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Mainstream, VOL LIII No 31 New Delhi July 25, 2015

The Continuing Greek Tragedy: Scripting a Survival Strategy?

Sunday 26 July 2015

by V. Krishna Moorthy

Introduction: The History

Ancient Greece, the birthplace of Western civilisation since about 2500 years ago, is known for its achievements in Philosophy, Sciences, Arts and Government. The Geek civilisation developed chiefly in City-States. They were fiercely independent and in constant rivalry with one another. The citizens were highly patriotic, took part in public affairs and established the world’s first democratic govern-ments. A common language, religion and culture bound the people of the City-States together. Ancient Greeks prized their freedom and way of life, stressing the importance of the individual, encouraging creative thought. Greek Theatre, which dates back to 500 BC, is well known. It has a great tradition of keeping the two main genres of theatre—Tragedy and Comedy—strictly separate. Unfortunately, in the present- day make-believe world, you need an appro-priate mix of both to suit the situation and survive in this competitive world! Latin American, African, Asian and South-East Asian nations, which have faced similar crisis situations in the recent past, have overcome and survived these crises and triumphed in spite of all the odds, and dictates from global institutions like the IMF, World Bank (which were themselves born out of crisis situations!) etc., their top brass as also the over-bearing attitude of the major contributors to these institutions.

Philosophy originated in ancient Greece during 500 BC and great philosophers, like Socrates, Plato and Aristotle, were considered amongst the top world philosophers. Through conquests Rome had become one of the most powerful countries in the Western Mediter-ranean by 200 BC. Greece’s age of splendour however, was short-lived due to constant in-fights between the City-States. Taking advantage of this confusion, Macedonians, a barbarous and warlike people who lived in the mountains to the north of Greece, with King Philip in the lead, interfered in the affairs of the City-State at a time when Greece was too divided to put up any real defence.

Over time, the Greek leaders had given up ruling the country and contended themselves with the money that their satraps sent back from the provinces. They used the money to build themselves magnificent palaces and held court in great style, ate off golden dishes and wore splendid robes. They loved good food and good wines even more! At a time when they were preparing for a campaign to conquer more areas and expand the kingdom, King Philip was assassinated. Following this, King Philip’s son Alexander inherited Greece along with Mace-donia.

Ancient Greeks lived by two creeds etched into the Temple of Apollo at Delphi:

Nothing in Excess

and

Know Thy Self.

The current crop of Greeks, unfortunately, appear to have not paid any heed to either of the creeds. The story of modern Greece starts with the War of Indepen-dence from the Ottoman Empire, when in 1803 a group of Greek soldiers blew themselves up at Kougi in north-western Greece, rather than be imprisoned by the Turks. This showed their love for freedom and independence!

Part II

The modern State of Greece was born after 11 years of fighting against the Ottoman Empire (1821-1832). However, it was not until the Western intervention in 1827 that the conflict turned decidedly in favour of Greece. When Greece finally achieved independence, three Great Powers—France, the UK and Russia— negotiated the terms of that independene. Despite the nationalist origins of the Greek conflict, the

Treaty of Constantinople, negotiated by the Great powers in 1832, declared the Kingdom of Greece an absolute monarchy and appointed a Bavarian Prince, Otto, as the Monarch. Since the 17-year old Prince Otto was a minor when he was named Monarch, a Council of Regents—con-sisting of three Bavarian advisors, who came to be known as the ‘

Troika

—was appointed to rule Greece in Otto’s name.

