Monday, May 14, 2012

Enough with the “Memorandum”

The obsession with the “memorandum” – and who is for or against it – has completely leveled Greece’s public debate and it has simplified a complicated subject. It’s time we stop talking about the “memorandum” and have a serious conversation about the country’s problems and its future.

Greece faces two problems: state funding and finding a development model that will lead to growth. The two are obviously linked, but they are, ultimately, distinct. Funding is the most immediate problem and the one that limits Greece’s choices. Without the need to fund the state, our conversation would be different. But we do not have that luxury.

Like any country, the Greek state has three needs: to cover primary expenditures (salaries, pensions, etc), to pay interest, and to repay bonds that are maturing. To cover these needs, the state can levy taxes or it can borrow (option number three is to print money, but as a member of the Eurozone, Greece cannot do that). In a country with a budget deficit, borrowing is the way to reconcile revenues with expenses. But Greece cannot borrow from private markets since there are insufficient lenders who are willing to give money to Greece on terms that make the country’s debt sustainable. Nor will this change soon.

So the country has two options: it can borrow money from the official sector (countries and/or international organizations) or it can equilibrate revenues with expenditures. Borrowing from the official sector equals memorandum. Not necessarily the “memorandum” that we have now but some form of a memorandum. To get money, the country needs to make commitments. No memorandum means no official borrowing and thus anyone who is denying our existing or any memorandum is saying that the Greek government ought to find by itself the money to cover its needs.

The problem with this position is that Greece’s fiscal hole is very large. According to our 2012 budget, the state will run a primary deficit, which means it is short on cash even if it pays zero euros on interest. Indeed, without new measures, the budget will remain in deficit until 2016 (at least). Now, the gap grows if the state plans to pay interest (€13-€14 billion a year to 2016) or to repay maturing debt (€30-€48 billion a year to 2016). This money does not even include support for the banking system.

Politicians who oppose the Memorandum ought to tell us how they will cover this deficit: through what revenue sources and through what cuts? Even if we assume that a unilateral repudiation of 100% of our debt will not trigger the collapse of the banking system or an exit from the Eurozone, the budget is still short €2-€4 billion a year. What measures will close this gap?

Of course, SYRIZA has an answer, although we haven’t heard much of it after the election: “Funds can be found through a radical overhaul of the tax system, a levy, as appropriate, on large incomes and accumulated wealth and the reduction of spending that do not serve the people’s interests” (my translation). According to the party, these measures will lead to “tens of billions” of additional revenue every year. So there is money out there and we will go get it, says SYRIZA, although its reference to “tens of billions” betrays the immaturity of the party’s economic thought (by comparison, in 2011, direct tax revenues were ~€45 billion, so “billions of euros” sounds a bit much). Yet we ought to discuss these plans and to understand where this money will come from without destroying the country’s economic foundation.

We also ought to discuss whether this plan is compatible with Greece’s membership in the Eurozone. Instead of yelling “yes” or “no,” we need a somber conversation. Without official funding, for example, it is quite possible for the people to demand a return to the drachma because the numbers do not add up. On the other hand, Greece already owes over €100 billion to Europe and the International Monetary Fund. To manage our finances without aid, we would certainly repudiate those debts – what will our partners say about that? Even those who want to amend the “memorandum” say little about how they wish to amend it. For example, if SYRIZA. were to present its economic plan as a basis for debt restructuring, no one will take them seriously. Either way, we need concrete proposals, not slogans.

This conversation covers only one of the two problems: the need for state funding. The other problem is broader, more fundamental and more important: how to restore Greece to a growth trajectory. Unlike the half-baked conversation about the “memorandum,” we do indeed have fundamental differing views about this. On one hand, there is a liberal view that believes in deregulation and the shrinking of the state. On the other hand, there is the belief in a stronger state that will restrain market forces. Between the two extremes, of course, are many combinations. But the obsession with the “memorandum” has obscured this more meaningful dialogue. It is time to say what we are for, not just what we are against.


  1. Dear Nikos,

    thank you very much for sharing your thoughts (in English).

    I deeply appreciate your views on the "Greek situation" and hope your voice gets heard at the right places.

    I think it is now time for actually getting things done and leave the fingerpointing for later.

    mmi (from Germany....)

    1. Thank you mmi - much appreciated. I too hope that the country's debate becomes more sensible as head to another round of elections.

  2. Who would criticize your analysis, Nikos? Not I. But when you conclude that: ""It is time to say what we are for, not just what we are against."", you're wrong. There is no time left for debate, action is needed and Greece should be given all of the encouragement she needs and as much help as possible, to leave the Euro.
    Greece established the concept of democracy in the Western psyche: it is time for her make clear that democracy can be destroyed by the foolish, devious, grandiose projects of politicians - beware Francophone politicians fostering plans.

    John Coles

    1. John, of course you are right - it's time for action. Yet without a proper debate, what action can we take? When we haven't done a proper assessment of what happened and when we haven't talked sensibly about our options, what kind of action is possible? When people say "let's leave the Eurozone" or "let's default but not leave" or "let's kick out all the immigrants" or "let's renegotiate to create growth but without saying how" - what kind of action is possible from such confusion? That's what I am getting at.

    2. John Coles: Politician's fallacy ( ). No matter how urgent a situation is, if you don't have a solid plan, doing anything can hurt more than it helps.

      Defining yourself as against something rather than for something is a well known psychological defense mechanism to delay having to establish your own identity. It always leave at a disadvantage, as you are constantly reacting to your environment rather than acting on it to bring it closer to your goals.

      Also, thank you Nikos for an insightful post, as always.

  3. A little too obscure for me, Eric Fournier, but then I'm just a simple sailor who knows too well that debate can often be little more than fearful procrastination.

  4. Nikos - thanks for continuing to maintain your very high-quality site.

    Being a sector financial balances addict, I can't help viewing Greece's 'fiscal hole' you mention in the context of the huge current account deficit. There seems to be insufficient discussion of this.

    The foreign sector seems to want to 'prefer' to run a large surplus with Greece: in 2011 this seems to have been as high as 9.8%, barely down from the 10.6% in 2010.

    The domestic private sector should also generally 'prefer' to run flow surpluses. Households should run a surplus for sure (admittedly they didn't in the 2000s, but this was not a situation we should want to return). Firms may (in fact ought to) run a deficit but this seems to be smaller in most countries than the household surplus, leaving the overall domestic private sector 'natually' in surplus.

    So if Greece wants to reduce its budget deficit, it needs one or both of the other two sectors (foreign sector, and domestic private sector) to 'agree' to run a smaller surplus than they would prefer.

    I would suggest that it is more desirable, in terms of economic stability, for the domestic private sector to prevail, and for the foreign sector to be the one which is thwarted, so as to speak, and have its surplus forced down. However, my fear would be that the foreign sector may be more 'powerful', and that continued austerity will simply force the domestic private sector into an unstable deficit position, with the current account remaining stubbornly large.

    In short, there can be no solution for Greece until the current account is largely closed.

    The fact that a Eurozone exit would close Greece's current account immediately strikes me as a key advantage, which should be seen against all the other negatives of such a course of action.

    (Of course, if there were another way of slashing the current account to zero without leaving the Eurozone, eg by some Warren Buffett-style import certificates, that would be better still.)


Note: Only a member of this blog may post a comment.