Policy
Paper

No 16_November 2013

Greece’s
successful death
Dr. Nikos Chrysoloras
Research Associate at the Crisis
Observatory, ELIAMEP
EU correspondent for Kathimerini

Copyright © 2013
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Greece’s successful death
Dr. Nikos Chrysoloras
Nikos Chrysoloras (PhD, LSE) is a Brussels-based EU Correspondent and Commentator at Kathimerini,
Greece’s leading newspaper, and a Research Associate at the Crisis Observatory of the Hellenic
Foundation for European and Foreign Policy (ELIAMEP). In 2012, he won the "Commentator Award" atthe European Press Prize. His articles on Greece, Cyprus, EU policy, and the Eurozone debt crisis, werecarried and cited in several publications across Europe and the world, while he has often commented
on current affairs in radio and TV shows. His portfolio also includes peer reviewed publications, andconference papers, as well as briefs, analyses, and articles for think tanks, and advisory firms. He hasinterviewed several heads of states and governments, EU Commissioners, parliament speakers andministers, business leaders and Nobel Prize laureates, as well as the heads of NATO, the EU
Commission, the European Parliament, the Eurogroup, the EuroWorkingGroup, the European Stability
Mechanism, the Council of Europe, and the European Investment Bank.

ELIAMEP offers a forum for debate on international and European issues. Its non-partisan character
supports the right to free and well-documented discourse. ELIAMEP publications aim to contribute toscholarly knowledge and to provide policy relevant analyses. As such, they solely represent the views of theauthor(s) and not necessarily those of the Foundation.

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Greece’s successful death
Dr. Nikos Chrysoloras

Table of Contents
Abstract ....................................................................................................................... 4
Greece’s successful death …………………………………………………………………5
A changing problem .................................................................................................... 8
Conclusions: Enough Already! ................................................................................... 9
About the Crisis Observatory .................................................................................... 123

Greece’s successful death
Nikos Chrysoloras

Abstract
The nature of the "Greek problem" has now ceased to be fiscal. Hence, the Troika's
insistence on the adoption of new austerity measures, in 2014 and 2015, is based on anarbitrary (if not metaphysical) assumption regarding the "120% of GDP" public debt
sustainability threshold, and delivers a toxic policy mix. The correction of macroeconomic
imbalances is not achieved through the creation of a new sustainable growth model, but
through the amputation of the economy. The old "Greek way" of doing things is dying, butthere is nothing to replace it, because nothing can grow in the asphyxiating environment ofmanic consolidation, and simultaneous cash and credit crunch. An emergency European
investment program could increase the chances of averting a Greek implosion.

Key Words:
Austerity; Grexit; Procyclical policy; Eurozone; Growth4

Greece’s successful death
Dr. Nikos Chrysoloras

Greece’s successful death“The operation has been successful, but the patient died”, is a catchphrase Greeks
often use, and it perfectly describes the reality in the country in late 2013. In many
ways, the Eurozone/IMF-backed economic adjustment program has been successful:
Greece achieved the largest fiscal consolidation of any other country in modern
history, and its budget deficit this year will be lower than the deficit of Portugal,
Ireland, Spain, the UK, the US and many other advanced economies.1 Also, Greece
almost zeroed its current account deficit, it has markedly improved its global
competitiveness rankings, and it has become a global leader in the implementation of
structural reforms, according to the OECD, the World Bank, and the Lisbon Council.2
But the cost of this unprecedentedly rapid adjustment has been so heavy, that
Greece may not hold on enough to enjoy its fruits, since the danger of total implosion
is imminent.
Table 1: Overall budget balance (Percent of GDP)Country
2013
2014
Greece–4.1–3.3
Ireland–7.6–5.0
Portugal
–5.5
–4.0
Spain
–6.7
- 5.8
Source: IMF Fiscal Monitor Projections, October 2013. Excludes one-off payments forbanksThis warning does not echo the market mood. Over the last few months, aspeculative rally has been unfolding in the Greek stock and bonds markets, fueled bytriumphal reports in the international media that the country is on its way out of thewoods. But this rally is completely out of touch with the reality on the ground, and it
masks a dire, and potentially destabilizing, total crisis. My analysis is based on thefollowing evidence:- Unemployment is at 27.6%3 and, most importantly, no one can pinpoint a source of
new jobs and growth. Greek exports, one of the two potential sources of new jobs,
have remained stagnant throughout the crisis,4 and unlike what happened in the rest

