Saturday, February 25, 2012

Why Should Europe Care About Greece?

If Europe could be sure that a Greek collapse would entail no contagion, should it still care about what happens to Greece? Or, to put it differently, besides the stability of banking and of the currency union, what are Europe’s interests in Greece? My sense is that there is one obvious interest and one less obvious one.

The obvious interest is that contagion takes many forms. High unemployment is already prompting another emigration wave, and many of these immigrants will land in Western Europe. The economic and social implications for the recipient countries can be severe given their own economic problems. More generally, a worst case scenario for Greece can be very bad. Greece is the border between Europe and the Middle East and North Africa, and a weaker Greece could destabilize SE Europe by increasing the flow of people and goods crossing into Europe. Worse still, a weak Greece could be unable to contain rising social tensions and enforce the law in its own borders, paving the way for its territory to be used as a haven for illegal activity. Europe has an obvious interest to prevent this scenario from playing out.

The less obvious interest is the impact of a Greek collapse on the European brand. I don’t mean, merely, that a prolonged and unsolved crisis damages one’s reputation in the same way that the Yugoslav wars of the 1990s damaged Europe’s claim to have a common foreign policy (though as I disagree with the claim that the European leadership has mishandled the economic crisis – but that’s another matter). Rather, I mean something deeper that goes to the core of what Europe stands for. If America’s brand is “life, liberty and the pursuit of happiness,” Europe’s brand is “rules and institutions lead to peace and prosperity.” From the European Coal and Steel Community to the accession of Greece, Spain and Portugal in the 1980s to the 2004 accession of the 10 new member states, Europe has fashioned itself as offering a rules and institutions-based path to peace and prosperity. Even when dealing with Ukraine or Turkey, Europe sees itself as an anchor – follow the playbook of the acquis, it says, and all will be good.

That brand will take a severe beating if Greece fails. Most obviously, there is the question, are rules enough? Greece (nominally) checked off lots of boxes, but as the rest of Europe is finding out, there was much rotten beneath the surface. Of course, one has to also ask, do the rules help? Where is the European growth model? Where is Europe’s capacity to create growth and induce productivity? What good are all these common rules if you can end up with the market distortions and with the corruption that one sees in Greece? But the more existential question is, how much common purpose and solidarity have these rules created? This crisis has made plain that while there is much desire to work together at the political level, at the social level, we are not far off from a recrimination yelling match of “you lazy Greek,” “I founded democracy, you Nazi.” These alarming attacks and bickering show how easily we can erase decades of goodwill by reverting to old or new stereotypes about other people.

These are the deeper stakes for Europe. A belief that the human and political condition is malleable and that history and even culture can be contained through rules and institutions. If Greece truly fails, that idea will need serious life support to remain alive.

Monday, February 20, 2012

Are Markets to Blame for the Greek Crisis?

Greece’s experience these past two years has made me into an even stronger believer in markets and in capitalism. Here’s why.

It is easy to paint a picture where poor, defenseless Greece is fighting against the forces of global capitalism, where evil banks and greedy markets want to profit from Greece’s demise, and where the urge to “rise up” and “resist,” so wedded into the Greek psyche, puts our current crisis on a morally equivalent basis as the Revolution or the Resistance. Certainly many Greeks feel that way, as did our former prime minister who often lashed out against speculators and the markets. But such a reading of the crisis is deeply misleading and it is ultimately wrong. If this crisis is to produce real change in Greek society we need a correct diagnosis of what happened and why. And markets are hardly to blame for our current condition.

In a way, the Greek crisis is a typical sovereign debt crisis. A profligate government was able to sustain excessive spending through continuous borrowing; at some point, faith in its ability to repay debt is shaken and so it can no longer borrow at reasonable rates. At that point, an international coalition gets together to offer a solution – at first, this comes in the form of a financial lifeline (bailout); if that does not work, the country may either seek another bailout, it can negotiate a debt exchange with its creditors or it can outright repudiate its debts. This is exactly the path that Greece has followed.

The background of the global economic crisis and Greece’s participation in the Eurozone only affect the particulars of that trajectory, but they do not alter its fundamental character. Some of these forces have actually aided Greece. The exposure of European banks to Greek debt has been a constructive force in favor of an orderly resolution, as has been the fear that Greece could be another “Lehman Brothers.” Greece’s membership in the Eurozone has raised the stakes of failure and has given the creditors a level of patience that they might not otherwise have had. And the fact that Greece does not have an independent currency has shielded the country from pressures that put enormous strain on Asian or Latin American states during their own crises.