During the fight against the Ottomans, Greece accumulated a large external debt—a debt on which it defaulted in 1826, greatly restricting the new country’s ability to access international credit. The UK, France and Russia agreed to loan the new country 600 million Francs. As a condition of the loan, the three countries maintained in Athens diplomatic representatives who were heavily involved in the creation and supervision of the Greek Government. The Great powers wanted to see immediate return on their loans after the new country began taking shape. However, the only immediate source of internal revenue for Greece was agriculture. Loans were given to farmers to expand cultivation on land that was nationalised after the War. Greece’s economic growth stalled altogether in the 1870s. The country’s limited success in servicing its external debt continued to prohibit it from accessing international credit markets and threatened to spark an income crisis for the state. However, Greece’s strategic importance again prompted Western inter-vention to starve off a financial crisis for another couple of decades. The accelerated decline of the Ottoman Empire and the emerging power vacuum in the newly independent Balkans drew the attention of the West-European powers hoping to use their relationship with and influence over Greece to counter the expansion of Russia or the Austro-Hungarian power in the region.

Immediately after the 1878 Berlin Congress, the UK, France and Germany wanted Greece to increase its military development and become a stronger force in the Balkans. The three countries agreed to act as intermediaries between the Greek state and foreign creditors to facilitate additional international loans and successfully negotiated several large foreign loans for the country. Greece used some of this credit for defence spending but also built a large public debt that went primarily towards servicing its existing debt. Then in 1893, Greece defaulted once again. So goes its default history! Greece was once a major superpower. However, now it is too broke to pay its creditors! Greece is a beautiful, sunny and laid-back country. Greeks, like Indians, have a sense of family, are highly emotional, noisy, garrulous, argumen-tative, bossy and wonderfully indifferent to rules of any kind! In civilisational terms, it is difficult to think of a Europe without Greece—the cradle of the European civilisation. Such is the impact of Greek culture on the mindset of the Western world, particularly Europe. The world owes a great deal to Greece because of the word “

democracy

” which has its roots in ancient Greece. Unfortunately, Europe has been the scene for some of the brutal conflicts for hundreds of years. Europe has been the cause of much of the world’s misery for hundreds of years. It was the main theatre of two World Wars that caused a horrendous loss of lives—in millions—of several nations unconnected with the conflict.

Unlike elsewhere in the world, deep-rooted prejudices are very strong in Europe and they manifest themselves in several ways. Europeans in particular have bad memories of the Ottomans who overran Eastern Europe. They held Romania and Hungary besides laying siege on Vienna, the main cultural centre, as far back as 1529. Besides, even now Hungarians mourn for the lands they lost under the

Treaty of Trianon

they were compelled to sign 85 years ago under protest. There are other instances of mistrust and grievances that have not been resolved to this day resulting in frequent bloodletting off and on, disturbing the peace in the region.

Even in recent years Europe has seen some brutal conflicts in the Eastern front. The Balkans have experienced genocide and wars in the 1990s. The latest in the series of such conflicts is Russia taking on Georgia and Ukraine at will with simmering hate feelings. Even though these conflicts have been contained, old rivalries are simmering. Europe’s Turkey phobia has kept out a large, vibrant and democratic country like Turkey out of the EU, being a Muslim nation. The memories of the 500-year old Ottoman attacks are not forgotten even to this day!

For quite some time a terrific economic hurricane has been blowing through Europe. This got intensified with the global financial crisis of 2008-09. Another major factor that is eating into the vitals of most nations in Europe is the continent-wide rapid decline of population, the increasing longevity of its elderly and the economic costs the nations have to bear in the process. Added to this problem is the stubborn refusal in the past to allow in many more immigrants as it does now. Unlike the US, Europe has not been able to take advantage of the immigrant population whose contribution has been significant to America’s successful economic growth and innovations in products and services. All this has led to a continuous decline in economic activity impacting the self-confidence of the people. Germany has been a great exception to this, with the richest and most efficient economy in Europe, followed by France to some extent.

In this background, the creation of the European Union, by far the strongest and richest economic confederation the world has ever known to date, was a Godsend to European nations. Since its creation, the contribution of the European Union has been significant in the creation of peace and revival of steady economic growth of the European nations and bringing them together, besides ensuring containment of conflicts so far. For this contribution, the EU was awarded the Nobel Peace Prize in 2012, the citation of which stated that ‘the formation of the EU has transformed most of Europe from a continent of war to a continent of peace.’ Now, with the July 5 outcome, with a big

‘No’

by the people of Greece to the referendum, there is the imminent danger of the collapse of the EU and with it the Euro, the common currency, resulting in revival of old rivalries and the possibility of the Generals and Admirals getting back to active jobs once again posing an imminent danger to the whole region and the world as such.