1

2

3

4

IMF, Fiscal Monitor, October 2013, available online:
http://www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm
World Economic Forum, 2013-14 Global Competitiveness Report, available online:
http://www.weforum.org/reports/global-competitiveness-report-2013-2014; OECD, Economic Policy
Reforms: Going for Growth 2013, available online: http://www.oecd.org/eco/growth/going-for-growth2013.htm;
and
World
Bank,
Doing
Business
Report2013,
available
online:http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/AnnualReports/English/DB13-full-report.pdf
Eurostat, September 2013 Unemployment report, available online:
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-31102013-BP/EN/3-31102013-BP-EN.PDF
ANSA, “Greek Exports on the Wane”, October 28, 2013; available online:
http://www.ansamed.info/ansamed/en/news/sections/economics/2013/10/28/Trade-Greek-exportsthe-wane-2-6-fuel_9531356.html

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of the crisis hit countries, current account adjustment has only been achieved
because of the cataclysmic slump in imports, i.e wartime-like Depression. Similarly,
recorded productivity gains “are mainly due to a much stronger decrease inemployment than in output”.5 More worryingly, the latest “Quarterly Report on theEuro Area”, published by the Directorate General of Economic and Financial Affairsof the European Commission (DG ECFIN) shows that the profitability in theinternationally tradable goods sector of the Greek economy is falling faster, and it ismuch lower, than in the non-tradable goods sector. Greece is unique of all the crisishit countries in this respect. According to the same report, both employment and“value-added in the tradable sector has contracted significantly against the 2006
level”6. And while unit labor costs in Greece fall (-6.2% in 2012, according to the EU
Commission’s September 2013 Social Situation Review), like everywhere else in theEuropean periphery, there is a “limited pass-through of falling wage costs into export
prices”.7
Even if exports had increased though, the starting point was exceptionally low, and it
was unreasonable to expect that Greece would become an export-powerhouse inthree years. If that was the plan, then it is doomed to fail.
- Tourist industry, the second potential source of jobs, is projected to reach a recordof 18 million arrivals this year, but if the political situation stabilizes in the wider
Mediterranean region, this number will fall again. Greece has not made enoughefforts so far to develop year-round tourism, attract tourists in its capital (national
capitals are the major source of tourist revenues throughout Europe), or attract
foreign direct investment in tourist-related activities. In any case, tourism alone
cannot pull Greece out or recession, and, interestingly enough, it is an industry,
which could, potentially, benefit the most from "Grexit".
- Economically active population in Greece is now much smaller than the total
number of unemployed, pensioners, and NEETs and keeps falling (about 3.6 million
economically active, against around 4.7 million inactive).8 This is not sustainable. Of
those economically active, only 1.8 million are salaried workers in the private sector.
The rest are either civil servants or independent professionals and businessmen.
Most of the latter ones either evade some of their taxes, or their businesses do not
produce enough revenue anymore to pay any taxes. Out of the 1.8 million salaried
workers, only 1/3, i.e. 700,000 people are being paid on time by their employers,
according to the Greek authorities.9 The rest get their salaries after severe delays,

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8

9

6

European Union (September 2013), Employment and Social Situation Quarterly Review, available
online: http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=1974&furtherNews=yes
European Union, (2013), “Labour costs pass-through, profits and rebalancing in vulnerable Member
States”, in Quarterly Report on the Euro Area, Volume 12, No. 3, pp. 1-34.
Ibid.
See, Hellenic Statistical Authority (June 2013), Labor Force survey, available online:
http://www.tovima.gr/files/1/2013/09/12/erg.pdf
See, Efimerida ton Syntakton, “Χωρίς επίδομα αδείας 1 εκατ. εργαζόμενοι”, citing data from theGreek pension fund IKA, available online: http://www.efsyn.gr/?p=102100

