can Zeus come to the rescue in the festering euro crisis?



Author: George Mangion
Published on Malta Today, 18 June 2015

godsThe EU seems to be surfacing from a number of dreary years of credit squeeze and its economy is only just starting to recover yet it wants the Greeks to pay retribution for accepting low cost loans in the past. Zeus was the god of the sky and ruler of the Olympian Gods in ancient Greece, brandishing a thunderbolt as a powerful weapon which he hurled at those who displeased him, so please be careful as Greece’s economic and social destiny is in the hands of the continent’s most unlikely trio. The Titans of the Greek political party, Tsipras and the finance minister, Yanis Varoufakis, were buffeted and cornered by the German politicians and yet although agonisingly long there is seemingly a compromise in the air to save Greece and prolong the life of a faltering euro.
The EU seems to be surfacing from a number of dreary years of credit squeeze and its economy is only just starting to recover yet it wants the Greeks to pay retribution for accepting low cost loans in the past, in an unbridled rush to fritter it away within an archaic and corrupt bureaucracy. Now the creditors are frantically banging at the door wanting payment from a moribund country. One may ask why is the IMF – supposed to be an even broker – singing from the creditors’ hymn sheet. Suddenly, the illuminati in Brussels discovered a black hole in the Greek pensions system, where much belatedly they are faced with a backlog of more than 400,000 pension applications to deal with (many of which are requests for early retirement) that will add to the country’s existing tally of 2.65 million pensioners.

Creditors expect pensions to be trimmed by the equivalent of 1% of gross domestic product while supplementary pensions stop being paid by the State and become paid directly from contributions. Naturally, such demands are strongly resisted by Tsipras and Varoufakis, yet why is there such a great resistance to trim the wings of a massive bird, aka pension system, which has soared high and clouded the skies, leaving dark shadows on the mechanism of the functioning economy? To answer this question, one needs to consider the background to the dilemma. The demographics are bleak as roughly 20.5% of Greeks are over 65, linked to high youth unemployment rate still above 50%, so in theory, until the situation improves young people are not going to be able to pay for their grandparents’ pensions.

Another unique fact is that Greek society has a dependency on pensioners with an official old-age dependency ratio above 30%, which means that for every 100 people of working age in Greece there are 30 people aged 65 or over. There are also abuses in the system (due to hazardous working conditions) where early retirement at around age 40 triggers a State pension.  Compared to Malta, where we pay today for today’s pensioners with no permanent state fund, the Greek system is also unsustainable and needs a major reform. It is no surprise that the Greek system is creaking under its weight since it consumes 17.5% of GDP, higher than any other EU country.

Ever since it was bailed out, the stark reality is that Greece is now branded as a battered economy with the accumulated national debt reaching 180% of GDP, where incomes have fallen by a quarter in recent years. It was destroyed in the past decades when cheap loans from EU banks fed its cavernous appetite for a dysfunctional bureaucracy littered with abuses in a public sector hegemony. Really and truly, the profligacy cannot be blamed on Syriza, its present government, but seriously, the time of reckoning is nigh and creditors want their share of promised prepayments. Yes – this turmoil has germinated a radical political party called Syriza which is now gambling Greece’s future and that of the euro crisis in an eleventh hour dangerous game of brinkmanship. As a spoiled child capriciously fed candy for many years, it grew obese and is now being punished by being ordered to trim the excess fat, possibly take to daily exercise and instead of fatty foods it is being force fed on a drip.

It is true that the cost of bailing out Greece and slashing its debt levels would add tens of billions to the loans granted collectively by the eurozone countries. For now, at least, that assessment is absolutely spot on. The stakes are high for the long-suffering Greek people, who are expected to swallow a further dose of austerity, but they are even higher for the European Commission, the European Central Bank and the IMF. The pulsating fear, starkly expressed by the Commission in its latest health check on the euro area, is that a potential default by Greece could have knock-on effects, not just through the rest of the single currency zone, but which could also lead to a second global economic crisis. The unexpected global market jitters occasioned by the downgrading of the Greek currency simply added more salt to the already gaping wound.

So is Malta the exemplary child when compared to other Mediterranean islands?… so say apologists… our economy is growing at a higher rate than the EU average and unemployment is shrinking while one observes a registered improvement in the number of females returning to work after child birth thanks to fiscal concessions and free child care centres. That is, if we continue to omit from the dole queue the thousands of married females who opted voluntarily to stop working. Recent projects by Malta Enterprise add up to an impressive three billion in the collective FDI and include namely the building of two hospitals by Bart’s of UK, the Sadeem International University, the cruise liner and holiday village at Qala, the China Electric investment in the ailing Enemalta utility and various luxury high rise buildings / hotels.

Certainly the multiplier effect of such an investment will help the domestic economy to blossom and perhaps it shall shortly be buttressed with another two billion added to a sovereign fund now being marketed by top audit and legal firms (numbering over 100 in licensed agents). Stoically, Malta  proudly gave its share to Greece and will continue to do so if more bailouts are sanctioned. Ironically the fear of contagion due to a Grexit spreading to larger economies of Italy, France and Spain have sent the jitters in the corridors of Brussels. So is there a solution in sight? Commentators suggest a spreading of the weight of the burden of the debt crisis. The question is whether the same can be borne by creditors although a way is required that forestalls any trigger of an official default, otherwise any downgrading by the rating agencies will spread havoc in the markets.

Yes private creditors would need to bear losses, while the eurozone bailout fund known as the European financial stability facility must be fortified to rise from its current lending capacity. The impression in the air is that Germany is acting more in its own interest as opposed to the common European good, which has provoked angst after the news that Berlin had abandoned solidarity for self-interest. So what is to stop Greece telling the EU and the IMF to take a running jump? There are three probabilities to this happening. First, Syriza has a reputation of saying one thing and doing another. Rather than challenge its creditors, it may consider it wiser to say publicly that it will go ahead with deep wage cuts and sweeping privatisation but really and truly soft pedal on the reforms once it has got the loan.

Second, there is no great desire for Greece to leave the euro even though many in Greece would welcome the opportunity to have a fresh start with a devalued drachma, although their number does not include the country’s political establishment. Third, while there is no immediate risk of Greece being kicked out of the club, such a threat could only materialise if German taxpayers were to rebel and exert real political pressure on Angela Merkel’s government.

Alternatively, if Athens actually goes ahead with the structural reforms, the economy’s growth prospects will be jeopardised, tax receipts will suffer, pensioners will bleed and the deficit will remain stubbornly high. The euro crisis is deep and perhaps insoluble in the near term but Syriza does not have many options or ace cards in the pack – instead Brussels is well advised to pray for support of the all mythical Gods this time!


Author: George Mangion
Published on Malta Today, 18 June 2015
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