In other ways, however, the international financial environment is making life harder for Greece. After years of lax lending standards, investors have become very risk averse, which means that it is harder for almost anyone to borrow, not matter what their credentials. And by virtue of its membership in the Eurozone, Greece cannot create growth the way that countries in its position tend to create growth: by devaluing their currencies. As a result, Greece’s exit path is somewhat more complicated.

But the big picture is straightforward: Greece’s fiscal problem is its inability to borrow at low rates in order to finance its budget deficit and to roll over its maturing debt. The reason is that markets demand a prohibitively high premium to lend money to Greece. Of course, markets can be sheepish, fickle and whimsical; and they can move wildly based on sentiments rather than fundamentals. But in this case, markets are delivering a message that is identical to the message that the majority of the Greek people are delivering: “leaders of Greece,” they are saying, “we don’t have faith in your promises, we doubt your commitment to change and we question your competence.” How many Greeks really disagree with that?

The difference is that when markets deliver a message, it is heard. While people complain about “undemocratic markets,” in this case, markets have forced lots of democratic discipline in a state that had little. We finally know how many people the state employs; we have some semblance of honest numbers; we have some effort to rein in exorbitant salaries in the broader public sector; we might finally sell or utilize some state assets (which everyone agreed were being wasted until the IMF said so); we are under pressure to tackle tax evasion; and we have a demand that closed professions be opened. One could only wish that our democratic institutions could deliver so much pressure for change so quickly! Of course, in a country where democracy often means mob rule, market discipline is an inconvenience. But it’s such a welcome relief from the sclerotic politics that have paralyzed Greek society for years.

The truth is, we did not get into is mess because of capitalism. We got into it because for three decades we have systematically bent every rule of capitalism; we have bought into a leftwing philosophy that says markets are bad, companies are evil, and profits are dishonorable. We have become a terrible place to do business and we have broken the relationship between work and reward, which lies at the center of the market system. We have given the state an exorbitant amount of power – power which it has abused, often in tandem with corrupt private interests.

In a country where corruption is so endemic, an infusion of capitalism would be a potent counterforce. As Clive Crook once wrote, “limited government is not worth buying. Markets keep the spoils of corruption small. Government that intervenes left and right, prohibiting this and licensing that, creating surpluses and shortages—now that kind of government is worth a bit.” The demand for corruption comes from the fact that the normal path to success – making good products and selling them – is so laden with problems. You only cozy up to politicians because they have so much power. Take away their power, and corruption would fall.

Support for markets, of course, is not the same as support for big business, much as it sounds like that to many people. To quote The Economist again: “Economic liberalism, much like political liberalism, puts great weight on checks and balances, on limits to power and hence to abuses of power. In economics, the most potent checking force bar none is competition. Bosses, shareholders and pro-business politicians all loathe it. They stand to gain, in one way or another, from conspiring to gull the public into regarding competition as a threat to the greater good, rather than to themselves.”

Greece’s experience is a painful reminded that when so many decisions pass through government hands, we end up with lots of corruption, waste and injustice. The markets that people bedevil are, in fact, a force for change. Not only are markets forcing change in Greece but they are securing reforms that successive electorates have been unable to for years. Markets are asking for a less corrupt society, a more competent leadership, and a more competitive and meritocratic economy. Who can argue with that?

Φταίνε οι Αγορές για την Ελληνική Κρίση;

Η κατάσταση στην Ελλάδα τα τελευταία δύο χρόνια έχει ενισχύσει την πίστη μου στον φιλελευθερισμό και στον καπιταλισμό. Η μια οπτική της κρίσης είναι αυτή όπου η φτωχή και ανυπεράσπιστη Ελλάδα μάχεται ενάντια στις δυνάμεις του παγκόσμιου καπιταλισμού, όπου οι κακές τράπεζες και οι άπληστες αγορές προσπαθούν να επωφεληθούν από την κατάρρευση της και όπου η ελληνική τάση για την «αντίσταση» κάνει την τρέχουσα κρίση ηθικά ισοδύναμη με την επανάσταση ή την Αντίσταση. Πολλοί Έλληνες αισθάνονται έτσι, και άλλωστε ο Γιώργος Παπανδρέου συχνά επιτέθηκε κατά των κερδοσκόπων και των αγορών. Αλλά θα ήταν σφάλμα να δούμε την κρίση υπό αυτό το πρίσμα. Πιστεύω πως χρειαζόμαστε μια σωστή διάγνωση για το τι συνέβη και γιατί, αν αυτή η κρίση είναι να οδηγήσει σε πραγματική αλλαγή την ελληνική κοινωνία. Και είναι πολύ δύσκολο να κατηγορήσουμε τις αγορές για την κατάστασή μας.

