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Greek Crisis and Growth
LSE, 8 March 2013
Andreas Koutras
http://andreaskoutras.blogspot.com
A brief history of debt
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Greece incorporates in 1830 (Feb 3rd). First loan 1825. Moratorium in 1827. Settled 1930
King Otto, new loan 1832 with instalments and special account to collect repayments.
Moratorium 1836,1843. Greece out of capital markets 1878. British-French occupation of
Piraeus port for 3y (1853). International Financial Commission (left in 1978). Default 1893,
more IFC, default 1921. Grand settlement 1928-31.
Greece is the first country that breaks away from Ottoman Empire. No infrastructure, state
apparatus, schools, roads, no aristocracy, no land ownership, no middle class (inside country).
Greece as a whole bypassed with the “help” of the church, renaissance, reformation, scientific
revolution and enlightenment.
New state aimed for a “clean” Greek state based on a continuity dogma.
Modern Greece has changed borders 8 times, had 2 civil wars, more than 5 wars (attacking
not defensive), mass immigrations, German occupation, hyperinflation.
The cradle of democracy flirted with all alternatives. Dictatorship, constitutional democracy,
absolute monarchy, constitutional monarchy, having more than one government, anarchy....
Despite all these problems Greece is still in a rather good position from a more global point of
view. It is still one of the richest countries, member of NATO, OECD, EU, UN…
Economy
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Geomorphology. Local small and independent economies. Unable to unite and provide scale.
Commerce and shipping in the hands of few families mostly outside the Greek borders.
Industrial revolution mostly unknown as was the so called middle class.
Economy based on family, connections, topicality. Local chieftains political mafia.
The new Greece state is unable to enforce its will so it incorporates them into the system.
Clientism begins very early (19th Century). It grows and local politicians are basically pimps
selling protection.
Kapodistria the first governor is assassinated for tax reasons. He refused to give the tariff
collection to the local chieftains.
For decades the main income for the state was not taxes from growth but borrowing.
Result was that economic culture and behaviour adapted to this environment (borrowing –bust
cycle).
The Greek economy is not knowledge based but on who you know based.
Memes. Cultural Genes
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There is neither Communist DNA, nor Capitalist DNA.
There is no tax-evasion Gene and there is no corruption and bribery Gene.
Greeks are not different nor are they endowed with special skills. “When others were
building NHS we were killing each other”.
The culture of a society evolves, adapts and spreads. Memes where defined by Richard
Dawkins.
A meme is a unit of cultural behaviour that is able to reproduce, mutate and spread (Virus
of the mind)
Mimicking is the cheapest and fastest way to learn and adapt. Problem is that if what you
copy or mimic is wrong you face extinction once conditions change (no adaptation).
It is important to understand the mechanisms of economic behaviour.
For example, even if there is no corruption gene the equivalent meme is reproducing fast.
For years the Greek state as a policy did not collect taxes. 1) incentives were wrong, 2)
cheaper to borrow than tax (politically)
The political and economic environment changed the incentives
What is normal is no longer the norm.
Greek Politicians
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Politicians did not become overnight corrupted of lower cognitive ability or
irresponsible.
There was a slow evolutionary process towards this result. (Good one were not
elected as their policies proved wrong)
The plethora of cheap money through the Drachma devaluations and later EU
subsidies and borrowing meant that politicians did not have to make structural
changes to survive.
It was not necessary to solve complex problems. Just borrowing and throwing
more good money after bad was enough to get re-elected and pass the bill to
the future.
Sovereignty was not given away or lost. Successive governments failed to
exercise the sovereign right. If you do not use it you lose it.
The result was the corrosion of political education, absence of ethical system of
values and the rise of irrationality
The slogan “There is money” (Papandreou the 3rd) was preceded by “Tsovola
open the vaults and give everything” (Papandreou the 2nd)
Economic Incentives
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The incentive of a state is to survive through taxes. Growth brings taxes so the
incentive is for the bureaucracy to push for growth.
This balance collapses once the state is able to find funds from exogenous sources
like Borrowing, EU subsidies, selling mine concessions.
We have enough examples. The curse of oil, that supported dictatorial regimes
(Kaddafi) for many years.
In Greece that role was played by the devaluations, EU subsidies cheap funding
(German Put option)
Now the fast unravelling is causing a huge social problem
Nations, civilizations, Empires, Economies that do not adapt become extinct. That is a
rule of nature that is hard to violate.
There is more life in this
Greek Yogurt than in
their economy.
Investment and Growth
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All returns should be evaluated with respect to risk
In today’s Greece the political risk has overshadowed all others
Social stability. Labour environment.
Local authorities corruption
Tax stability for years
Executives able to manage
Greece attracts both local and foreign distress assets investment
rather than investment for growth.
There is no lack of capital in Greece. There is mis-allocation.
Growth impediments
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Education
Internet (46% penetration 2nd lowest in EU), IT.
Law, judiciary. Speed of law courts is slow.
Bribery and facilitation payments
Bureaucracy. Growth and soviet state are incompatible.
Land ownership and land law.
Social cohesion. Terrorism
Greece is the only EU country that has existential dilemmas of whether it belongs
to the west.
Structural Changes
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Cutting salaries horizontally brings down the labour cost.
Structural changes aim to also bring down the cost of living.
All governments failed on this up to now.
The so called left, that was for years preaching the end of
the monopolies and oligopolistic or guild practices forgot
them. Instead it contents on MOU aphorisms and populist
slogans. Instead of supporting Troika in their efforts to break
the monopolies and vested interests it opposes them.
58% of all Greek companies have less than 3 employees. i.e.
family based. High tax evasion. Depending on bank credit
which now does not exist.
Dis-incentives to grow big and become law-abiding and taxpaying company.
Q. Why so many wise men this year?
A. Their profession was deregulated!
Herculean Challenges
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According to the myth, Hercules, before becoming the hero we all know met Vice
(Ευδαιμονία) and Virtue (Αρετή) at the crossroads. as Hercules sat watching the
herd, a tall, slender woman in a simple white robe approaches him from one side,
while from the other came a curvaceous young woman in make-up and plunging
décolletage. The latter offered Hercules sex, entertainment, and lifelong ease; the
former offered him struggle and labour…”
Greece is in a similar situation. The current crisis is a rare change to build a better
future. Maybe the last chance history is going to give us.
The task has fallen on you for us (and previous generations) have failed. And you
cannot escape this responsibility.
Οἱ μὲν ἐμοὶ φίλοι, ἔφη, καλοῦσί με
This is the time to redefine and re-found not only the economy, but the society,
Εὐδαιμονίαν, οἱ δὲ μισοῦντές με
culture and what it means to be Greek.
ὑποκοριζόμενοι ὀνομάζουσι Κακίαν
We need to escape from the trap of Pernicious Nationalism or Orthodox Greece.
The next few years could become years of renaissance and enlightenment for
Greece.
Money do exist now. Kapodistria when he tried to build a new state had no
money. He only needed vision and hard work.
Today we lack this vision and the willpower.