Several countries of the European Union were affected by the financial crisis, and yet Ireland has recovered fairly well. Even countries like Portugal, Spain have shown remarkable maturity by accepting responsibility for a financial crisis at their doors and have worked hard to put the problem behind. Italians have muddled through a fiscal mess while the French have done their bit. Great Britain, which is outside the EU, is in a different type of danger zone with prospects of political disintegration of its own while its economy is not that rosy, though David Cameron has romped back in the recent polls. In this dark horizon, Germany, with its solid economic performance, is the richest and most efficient economy in the EU, and the most significant supporter of the belea-guered Greece in its problems since the crisis erupted. Yet many East Europeans uniformly blame Germany for their overbearing, arrogant and dictatorial attitude for the present situation.

Part III

Greece, when it joined the European Union in 2001 as one of the founder members, surprised many. It window-dressed its economic funda-mentals to fool the smartest of forensic auditors in the run-up to its joining EU—by far the strongest and richest economic confederation the world has even known—and the common currency, Euro, they adopted. The country is a major tourist destination for all kinds of travellers for holidaying and it is also a friendly country. While Greece’s importance to the EU’s economic value is minimal, as it contributes less than two per cent of the Euro Zone’s GDP, its civilisational role to Europe as a whole is highly significant and enormous. Greece’s problems are many, with a narrow economic base, mainly agri-culture, tourism, and construction, further limits its options. Greece has limited opportunity to grow. It has low levels of domestic savings and is heavily dependent on international capital flows. Greece’s problems are not the result of financial market speculation, but the govern-ment living beyond its means. Greece problems surfaced first in October 2009 when its fiscal deficit crossed 12 per cent of the GDP—over twice the level declared earlier and from the time the EU imposed the three per cent ceiling.

On June 30, 2015 Greece became the first advanced economy to default on an IMF repay-ment. Following this, the European Financial Stability Facility (EFSF), the fund providing Greece’s financial lifeline, on July 3, 2015 officially declared the country in default, injecting even more urgency into a make-or-break proposed week-end referendum. Once the loan is recalled, which is not done yet, it would hasten the

‘Grexit’

or Greece’s exit from the 19-nation Euro Zone. For nearly six years Greeks have watched helplessly, as the country ran out of money, excuses, and time to pay off their unpayable debts.

The decision of Greece’s radical Left Government, headed by the former civic activist and now Prime Minister Alexis Tsipras, to call for a referendum, the first in more than four decades, on July 5, 2015 to know whether the bitterly beleaguered nation should accept the severe restrictions and conditions attached by its creditors on financial transactions in the country imposed the previous week to stem a bank run, and to a continued bailout. Alelxis Tsipras’ call to Greeks urging them to vote

“No”

in the referendum has become a reality. An overwhelming majority (61 per cent) of them have rejected the conditions for the rescue package from creditors. Thus, Greece has thrown the future of the country’s Euro zone membership into further doubt thereby deepening a standoff with lenders. Many analysts believe that the July 5 vote was a mandate to strengthen Greece’s negotiating position to seek a viable solution. The result of the vote leaves Greece in unchartered waters risking a banking collapse that could force it out of the Euro Zone.

The July 5 vote was an angry message to the creditors that Greece can no longer accept repeated rounds of austerity. The result of the July 5, 2015 vote indicates that the signs of Greece’s disintegration are visible on the horizon. the Greek

‘No’

vote is a great victory for the Left. Until now, the Left has not mounted such a serious challenge to the claims of the EU. The Left in Greece believes that the earlier rescue packages were designed more to save the European banks than the Greek people from their perennial problems. The Euro Zone appears to have become a scene of class war and now Syriza has been bold enough to fight it almost in full strength with a

“No”

vote. Thus, Greece has lurched into an uncharted territory and an uncertain future in Europe’s common currency zone after Greek voters overwhelmingly rejected demands by international creditors for more austerity measures in exchange for a bailout of its bankrupt economy. This has led to the EU’s panicked reaction.

