In the HBO drama, the Sopranos, there is a scene in which the anti-hero, Tony Soprano, mob-boss and sociopath, chases a middle aged gangster across the streets of New Jersey. The unfortunate pursuant crashes his car and injures himself, much to the glee of Mr. Soprano. He stops, gets out his car, walks to the injured man still sitting in the driver’s seat moaning in pain, and opens the door. Feigning care for a stunned public that gathers around, Mr.Soprano grabs the hapless man’s neck, proceeds to threaten the anguished driver and demands the money that is owed to him to be given within 24 hours. Mr. Soprano then casually leaves quietly and unperturbed.
If one could find a most appropriate metaphor for the current situation in Greece, perhaps this is it. Greece, shattered and devastated, has an unemployment rate of 25.4%, and is struggling to pay its public sector workers. Its manufacturing sector contracted for the 8th consecutive month according to the Purchasing Managing Index, and its GDP has been falling rapidly since 2009 when it was at $341.6 billion. Greek’s GDP is currently at $241.72 billion. With high unemployment, an anemic manufacturing sector and declining GDP, Greece is still expected to pay 6.74 billion Euros in June, 5.95 billion Euros in July, and 4.38 billion Euros in August. They owe the IMF 2 billion Euros and 6.7 billion Euros to the European Central Bank.
The ECB have pushed Greece to increase taxes and more importantly collect taxes the Greek government is owed. At the end of 2014, Greeks owed their government about €76 billion in unpaid taxes accrued over decades. The government says most of that has been lost to insolvency and only €9 billion can be recovered. Nevertheless, the incumbent Syriza government is attempting to negotiate better terms with creditors in order not to default on its impeding payments.
Unsympathetic creditors argue that Greece’s descent into economic chaos is a product of their own financial indiscipline and corruption. Up to 2009, Greece had accumulated high debts and prices were high making the country uncompetitive. There were even accusations of the unproductive Greek work force that chose to slack rather than to work hard. One could certainly argue that Greece is a victim of their own opulence, chasing loans without building a sufficiently strong growth stimulating sector. Indeed, in 2010 the Greek Ministry of Finance identified a bloated public sector and an inordinate focus in channeling investments into non-growth sectors (such as the military).
But Greece is also trapped by the rigidities of being part of the Euro. As economists such as Paul Krugman argue monetary policy instruments as a means of combating economic problems are more or less absent for countries that are under a common currency. Greece cannot increase interest rates in order to incentivize saving; neither can they print money in order to encourage banks to loan to productive industries. They have to rely on fiscal policies solely that require the participation of a public that is witnessing unemployment and salary cuts.
With high debts, high unemployment, lack of a monetary policy, shackled by the Euro, and condemned by a haughty international community, Greece’s condition is remisicent of Germany in the early 1930s. The Weimar Republic was beset with problems emanating from WW1. The Treaty of Versailles in 1919 had imposed a reparation bill that Germany continually complained was too high to pay. Throughout the 20s Germany had to borrow heavily, particularly from the US, in order to reconstruct. Once an industrial center, the Allies had sought to weaken Germany following the war, with France being particularly belligerent. She took over Germany’s industrial heartland, the Rhur, in 1921. This led to the famous hyperinflation bout in 1923.
But perhaps the one key shackle for Germany was being part of the Gold Standard. The Standard which had worked reasonably well in the 19th century was causing distortions in the global economy at the time. The four great powers – US, France, UK and Germany – faced differing economic scenarios which impacted the other. US and France had most of the world’s gold bullion, whereas UK and Germany were hamstrung by a lack of it. The abundance of Gold allowed the US to divest capital into Germany, who were only too happy to accept the largesse as it sought to rebuild and pay off its debts and reparations. The problem was that in 1928 when America raised interest rates in fear of a overheating stock market, Germany were left with a decreasing flow of capital, and fell into recession. The tap had been closed, and with it Germany’s ability to suitably build its own industrial sector. It could not increase its deficit in order to invest, and with pressures from UK and France to repay, it had little room to manoeuvre.
The Great Depression changed the situation dramatically, as the world began to suffer, and countries experienced their own financial crisis. They were less concerned about Germany’s ability to repay, and by 1932, forgave Germany’s reparations bill. In the 13 years since the Treaty of Versailles, where the bill was set at $32 billion, Germany had only paid $4 billion. Thereafter, Hitler came into power, and the central bank, led by the enigmatic and ill-tempered Hjalmar Schacht, started to print money to invest in public works, mostly those industries that related to rearmament. Even though Germany remained on the Gold standard (unlike the other great powers) it had the breathing space to build its own economy. While by 1937 cracks began to appear as Germany were priced out of the world markets and austerity at home affected the living standards of its people, perhaps a key lesson from this situation, was less oversight and greater freedom allowed Germany to work out its own destiny.
Returning to Greece, there is an irony that Germany is acting with an iron fist, condemning Greece for its profligacy and imposing directives. Greece, like the Germany of old, has to turn to more creditors just to pay the bill, and being part of the Euro, it cannot devalue its overvalued currency thereby cheapening domestic prices. Certainly, Greece is a victim of its own detrimental actions – just as Germany of old were – but being hamstrung by the Euro and with a supercilious international community, it can hardly atone for its economic actions without being condemned. Like Mr. Tony Soprano the international community is acting like gangsters without sympathy. All Greece can then do is remain servile, looking for loans to pay its creditors, and hope its people do not descend further into impoverishment. But without a flourishing economy, it is hard to see how in the future Greece can improve. And like Germany of old it may have to eventually ignore the international community in order to settle its own affairs.