Greece’s successful death
Dr. Nikos Chrysoloras

reaching up to 12 months. Hence, tax arrears have doubled, to 60 billion euros,10
over the last four years and they continue to rise, by tens of millions each month. No
surprise here: people who are not being paid by their employers cannot pay theirdues to the tax authorities. What this means is that the burden of the gigantic
economic adjustment has mostly fallen on those 700,000 people, who are still being
paid, but have also seen their compensations fall more than anywhere else inEurope.11 The result is that state revenues, compared to GDP, are still lower in
Greece than the EU average,12 but most of these revenues come from a very small
number of people, whose resources have now been almost completely depleted andtheir desperateness has reached a boiling level.
- People burn cash to survive. Greek banks have lost about 1/3 of their deposits
during the crisis years (around 90 billion out of the 260 billion). Deposits started
flowing back into the system after June 2012 elections, but this trend was reversed
after the deposits’ “haircut” in Cyprus, in March 2013. Now, Greek banks report that
their continuous bleeding (around a billion per month)13 is not caused by uncertainty,
but it is mainly due to the fact that people use their savings to live and pay taxes.
This outflow of deposits exacerbates the crisis in the cash-strapped banking system,
which cannot even absorb funds channeled from the European Investment Bank, inorder to finance the Greek economy, due to the lack of loans-generating capacity.
Table 2: Indicative Absorption Rates of EIB Programs (until September 2013)
Program

Total Allocation (mil. €)Absorption (mil. €)Jeremie (FRSP)

228

92

Jeremie (Venture Capital)
Jessica

49
257

6
4

- Non-Performing Loans now exceed 65 billion euros, or 1/3 of total loans andmortgages in Greece.14 The total amount of deposit outflows and non-performing
loans is about three times as much as Greek banks are due to receive through theEurozone-backed recapitalization program (50 billion euros). Rising NPLs mean that
Greek commercial banks simply do not have enough capital to back new loans andprovide credit to the economy. This creates a vicious circle, since lack of credit

10

11

12

13

14

Suzanne Dalley, “Greece’s Aggressive Pursuit of Tax Evaders Appears to Collect More Anger Than
Money”, in New York Times, October 28, 2013, available online:
http://www.nytimes.com/2013/10/29/world/europe/greeces-aggressive-pursuit-of-tax-evadersappears-to-collect-more-anger-than-money.html?_r=0
European Union (September 2013), Employment and Social Situation Quarterly Review, available
online: http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=1974&furtherNews=yes
Eurostat, Taxation Trends in the European Union, 2013 edition, available online:
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DU-13-001/EN/KS-DU-13-001-EN.PDF
To Vima, “Μειώθηκαν κατά 1 δισ. ευρώ οι τραπεζικές καταθέσεις στην Ελλάδα”, October 25, 2013,
available online: http://www.tovima.gr/finance/article/?aid=536733
Kathimerini, “NPLs swell to 65 bln euros, says PwC report”, October 31, 2013, available online:
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_31/10/2013_525721

7

exacerbates recession, which, in turn, exacerbates the credit crunch. It is no wonderthat access to finance and skyrocketing corporate lending rates, are the mostpressing problems reported by Greek companies, and undermine the effort to expand
the country’s productive base and increase exports.15- The Troika review is at a dead end. Greece has achieved the largest fiscal
adjustment in modern history,16 and now runs the highest cyclically adjusted surplus
in Europe and the second largest cyclically adjusted primary surplus in the world,
according to the IMF.17 But the Troika, in a vulgar display of fiscal sadism is asking
for more austerity measures, in a country which is on the brink of total implosion,
while, at the same time, the continuing competitive adjustment in the core of theEurozone undermines Greece’s efforts to recover.18
Surely, the government can deliver marginal savings in next year's budget, and most
Greeks can still pinpoint to secondary sources of waste. But it is politically impossible
to adopt the new massive round of cuts that the Troika demands (the initial request
was for 2.5-3 billion euros of new cuts). The government simply does not have thevotes to get such a bill through parliament and even if it does, Greeks will not havethe resources to foot the bill anymore. Hence, political stability is once again an open
issue.