European leaders have ruled out any fresh debt offer before the referendum results are out. Greece has 11 million citizens. The Greek Government’s decision to hold a referendum means that its position in the euro zone is more fragile than ever. The reason for the current crisis has been that Greece has been unwilling to accept more reforms and austerity measures. This has resulted in more indebtedness.

Initially, there was confusion over the very technical question posed in the referendum, as also anxiety regarding the constitutionality of the referendum in Greece’s top administrative court, the Council of State, which could derail it. The Council of Europe, a pan-European democracy and human rights watchdog, said that the vote does not meet its minimum standards. The

‘No’

campaign rejecting the proposals directed much of its venom at Germany, the Euro Zone’s dominant power and Greece’s biggest creditor. Now, that the outcome of the vote is known, it would decide whether Greece gets another last-ditch financial rescue in exchange for more austerity measures or plunges deeper into economic crisis. It could also determine whether Greece becomes the first country to crash out of the 19-nation European single currency area, membership of which is meant to be irrevocable. In the meanwhile, any future bailout by Germany is likely to face hurdles in its Lower House of Parliament according to a booklet that has been in circulation at Berlin.

The Greek crisis is not a new one and has been brewing for years. However, the latest crisis has been bubbling over more or less steadily ever since the Greek electorate in January 2015 voted in a government led by the anti-austerity Syriza party. The country has been at loggerheads with Greece’s creditors ever since the election in early 2015. The crisis has been brewing for almost seven years. The mercurial nature of the Greek crisis has already shipwrecked three governments in a span of six years. Despite repeated bailouts its GDP fell every quarter and today its debt-to-GDP ratio is over 175 per cent despite reforms and austerity measures. Prior to its strict reforms regime Greece had a very generous pension policy (96 per cent of an individual’s salary), labour policies and big industries like shipping paid no taxes!

One of the running battles between Athens and its creditors—ECB,EU, IMF etc.—has been wages and pension reform with the Greek Government under pressure to further slash payments to the elderly which have already been cut by 45 per cent over the past five years with a substantial population of the recipients reduced to penury. An estimated 11,000 Greeks are reported to have indeed committed suicide since the austerity measures were put in place in 2010 when the Trioka of the European Central Bank, European Union and IMF extended a Euro 420 billion to Greece on condition of severe austerity.

With the implementation of the severe austerity measures in the last five years the deficit has come down since 2010, the consequence has been that Greece’s economy and GDP have shrunk by 25 per cent and unemployment has soared to 26 per cent, and there is no safety net to speak of. Besides, there is decline in public health services which has taken a heavy toll. Destitution, hunger and homelessness are on the rise—all a result of the austerity measures imposed on the Greek nation by the lenders.

At present the Greek economy is in intensive care, as its parts, notably the banking system, has ground to a halt. It owes $ 1.7 billion to the IMF and $ 144 billion to the European Union Fund. It owes private investors only $ 38.7 billion of its total debt. Greece made a last-minute proposal for a third bailout worth nearly 30 billion Euros ($ 33 billion) to follow the two rescue programmes the cash-strapped Athens has received since 2010. Following the referendum announcement, EU President Jean-Claude Juncker, at a news conference, said: ‘I feel betrayed, as if the EU is the aggrieved party, while in reality it is the other way round. However, for the Greeks, membership of the European Union is about identity. It was the prospect of joining the EU that helped the country move from dictatorship in the 1970s. In a report recently, the Bank of Greece has put this aspect powerfully.’

If a Greek exit from the Euro zone actually happens following the outcome of the referendum, and decision of the creditors, a full-blown panic may set in. The exit would make it harder for countries to adjust further, straining Euro Zone’s unity. Other members like Spain and Portugal may go along a path similar to the one taken by Greece and exit from the EU, though unlike Greece, countries like Spain, Ireland and Portugal have improved their fiscal position through prudent policies.