Εν μέρει, η ελληνική κρίση είναι μια τυπική κρίση δημόσιου χρέους. Μια σπάταλη κυβέρνηση προσπαθούσε να διατηρήσει τις υπερβολικές δαπάνες με συνεχή δανεισμό▪ σε κάποιο σημείο, κλονίζεται η πίστη των αγορών πως η κυβέρνηση μπορεί να αποπληρώσει το χρέος, με αποτέλεσμα να μην έχει πια την δυνατότητα να δανειστεί σε λογικά επιτόκια. Σε εκείνο το σημείο, ένας διεθνής συνασπισμός παρεμβαίνει για να δώσει λύση στο πρόβλημα: καταρχήν, οργανώνει ένα βραχυπρόθεσμο δάνειο, και αν αυτό δεν επαρκέσει, η χώρα είτε ζητά περισσότερα χρήματα, είτε διαπραγματεύεται μια μείωση του χρέους, είτε κηρύττει στάση πληρωμών και χρεοκοπεί. Αυτή ακριβώς είναι και η διαδρομή που ακολουθεί η Ελλάδα.

H παγκόσμια οικονομική κρίση και η συμμετοχή της Ελλάδας στην Ευρωζώνη επηρεάζουν μόνο κάποιες από τις λεπτομέρειες αυτής της πορείας αλλά όχι και το θεμελιώδη χαρακτήρα της κρίσης. Μάλιστα, κάποιες από τις συγκυρίες ευνοούν την Ελλάδα. Η εξάρτηση των ευρωπαϊκών τραπεζών στο ελληνικό χρέος είναι μια επικουρική δύναμη υπέρ μιας ομαλής επίλυσης, όπως είναι επίσης και ο φόβος ότι μια ελληνική χρεοκοπία θα μπορούσε να είναι άλλη μια «Lehman Brothers». Επειδή η Ελλάδα είναι στην Ευρωζώνη το κόστος μιας αποτυχίας είναι σημαντικά μεγαλύτερο, και άρα οι εταίροι μας έχουν (κι έχουν ήδη επιδείξει) περισσότερη υπομονή, απ´ότι θα είχαν υπό άλλες συνθήκες. Και το γεγονός ότι η Ελλάδα δεν έχει ανεξάρτητο νόμισμα έχει θωρακίσει την χώρα μας από τις πιέσεις που ασκήθηκαν στις οικονομίες της Ασίας και της Λατινικής Αμερικής κατά τη διάρκεια των δικών τους κρίσεων.

Παράλληλα, το διεθνές οικονομικό περιβάλλον έχει δυσκολέψει αρκετά την κατάσταση για την Ελλάδα. Μετά από μια περίοδο άφθονου χρήματος, οι επενδυτές είναι πολύ πιο επιφυλακτικοί, πράγμα που σημαίνει ότι είναι πιο δύσκολο για τους περισσότερους να δανειστούν, άσχετα με τα διαπιστευτήριά τους. Επιπρόσθετα, η συμμετοχή της Ελλάδας στην Ευρωζώνη, δεν της επιτρέπει να υποτιμήσει το νόμισμα της προκειμένου να δημιουργήσει ανάπτυξη όπως έχουν κάνει άλλες χώρες στην ίδια θέση κατά το παρελθόν. Ως αποτέλεσμα, η πορεία της Ελλάδα έχει καταστεί πιο περίπλοκη.