A changing problem
Obviously, when the crisis started, in 2009, Greece’s fiscal situation was
unsustainable, if not catastrophic. But since then, the country has adopted corrective
measures amounting to 30% of its GDP (!), as DG ECFIN’s Deputy Director General,
Servaas Deroose, recently admitted.19 Running a double-digit fiscal deficit, backthen, was undoubtedly irresponsible, but asking a country, which has lost 25% of its
GDP, to run a double digit cyclically adjusted primary surplus, now, is also borderingon the insane.
The Troika says that these new savings can come from further shrinking of the public
sector and lay offs. But more dismissals from the public sector would add a further
burden to the country's "ground-zero-like" social security system, through additional
unemployment benefits and pensions. In the absence of credit and investment, theprivate sector cannot create enough jobs to absorb those dismissed from the public

15

16

17
18

19

8

European Central Bank (2013), Survey on the access to finance of SMEs in the euro area (SAFE),
available online:
http://www.ecb.europa.eu/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201304en.pdf?60898720eeff7420c0a7c03f977e086a
International Monetary Fund (June 2013), Greece: Ex Post Evaluation of Exceptional Access underthe 2010 Stand-By Arrangement
International Monetary Fund (October 2013), World Economic Outlook
Jan in ‘t Veld (October 2013), Fiscal consolidations and spillovers in the Euro area periphery andcore, European Commission, DG ECFIN Economic Papers, No. 506.
During a hearing at the European Parliament over Troika crisis management, November 5, 2013.

Greece’s successful death
Dr. Nikos Chrysoloras

sector. Hence, the social crisis will be further aggravated, and the bill will only be
moved around, not avoided.
In short, Greece’s budget balance is now much better than in many other EU
countries. The size of its once inflated public sector is also approaching the EU
average, through a shrinking amounting to more than 150,000 civil servants, in the
period between 2010 and 2015. The purpose of the Memorandum of Understanding,signed with Greece’s emergency lenders, has been achieved in these respects. But
enough is enough. Unlike other crisis-hit countries, Greece is not suffering fromprolonged recession. It is at the brink of a total catastrophe, because of the depth
and pace of its economic adjustment, and the fact that no provision was made for acushion to mitigate its effects on economy and society. For example, most of thepeople who left, or are going to leave, the public sector will still be subsidized bystate coffers, either through pension funds, or unemployment benefits. Hence, anever-shrinking number of working-population is asked to fill these coffers, since very
little was done to create jobs in the private sector and increase the production of
wealth. Given this picture, Troika’s insistence that Greece’s main problem continues
to be fiscal in nature constitutes a gross misreading of the available data:
Table 3: Budget Balance Projections for Greece and Germany, in 2013
(Percent of potential GDP)
GreeceGermany
Cyclically Adjusted Balance
0.6–0.1
Cyclically Adjusted Primary
4.2
2.0
Balance
Source: IMF Fiscal Monitor, October 2013

Conclusions: Enough Already!
Fiscal consolidation was a necessary component of Greece’s adjustment program,
since, in 2009, the country’s deficit skyrocketed to unsustainable levels. But fiscal
balance has now ceased to be the main challenge. Instead, “Greekovery” requires
immediate action on two fronts: first, a credible plan to reduce the burden of debt
servicing costs for the Greek economy. This plan does not necessarily mean a debt
haircut. Public debt sustainability depends on how much does a country need eachyear to service its obligations. Extended maturities and low interest rates can easily“do the trick”, no matter the absolute number of Greece’s debt. Hence, the Troika’s
fixation with the arbitrary “120% of GDP” threshold is, totally incomprehensible. Thisfixation leads to more demands for spending cuts, which do even more damage to an
already shattered economy.