A withdrawal from the EU will mean that Greece will have to reintroduce its old currency

Drachma

—one of the world’s oldest brands of legal tender, and traces its roots back to 500 BC. The Tetradrachm, which equalled four drachmas, was a coin that had the profile of Athena, the Goddess of Wisdom on one side, and an Olive Branch and an Owl on the other—a symbol of wisdom and a bird which can see things people cannot. The currency gained immense popularity across the Mediterranean areas and even reached India, due to the conquests of Alexander the Great. When reintroduced, it will be a return to the currency that served Greece well, on and off, for over 2500 years. The drachma, however, is set to plummet, and has to be greatly devalued. Though it would mean an immediate world of pain, a devalued currency will boost exports spurring growth. However, the flip side is that the country’s import bill will soar high. It will also increase Greece’s debt burden still determined in Euros.

The world appears to be prepared for

Grexit

—which implies that Greece will not accept the conditions and therefore repudiate its entire debt. Greece’s decision to quit the EU may lead to countries like Spain, Portugal, Italy and France questioning the benefits of austerity measures undertaken by them. With the EU refusing to accept the Hellenic Republic’s proposals for a compromised and watered-down austerity measures, would result in imposition of capital controls. With banks shut, the crisis has been precipitated. The government and people have taken it as a humiliation of Greece and its people.

The implications of Greece exiting the EU are many. There will be flight of capital assets from Euro assets to US securities. This is one possibility. There are, besides, financial, political and strategic implications with Russia already working on a proposal to supply gas to Europe through Greece, and also offering it the membership of the newly proposed BRICS New Development Bank. The financial implication includes higher interest rates in Europe, fall in Euro and appreciation of the US dollar. This in turn will result in severe competition for US exports.

The Euro Zone leaders are in a bind. They want to keep Greece in the Euro Zone, but it will cost them heavily.

Thus, the disillusionment in Greece with the European Union project appears full. While the EU leaders have set Sunday, July 12 as the deadline to come out with appropriate proposals for continuing the bailout, Alexis Tsipras, the young Prime Minister, who strode into a Greek hero’s welcome in the European Parliament at Brussels on July 8, pledged to deliver sweeping reforms of an economy crippled not just by recent, creditor-imposed austerity but by decades of corruption and political connivances with powerful vested interests. In response to the severe criticism of EU leaders, Tsipras said that while Greece needed to reform state finances and labour laws, he did not detail what laws he proposes to enact to bring in the austerity measures. He took copious notes, when Verhofstadt, the Prime Minister of Belgium, began listing out several suggestions that included privatising banks, and ending Greece’s special treatment for shipping magnates, military and the orthodox Church.

Winding up his response to the criticism after over three hours of argument, Tsipras said: ‘We demand an agreement with our neighbours. But one which gives us a sign that we are on a long-lasting basis exiting from the crisis which will demonstrate there is light at the end of the tunnel.’ He appealed across the partisan divides, noting that he had the backing from his own opponents in Athens to keep Greece in the Euro. And in the spirit of a debate peppered with talk of ancient Greek democracy, Tsipras—while asking for indulgence for Athens—quoted Sophocles who once taught Greeks: “That there are times when the greatest law of all human laws is justice for the human being.”

The Greek Government has since sent a package of reform proposals to its Euro Zone creditors in the race to win new funds to avert bankruptcy and help cover its debts until 2018. The latest offer includes cuts in defence spending, a firm timetable for privatising state assets, hikes in VAT for hotels and restaurants, slashing a top-up payment to poorer pensioners. Meanwhile, Tsipras has appealed to his Syriza party legislators to throw their weight behind the new proposals urging them to keep Greece in the Euro Zone since the mandate they got in the referendum was confined only to getting a better deal than the ultimatum that the Eurogroup gave them, and the vote certainly was not a mandate to take Greece out of the Euro Zone. PM Tsipras has since got the backing in the parliament for the government’s reform plan containing austerity measures to win a third bailout. Some of the important measures highlighted in this proposal are:

• $ 300 million defence spending cuts by 2016.