Το βασικό δημοσιονομικό πρόβλημα της Ελλάδας είναι ότι δεν μπορεί να δανειστεί χρήματα σε λογικά επιτόκια προκειμένου να χρηματοδοτήσει το δημοσιονομικό της έλλειμμα και αναχρηματοδοτήσει τα ληξιπρόθεσμα χρέη της. Ο λόγος είναι ότι οι αγορές απαιτούν απαγορευτικά υψηλά επιτόκια για να δανείσουν την Ελλάδα. Δεν υπάρχει αμφιβολία πως οι αγορές μπορεί να είναι ανόητες, άστατες και ιδιότροπες▪ μπορούν επίσης να κινηθούν με βάση τα ​​συναισθήματα και όχι τη πραγματικότητα. Αλλά στην περίπτωση αυτή, οι αγορές εκπέμπουν ένα μήνυμα που είναι πανομοιότυπο με το μήνυμα που προσπαθεί να περάσει η πλειοψηφία του ελληνικού λαού στους Έλληνες ηγέτες:

«Δεν δείχνετε ικανοί, δεν είσαστε αξιόπιστοι και σίγουρα δεν είσαστε πρόθυμοι να πραγματοποιήσετε τις αλλαγές που πρέπει να εφαρμόσετε και για τις οποίες έχετε δεσμευτεί.»

Πράγματι, πόσοι Έλληνες διαφωνούν με αυτό το μήνυμα;

Βέβαια, όταν οι αγορές έχουν να δώσουν ένα μήνυμα, αυτό εισακούγεται. Ενώ σε γενικές γραμμές μιλάμε για «αντιδημοκρατικές αγορές», στην περίπτωση αυτή, οι αγορές έχουν επιβάλλει μια δημοκρατική πειθαρχία σε μια χώρα που της έλλειπε. Επιτέλους ξέρουμε πόσα άτομα απασχολεί το κράτος▪ έχουμε σχεδόν ειλικρινή στατιστικά▪ πάμε να μειώσουμε τους υπερβολικούς μισθούς στο δημόσιο τομέα▪ ίσως να αξιοποιήσουμε επιτέλους τη κρατική περιούσια (ένα διαχρονικό ζητούμενο, μέχρι που το πρότεινε το ΔΝΤ και όλοι αντέδρασαν)▪ είμαστε υπό πίεση να πατάξουμε τη χρόνια φοροδιαφυγή▪ και υπάρχει μια λογική απαίτηση να ανοίξουν επιτέλους τα κλειστά επαγγέλματα. Μακάρι οι δημοκρατικοί θεσμοί να μπορούσαν να φέρουν τόση πίεση για αλλαγή τόσο γρήγορα! Φυσικά, σε μια χώρα όπου η δημοκρατία συχνά παίρνει την μορφή της οχλοκρατίας, η πειθαρχία είναι μια ενόχληση.Παρόλα αυτά, παραμένει μια ανακούφιση από την αρτηριοσκληρωτική πολιτική που έχει παραλύσει την ελληνική κοινωνία εδώ και δεκαετίες.

Η αλήθεια είναι πως δεν φτάσαμε σ’ αυτό το χάλι λόγω του καπιταλισμού. Φτάσαμε γιατί εδώ και τρεις δεκαετίες έχουμε παραβιάσει συστηματικά κάθε κανόνα του καπιταλιστικού συστήματος. Έχουμε υιοθετήσει μια «αριστερίζουσα» φιλοσοφία που λέει ότι οι αγορές, οι εταιρείες και τα κέρδη είναι αθέμιτα. Είμαστε μια χώρα στην οποία σχεδόν κανείς δε θέλει να επενδύσει, και έχουμε απολέσει τη σύνδεση μεταξύ εργασίας και ανταμοιβής, που βρίσκεται στο επίκεντρο του φιλελευθερισμού. Έχουμε δώσει στο κράτος υπερβολική δύναμη και (φυσικά) την έχει καταχραστεί, συχνά σε συνδυασμό με διεφθαρμένα ιδιωτικά συμφέροντα.

Σε μια χώρα με τόση διαφθορά, ο φιλελευθερισμός αποτελεί μια ισχυρή αντίρροπη δύναμη. Όπως έγραψε κάποτε ο Clive Crook: «την περιορισμένη κυβέρνηση δεν αξίζει να την εξαγοράσεις. Η αγορά περιορίζει τα λάφυρα της διαφθοράς. Όταν το κράτος παρεμβαίνει αριστερά και δεξιά για να χορηγήσει άδειες ή να δημιουργήσει πλεονάσματα και ελλείμματα – τότε αυτό το κράτος αξίζει πολλά.» Η ζήτηση για τη διαφθορά προέρχεται από το γεγονός ότι η κανονική πορεία προς την επιτυχία – να παρασκευάζει κανείς καλά προϊόντα και να τα πουλά - είναι τόσο δύσκολη. Αντίθετα, απευθυνόμαστε στους πολιτικούς και τους ζητάμε χάρες γιατί έχουν τόση δύναμη. Πάρτε τους τη δύναμη και η διαφθορά θα μειωθεί.