9Figure 1: Maturity Profile of Greek Central Government Debt

Source: Public Debt Management Agency

So, the second thing Greece needs is not further fiscal consolidation, but a plan of
emergency European investment, in order to expand the country’s productive base,increase wealth production, and alleviate the social crisis, until the ongoing structuralreforms bear fruits. It is worth clarifying, here, what do we mean by reforms: Greece
does not need more “reforms with a positive fiscal impact”, a euphemism for more
cuts. Mismanagement or misallocation of public resources can now be addressed in
an ad hoc basis, for each public entity. The kind of reforms that is really necessary
may be fiscally neutral, at least in the short term: real reduction of bureaucracy andred tape; an overhaul of the electoral system; streamlining of information technology
resources used by the public sector, in order, inter alia, to create economies of scale;
generalized use of open source software; a stable tax regime; a legislative frameworkthat favors medium - export oriented - enterprises, instead of independent
professionals, and very small companies, whose income depends solely on internal
consumption; a revamp of secondary and professional education. In other words,
what is needed, is to make sure that all the necessary steps are taken, so that
Greece becomes a more innovative and attractive economy. Such reforms will alsofunction as the necessary checks and balances, which will prevent the misuse of thesuggested “investment plan” funds by the clientelistic networks that ruined thecountry.
In any case, let us be realistic: no country can change its productive model without
credit and liquidity. Greece deserves to get this “investment” plan, since its people
have paid more than their dues to prevent contagion of the European periphery andcorrect the dire mistakes of the past. Moreover, Eurozone companies and states will
get their money back from such potential investment, which would build on Greece’s
competitive wages, highly trained human capital, decent infrastructure, and ideal
geographical location. Otherwise, they risk losing all the money they have provided,in the form of loans, to Greece, because the danger of implosion will persist.
Unfortunately, this option is not even discussed in Brussels or Berlin. So the Troika
insists on more fiscal measures, since there are no other options available. But

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Greece’s successful death
Dr. Nikos Chrysoloras

administering chemotherapy to a patient suffering from high sugar levels, justbecause insulin is not readily available, will not prevent a diabetic coma. To thecontrary, it will probably make things worse.
The only cause of optimism is that the Greek people, so far, have shown remarkable
resilience to the dramatic contraction of their economy, loss of wealth, anddeprivation. And it is true that if the Greek government survives this winter, then morethan 90% of the adjustment envisaged in the MoU, will be over. But surviving thewinter and the Troika’s demands without a catastrophic crash is far fromcertain. Even if Greece makes it in the end, it will not be because of what the Troika
demands in late 2013, but despite that.

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About the Crisis Observatory
In the context of the worst economic crisis in the history of post-war Greece and the wider
European debt crisis, initiatives for the systematic and scientific documentation, study andanalysis of the crisis in both Greece and Europe are sorely needed.
The Crisis Observatory aims to answer this call. The Crisis Observatory is an initiative of theHellenic Foundation for European and Foreign Policy (ELIAMEP), with the support of the Stavros
Niarchos Foundation.
Its primary objective is to become a central hub for information, research and dialogue for boththe Greek and European crises. The Crisis Observatory's guiding principle is the presentation of
new research, policy proposals and information, which are based on solid arguments andempirical evidence, with a view to improving the level of public discourse about the crisis. In
order to achieve this objective, the Crisis Observatory's work is organized around three central
pillars:o

The provision of educational material with a view to enhance the ability of the average
citizen, who often does not have a good hold on economic issues, to understand basic
parameters of the crisis.

o

The provision of serious, evidence-based and representative, in terms of subject focus andtheoretical/political approaches, information about the crisis.

oIntervention in the public discourse about the crisis, through the creation of a venue for thefree expression of different views and policy proposals promulgation of new research about
the crisis.

The team of the Observatory is:
Head of the Observatory-

Dimitris Katsikas, Lecturer, Department of Political Science and Public Administration,
University of Athens [International and European Political Economy]

Postdoctoral Fellow-

Kyriakos Filinis, PhD, Department of Political Science and Public Administration, University ofAthens [Political Economy]

Research Assistant-Vrettos Konstantinos, PhD Candidate, Department of Economics, University of Athens[Institutional Economics, Environmental Economics]
Research Associates-

Marianthi Anastasatou, Economist, Reseach Associate, Council of Economic Advisors[Macroeconomics, Economic Growth, Competition, International Trade]-

Nikos Chrysoloras, PhD, Journalist, Correspondent for European Institutions, Brussels

Special Advisor-

Nikos Koutsiaras, Department of Political Science and Public Administration, University ofAthens [European integration, Employment and Labour Market Policy, Social Policy, EMU
and Macroeconomic Policy]

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49, Vas. Sofias Ave. 10676 Athens, Greece | Τel. +30 210 7257 110 | Fax +30 210 7257 114 | E-mail eliamep@eliamep.gr