• Introduction of a uniform VAT rate (23 per cent) for restaurants.

• Increasing the tax on shipping companies and removal of concessions for Islands.

Of the 300-member Parliament, 251 legislators favoured the motion while the rest opposed it; some of them were either absent or technically absent from the voting thus carrying the motion.

Impact on India

Greece’ referendum has roiled global stocks, bonds and currencies. However, India’s financial markets have managed to hold on their own for now. Yet, at a time when India’s economic growth is picking up steadily, the Greek crisis has hit the global markets which will have its impact indirectly on us too. According to RBI Governor Raghuram Rajan, and Chief Economic Advisor Arvind Subramaniam, since the country has limited direct exposure both in financial and trade terms and stable macro-economic fundamentals, the crisis will have marginal impact. However, the indirect exposure, like its impact on exchange rates, how Euro will react to the issue and any untoward incident in Greece will naturally impact the sentiment of global investors that in turn will have an impact on the Indian economy and markets as well.

Conclusion

In the final analysis, Greece is too big a country, if not in economic terms, to be allowed to slide towards bankruptcy. With the Greek leadership, nurtured in the political culture of anti-capitalism, the scholarly, insolent and grand-standing former Finance Minister Yanis Varoufakis, who embraces an anti-capitalist disdain blended with the virtues of entitlement, had to, for tactical reasons, move out of Tsipras’s government to give place to the Oxford-educated Euclid Tsakalotos. A strong supporter of Irish republicanism, Tsakalotos, believes that deficit financing and unaffordable public debt is a perfectly legitimate way to run a country. Therefore, it is possible that Tsakalotos feels that it is for the survival of the EU as a confederation to accept a reasonable bailout package offer from the Greek Government and fund it rather than Greece drawing up the contours of a survival strategy. The proposed austerity measures, including tax hikes and cuts in pension spending, are certain to inflict more pain on a Greek public who just days ago voted overwhelmingly against a similar plan. Once the package of proposals is approved by the international creditors, it will provide a three-year long-term financial support of 80 billion Euros ($ 89 billion)for a nation that has endured six years of recession as well as some form of debt relief. Failing which, Greece faces the immediate prospect of crashing out of Europe’s common currency area creating
more problems for Eurozone members in particular.

The emergency summit of all 28 EU leaders scheduled for July 12-13, 2015—billed as the last chance to keep Greece in the Euro—was called off due to slow progress. Germany as usual took a tough line complaining of a loss of trust in Athens, though France has been most supportive to do everything to keep Greece in the Euro. Eurozone leaders in their negotiations agreed that Greece would have to push through new laws covering introduction of tough conditions on labour reforms and pensions, VAT, taxes and measures on privatization in the next one week. Meanwhile Greece’s PM insisted that a deal was possible if all parties want it and he was ready for an honest compromise.

In this uncertain situation the whole world believes that Greece has to be saved from financial collapse with other people’s money without too many stringent conditions. While the Euro leaders have not been able to come a decision to help the beleaguered Greece, Kunal Dixit, the founder of Trestor Foundation, a non-profit technology Indian start-up company, has offered help to all credit-worthy Greek citizens 2000 Euros each in the form of a virtual currency (Bitcoin like) in lieu of promissory notes signed by them who want to purchase Trests but do not have access to their Euros because of capital controls.

It may not be out of place in this context to recall what poet John Keats said about 200 years ago (1819) in his Ode on a Grecian Urn’

:

‘What mad pursuit? What struggle to escape?’ 

Keats concluded his ‘Ode’ with these words:

‘Heard melodies are Sweet; But, those unheard are Sweeter!’

The whole world watches with bated breath as to how the situation for Greece as well as the EU turns out in the coming days and months!

The author is the CEO, Parivartan, Mysore. He can be contacted at moorthy_vk@rediffmail.com