Το να υποστηρίζεις τις αγορές, φυσικά, δεν είναι το ίδιο με την υποστήριξη για τις μεγάλες επιχειρήσεις, όσο και αν πολλοί ταυτίζουν τα δύο. Για να παραθέσω και πάλι το Economist: «ο οικονομικός φιλελευθερισμός, όπως και ο πολιτικός φιλελευθερισμός, δίνει μεγάλο βάρος στους ελέγχους και τις ισορροπίες, στα όρια της εξουσίας και στο περιορισμό της κατάχρησης της εξουσίας. Στην οικονομία, η πιο ισχυρή δύναμη που περιορίζει τις καταχρήσεις είναι ο ανταγωνισμός. Τα αφεντικά, οι μέτοχοι και οι πολιτικοί που στηρίζουν κάποια συμφέροντα τον απεχθάνονται. Επωφελούνται, με τον ένα ή τον άλλο τρόπο, με το να συνωμοτούν και να προσπαθούν να πείσουν τον κόσμο ότι ο ανταγωνισμός αποτελεί απειλή για το κοινό καλό ενώ στην πραγματικότητα αποτελεί αποτελεί για τους ίδιους.»

Η ελληνική εμπειρία είναι μια οδυνηρή υπενθύμιση πως όταν τόσες αποφάσεις περνούν από τα χέρια της κυβέρνησης, καταλήγουμε με πολλή διαφθορά, σπατάλη και αδικία. Οι αγορές είναι στην πραγματικότητα μια δύναμη αλλαγής. Μόνο επειδή το επιτάσσουν οι αγορές έχει αναγκαστεί η ελληνική κυβέρνηση να κάνει μεταρρυθμίσεις που διαδοχικές ηγεσίες εκλεγμένες από χιλιάδες ψηφοφόρων δεν μπόρεσαν να εφαρμόσουν. Οι αγορές ζητούν λιγότερη διαφθορά, μια ικανή ηγεσία και μια πιο ανταγωνιστική και αξιοκρατική οικονομία. Ποιος μπορεί να διαφωνήσει με αυτά;

Thursday, February 16, 2012

Time to Let Greece Go?

Europe is exhausted with Greece. Greece is exhausted period. It is time to let go? Not quite. 

The case for letting go is simple. The results of first €110 bn bailout have been mixed. After a strong start in 2010, progress slowed, and 2011 was abysmal. The economy continues to shrink, finances are not improving, unemployment keeps rising, social tensions are mounting and public health is deteriorating. There is no longer a sincere dialogue between Greece and troika. Greece no longer claims any ownership over this program (if it ever did). Politicians have zero credibility to promise, much less implement, reforms. If the Europeans don’t trust the Greeks, and if the Greek government can’t deliver, what’s the point of keeping down this path? 

A default and even a Eurozone exit would not be the end of the world, although a Eurozone exit carries more contagion risk than a mere debt write-off. So many countries have defaulted and launched new currencies without collapsing. A default would allow the government to offer tax breaks or increase spending to prop up growth. A new currency would make goods and services more competitive, and it would prompt an export boom. Trade may be hampered for a while as finance becomes scare, but it will ultimately be restored. Provided that Europe can contain this exit, Greece would plunge into a deeper crisis but at least it would see a clearer way out. Much of the pain facing Greek society would become deeper for a short period but would be alleviated later on. 

If that is so, why not just default? Odd as it may seem, default is the easy way out. It alleviates pain but does not correct the underlying problems from which pain emerged. Europe is rightly frustrated that Greek governments cannot seem to implement reform. But this is a supply problem. At the same time, the demand for reforms is changing, and in that sense, first bailout did much good. A default in 2012 is not the same as a default in 2010. If Greece defaulted in 2010, as many economists advocated it should have, the default would have been devastating but not cathartic. Greeks would have blamed various villains such as politicians, domestic and foreign banks, speculators and the European Union. Answers to the question “what went wrong” would have been too broad, and the crisis would have laid no seeds for regeneration. 

Instead, the national conversation is different today and, in many ways, it favors reform. After a big demonstration at the time when Greece signed the first bailout agreement, public opposition was subdued in 2010. Partly, it was a grace period – any young government gets a break during a major initiative. But more broadly, there were two forces at work. First, the reforms of 2010 were narrow, and it was easy to beat one interest group at a time. Second, there was genuine hope that chronic ills – tax evasion, restrictive regulations and exorbitant benefits in the public sector – would be corrected. 

