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The four fallacies regarding Greece

Published Feb 10, 2015


THE ATHENS Stock Exchange is in for a turbulent ride, reflecting the cat-and-mouse game Greece’s new government and the EU/European Central Bank/International Monetary Fund “troika” are playing with one another.

To understand what’s really going on, one must cut through a range of widely held assumptions that turn out to be fallacies. Let me point out four of them:

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n Greece is often called a “bottomless pit”. Never throw good money after the bad, the argument goes. But that is off the mark. After the painful adjustment processes of the past, Greece is better off in economic terms than before.

The economy is growing and the current account is in surplus. The budget deficit is under 3 percent – something that cannot be said for Italy or France.

What is missing in Greece is popular support for the reform policies. Obtaining that is vital to put the reforms on firm footing. Austerity alone is not enough.

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Banks are another weak point. They suffer from bad loans (40 percent are in default). In addition, depositors have withdrawn their money for fear of an uncertain future.

n It is often said Greece is lacking cash. The new government needs funding for all the social programmes promised in the election campaign. At the same time, Greece must service its huge debt.

But this argument misses the point. Under the current circumstances, Athens cannot expect help from financial markets. Financial markets should not be a government’s first choice.

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The logical way for Syriza to raise revenues would be a tax on the country’s oligarchs who have been largely spared. The collection of public revenues aside, that would also be a chance to dethrone the old elites and establish new structures in society that would yield more popular support for reforms. That would also increase the willingness among creditors to accommodate Greece’s needs.


n The third fallacy is that Greece’s European Monetary Union (EMU) partners are supposedly unwilling to throw in more cash. There is a large willingness among creditors to help the Greeks, even after the harsh words voiced by Alexis Tsipras and his cabinet in his first week of government.

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No one wants Greece to implode. Its European partners are open to discussions with Athens. This has less to do with economic considerations – the 10 million Greeks make up 2 percent of the EU – than with the need to speak and act with one voice on political issues like the Ukraine question.

Creating an opening for Russia via Athens could force the US Navy to step up its naval presence in the Mediterranean.

But the key step that needs to be taken is for Tsipras and his finance minister, Yanis Varoufakis, to reveal their true intentions when it comes to economic policy. Only then can creditors assess their prospects to get money back. This is also the basis for future co-operation within the EMU.

A monetary union only works if everyone adheres to common rules. Many euro zone countries will want to know whether there is a viable alternative to the Brussels-led “cash-for-austerity” consensus.

Greece’s future economic policy concept is more important than all the discussions about smart solutions for debt restructuring.

So far, Tsipras and his team are playing their cards close to the chest. According to their campaign statements, they are planning more government intervention and income redistribution. But that alone is not enough. Greece ought to rely more on advice from smart economists than financial engineering moves by investment bankers.

n Greece’s new government acts as if it had all the time in the world to solve its financing problems. Right at the outset, the new team flatly rejected as “unnecessary” e1.7 billion (R22 billion) in short-term assistance offered by its partners.

In reality, the time window for Athens is narrow. For now, Greece can live off the central bank’s emergency liquidity assistance. There is also some leeway left in the budget. Athens could even impose capital controls, as Cyprus did, to stop the capital flight.

But the closer the time comes to pay back creditors, the more difficult it gets. Delays in payments, which might arise quickly, could trigger a bankruptcy. If a “Grexit” really happens, it will most likely be “by accident”.

Martin Hüfner is the former chief economist of Germany’s HVB Group. This article initially appeared on The Globalist. Follow The Globalist on Twitter: @Globalist

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