Both forces changed in 2011. As the reform agenda widened, the government’s commitment waned and the ruling party hedged its bets. This equivocation alienated the people who consented to pain only as long as it led to meaningful reforms. By mid 2011, the state had pushed for just enough reform to anger those who stood to lose from it but not enough to win over those who stood to gain from it. Now, the state keeps trying to raise taxes to pay for its unwillingness to shrink the public sector, to reform the private sector and to curb tax evasion. 

And yet the past 18 months have also empowered the reform movement. First, the bailout bred hope. It did for Greece what the Tunisian man who set himself on fire did for Arab world: it broke a psychological barrier and awakened all those who had given up on the prospect of Greece ever changing to regain some; it empowered people and forced them to reengage. For the first time in a generation, the bailout offered an alternative future for all those people who were sick and tired of “old Greece.” Second, the bailout forced Greek society to debate taboos by placing issues such as public sector employment and privatizations at the center of the national dialogue where they could no longer hide. 

This was welcome but, in certain ways, not enough. There was certainly an ownership issue: Greeks people saw foreigners calling all the shots and were frustrated at their incapacity to impact their future. More broadly, however, the reform advocates were too afraid and politically narrow-minded to argue for reform. And so the debate soon became “memorandum or the drachma” or even, “memorandum or the tanks.” In some ways, these were indeed the dilemmas facing Greece. But they also misrepresented what was going on. Yes, Greece was forced to change certain things at gunpoint. But did we really need bureaucrats from Brussels, Frankfurt and Washington, DC to tell us that collecting taxes is a good thing? That people who should be paid relative to what they do? That we should have honest statistics? That we cannot spend more than we earn with impunity? Did we really foreigners to tell us those things? 

So where are we now? The overwhelming feeling in the country is one of frustration. That leaves five paths open. One is to allow a massive default and a new drachma – the premise being that only when the country hits rock bottom will it reform. But not everyone who hits bottom recovers, and certainly not quickly – this is risky and may push Greece on the edge and leave it there for a long time. Even though it may turn out to be the only path, it is indeed a last resort option as it would wipe out any short to near-term prospect for a liberal reform agenda to take hold. 

The other four courses depend on how frustration is mobilized politically. One option is for the country to become apolitical, where people are so frustrated and disillusioned that they disengage. Such an outcome would mean that we have weak governments with limited mandates and where little gets done. Another path is for the country to fall for populism, look inward and blame outsiders. Yet another path is for the country to demand “law and order” and accept a quasi-police state that pledges to restore order and some modicum of decision-making. And a final path is for frustration to generate momentum for a bottom-up restructuring of the country along the lines of a leaner but more efficient state and a bigger and more productive private sector. 

Europe needs to understand that its investment in Greece has nothing to do with paying back debt. Rather, it’s about to providing an environment where reforms can gain momentum – where that fifth path becomes more likely. Europe is too focused on the supply of reforms (and lack thereof) – it ought to focus on the demand instead. That demand has generally risen over the past 18 months – but it has also reached a wall. Absent any careful nurturing, it will dissipate. And the fallout from that failure will far exceed the economic havoc from a disorderly default and currency re-launch. What Europe needs is to reassure reform minded Greeks that reforms are possible and that any government elected by the people to carry them out will have enormous support in its efforts.

Sunday, February 12, 2012

Greece’s Choice

In a narrow sense, the Greek parliament has to choose between a second bailout and a disorderly default. But the prospect of default merely epitomizes a broader bankruptcy – political, institutional and moral. The choice facing Greece is simple: will this be a race to the bottom or a race to the top? There are two Greeces out there, and the battle is on about which Greece is going to prevail. 

One Greece is laid back and relaxed. It is not particularly ambitious, and it dreams of a job that pays well but demands little. It is a Greece that wants to eat well, drink well and live well – so long as it can do this without having to work hard. It is content and not at all shamed to work two or three hours a day and get paid a full day’s work. It sees nothing wrong with evading taxes, crossing a red light, or throwing trash onto the ground. It treats laws as guidelines – follow them when convenient, ignore them when not. It is a Greece that glorifies rebellion and roots for the underdog, not matter what the rebellion is about or what the underdog stands for. It is a Greece that wants to judge but fears to be judged. It knows and celebrates that no one is watching – and acts accordingly. It is paranoid and conspiratorial and finds blame everywhere else but in itself. It is a petty Greece, violent, entitled, spoiled and lazy. It is insular and insecure – insecure about its position in Europe, about its capabilities, about its potential to succeed. And it is a Greece that fears success and envies the success of others – better if we all fail or better yet if no one ever tries. 

The other Greece is hungry and anxious. It is ambitious, and wants to succeed and do big things. It is proud of its history but wants to make its own mark in the world. It is a Greece that can win championships and that can host the Olympics. It is confident, intelligent and highly educated. It has studied or teaches at the world’s premier universities. It conducts research at world-class labs, staffs the world’s top companies, and writes award-winning music and films. It is a Greece that can compete in cut-throat businesses like shipping – and come out on top. It is an entrepreneurial Greece, one that will look for the tiniest opening to profits. It is liberal, tolerant, and commonsensical. It has real worries and real concerns and it has no time for fake battles and illusory struggles. It wants to get things done. And yet it sees that its future is held hostage, that there too many shackles that hold it back. It is a Greece whose one hope and demand from life is to be given the opportunity to succeed. 

Bailout or no bailout, default or no default, the Greek people have to make up their minds. Which Greece do you want to live in?

Tuesday, February 07, 2012

Greece Needs a Better, not Just a Smaller State

To secure a second bailout, the Greek government is pledging to cut an additional 15,000 public sector jobs by 2012. Such a move is necessary. But Greece also needs a plan to improve the capabilities of the state not just shrink its size. 

Greece’s state is not too big relative to other European countries, at least not when looking at state spending as a share of GDP: at 44% (excluding interest), the Greek government spends less than the Eurozone average of 48%. Therefore, we cannot frame Greece’s problem simply as “the state spends too much.” Rather, the problem is that the Greek state *wastes* too much, and that the people do not get their money’s worth. At issue is not merely the level of spending but also its efficiency. If Greece got Scandinavian-type services, it could survive with such a big state. But it does not. 

The core problem is accountability. Simply put, Greece solved a legitimate trade-off with an extreme response. At the turn of the last century, the aftermath of an election would involve the newly elected government firing bureaucrats who supported another party so that it could hire its own constituents into the state sector instead. To stop such a destabilizing practice, Greece instituted a stringent tenure system. But in solving one problem it created two others. First, the practice of firing people ceased but that of hiring did not; as a result, the country had a bias towards higher public sector employment. And second, without the ability to fire people, the state lost its ability to enforce standards. The challenge, therefore, is how to construct a medium path whereby the state does not devolve back into a complete bureaucratic collapse after every election and yet it can reward hard work and punish bad work. 

And so in the desire to lower government spending, Greece risks devolving into a wholesale reduction in government services and civil servants. Reducing the state must thus be accompanied by three parallel efforts: first, a comprehensive and objective assessment of public sector employees; second, a program to recruit and retain talented people to work for the state (at first in pockets of excellence); and third, a system to ensure that the private sector (for-profit and non-profit) can step in and fill any voids created by the retreat of the state. Greece needs less state but also a better state.

Η Ελλάδα Χρειάζεται Ένα Καλύτερο, Όχι Μόνο Ένα Μικρότερο Κράτος

Στις διαπραγματεύσεις με τη τρόικα για το δεύτερο δάνειο, η ελληνική κυβέρνηση έχει δεσμευτεί να κόψει 15.000 επιπλέον θέσεις εργασίας στο δημόσιο τομέα μέσα στο 2012. Κάτι τέτοιο είναι όντως απαραίτητο. Αλλά η Ελλάδα χρειάζεται ένα πλάνο που όχι μόνο να συρρικνώνει το κράτος αλλά παράλληλα να το αναβαθμίζει. 

Σε σχέση με την υπόλοιπη Ευρώπη, το ελληνικό κράτος δεν είναι ιδιαίτερα μεγάλο: οι κρατικές δαπάνες είναι 44% του ΑΕΠ (χωρίς τόκους) έναντι 48% στην Ευρωζώνη. Το θέμα δεν είναι το ύψος των δαπανών αλλά η αποτελεσματικότητά τους – το κράτος σπαταλά χρήματα χωρίς οι πολίτες να απολαμβάνουν ανάλογες υπηρεσίες. Εάν οι κρατικές υπηρεσίες στην Ελλάδα ήταν στο ίδιο επίπεδο με την Σκανδιναβία, τότε δεν θα υπήρχε πρόβλημα. Αλλά δεν είναι. 

Το κύριο πρόβλημα είναι η λογοδοσία. Στα τέλη του περασμένου αιώνα, η επομένη των εκλογών οδηγούσε σε μια αλλαγή του κρατικού μηχανισμού, καθώς η νέα κυβέρνηση απέλυε τους δημόσιους υπάλληλους που δεν την στήριξαν και διόριζε στη θέση τους εκείνους που την υποστήριξαν. Η μονιμότητα ήταν μια ακραία απάντηση σ’αυτή την πρακτική. Αλλά αυτή η λύση δημιούργησε δύο νέα προβλήματα. Πρώτον, ναι μεν σταμάτησαν οι απολύσεις άλλα όχι οι προσλήψεις και έτσι η χώρα απέκτησε μια τάση διόγκωσης της απασχόλησης στον δημόσιο τομέα. Και δεύτερον, χωρίς απολύσεις, το κράτος έχασε την ικανότητά του να επιβάλει πρότυπα εργασίας. Το ζητούμενο είναι μια μέση λύση που να επιτρέπει στο κράτος να ανταμείψει τη σκληρή δουλειά και να τιμωρήσει τους τεμπέληδες και τους μη ικανούς χωρίς να γυρίσουμε στο μετεκλογικό χάος του παρελθόντος. 

Στην προσπάθεια μείωσης των κρατικών δαπανών, η Ελλάδα πρέπει να αποφύγει μια πλήρη κατάλυση του κράτους. Η συρρίκνωση του κρατικού τομέα θα πρέπει να συνοδεύεται από τρεις πρωτοβουλίες: πρώτον, αντικειμενική αξιολόγηση των εργαζομένων στο δημόσιο τομέα. Δεύτερον, ένα σχέδιο με το οποίο το κράτος θα μπορεί να προσελκύσει ταλαντούχους ανθρώπους (αρχικά σε πρότυπα τμήματα). Και τρίτον, ένα σύστημα που να εγγυάται ότι ο ιδιωτικός τομέας (κερδοσκοπικός και μη) θα καλύψει τυχόν κενά που θα δημιουργήσει η υποχώρηση του κράτους. Η Ελλάδα χρειάζεται λιγότερο κράτος, αλλά χρειάζεται επίσης και ένα καλύτερο κράτος.

Sunday, February 05, 2012

Should the Official Sector Take a Hit on its Greek Debt?

The IMF believes that official creditors should take a hit on their holdings of Greek debt; Germany is opposed. Who is right? 

The IMF has a point. The private sector involvement (PSI) agreement aims to bring Greece’s debt to GDP ratio to 120% by 2020 – an improvement but hardly a game changer. Assuming that Greece receives a second bailout, the official sector will become a more important financier than the private sector; 60% of Greece’s public debt will be held by the official sector in 2013, according to the December 2011 IMF review of the Greek program (the number will depend, of course, on the final provisions of the PSI deal). Official sector debt is as problematic as private sector debt. 

But Germany too has a point. The Greek Ministry of Finance shows a wider deficit in 2011 than in 2010. In part this is because revenues continue to disappoint – although this reality has not deterred Greece from making similarly optimistic assumptions about 2012. More importantly, spending is barely down: 1.2% by one measure, but including other special items, it may even be up. Reforms are stalled, and we have yet to see any privatizations. This is hardly a government that is taking its program seriously. Instead, it is compensating for its inability to make any reforms by raising taxes and trying to squeeze every last penny from the public (but, curiously, not from individuals and companies that owe back taxes). 

The choice facing Greece’s creditors is simple: do you offer a break in hope that this will trigger reforms or do you demand real reforms in exchange for a break? My sense is the latter. It is clear that the new, post-Papandreou PASOK has no real reform momentum left in it. It inhabits a never-land of promising reforms but implement none. Rewarding it with yet another break will merely allow it to prevaricate, equivocate, hesitate and outright lie for longer. 

The official sector should eventually offer Greece debt relief. But this gesture should be an accelerant for  Greece’s positive debt momentum – it cannot be the ignition of reform. Greece has to stop pretending that everything hinges on decisions made in Brussels, Frankfurt, Berlin, or Washington. This program will be won or lost in Athens. Period. And until the government starts acting like it understands this, it deserves no more breaks.