Wednesday, 11 March 2015

Will Greece Remain On A 'Life-Support' System?

A great deal of ink and broadcast time has been spent over the last few months on the fate of Greece. Mind you, this is a discussion that self-obsessed Greeks have been having at least since Homer, but it seems to have gained traction recently. As a very smart, very well plugged-in Greek friend explained at dinner last night, “A lot of people in Greece love nothing better than the fact that Greece is on the front pages of the world’s newspapers. While the content of this news may escape them they consider such coverage proof that Greece is where it should be – at the centre of the universe.”

            My friend, who would describe himself as a ‘realist’ rather than a ‘cynic’, says the current stand-off between Greece and the rest of the Eurozone is ‘pure theatre – nothing more.’ Both sides, he says, are playing to domestic audiences. The Greek side uses its bizarre, confrontational negotiating style to please the home audience. Given the high approval ratings of this strategy seems to be working. The optics of the  ‘little guy’ standing up to the power of the ‘big bullies’ effectively obscures the reality that the country is broke and can barely meet its pension obligations. The heavyweights of the European Union, for their part, need to show their own domestic audiences that they are not giving in to the ‘profligate and corrupt’ Greeks. They are well aware of the rising chorus of resistance to further financial assistance. “Hans will not give one penny more to those shiftless bums. If Portugal and Ireland worked their way out of the recession why can’t Greece?” So goes the rhetoric.

            The reality is a bit more complex. My friend anticipates a messy continuation of the current situation. “The creditors and the Eurozone are well aware that there is no way the current Greek government, or indeed any foreseeable Greek government, will make the necessary structural reforms to generate growth and help the country stand on its own feet. Rigid, antiquated ideology combined with deeply entrenched vested interests make such reforms virtually impossible. It’s not just Syriza, the former New Democracy government was never serious about implementing reforms. It is far more likely that the creditors will keep Greece on a life-support system by drip feeding it just enough cash to keep it within the Euro zone. Then they can forget about Greece and move on to more pressing issues. No one wants to risk a complete break- up of the Euro over a possible Greek exit from the single currency.”

            The only flaw in this argument is that the so-called ‘Hard Left’ faction in Syriza doesn’t want to play this game. They would like to drop the constraints of the Euro and return to the national currency, the drachma. The language they use while spinning around in their own little galaxy is full of such stirring phrases as ‘national sovereignty, dignity, national honour, and freedom from oppression.’ When reminded that even fellow ‘austerity’ sufferers like Portugal, the Baltic states and Ireland, urge Greece to follow through on reforms this faction in Greece says this is merely proof that Europe is not ‘ready’ for a real left-wing government. You have to remember that Greece is about the only country left where political terms like ‘Left’  and ‘Right’ are actually used in serious conversation. Most other countries have moved on to more current challenges rather than re-fight old, stale political doctrine.

            Behind the ringing calls for ‘national sovereignty’ with a return to the drachma lies a far more mundane reality. Returning to the drachma means essentially a return to the rotten old system that broke Greece in the first place. The government could simply print as much money as it wanted, regardless of its value, and reward its friends with jobs, higher state hand-outs, even more restrictive labour practices, and protective barriers for favoured industries – those that are left in Greece that is. The economic hardships faced by ordinary people would be glossed over as ‘sacrifices necessary for the common good.’ In other words, ‘Stop whinging about the lack of food on the shelves and glory in the return of Greek pride.’

            Remaining in the Euro, with all its financial constraints and empty Greek treasury, makes this type of political spending more difficult. But not impossible. “Remember all those €70 billion in non-performing loans held by Greek banks.  Do you think it is a straightforward process determining whose loans will be forgiven and whose repayment will be demanded,” my friend asked rhetorically. “I dare say there will be some interesting discussions between the banks and the government on this issue.”

            He may be right in his ‘life support’ analysis, but there is always the risk that an accident between inexperienced Greek negotiators and tired, frustrated Eurozone finance officials could push the country into the cold, hard world outside the Euro.

Monday, 9 March 2015

Has The Post-Erdoğan Era Begun In Turkey?

Are the wheels starting to come off the Turkish wagon? The political stability and economic growth that have characterized Turkey since 2002 are beginning to fray at the edges just before critical general elections in June that could determine the country’s political direction for years to come.

            These elections will go a long way to determining whether President Tayyip Erdoğan will achieve his goal of complete control or be hampered by the current constitutional restraints on the president’s power. He runs the risk of being politically and legally isolated in his extravagant new palace unless the ruling Justice and Development Party (AKP) wins enough seats to unilaterally change the constitution the way he wants. Not content with the current largely ceremonial role of president, Erdoğan desperately wants a new constitution to enshrine his vision of a powerful, unchecked, unfettered presidency.

Is Prime Minister Davutoglu's Patience Running Out?
            A toxic combination of international and domestic problems is making this task more difficult than it was just a few years ago. On top of this a growing sense of ‘Erdoğan fatigue’ seems to have gripped even some members of his own party. Maybe they’re getting tired of 12 years of bombast. How much longer is Prime Minister Ahmet Davutoğlu going to put up with Erdoğan’s constant – and unconstitutional – interference? Furthermore, many rank-and-file AKP members have shown little enthusiasm for a change in Turkey’s governing structure.

            In order to unilaterally change the constitution the AKP must increase its members of parliament from the current 316 to 330. This is not an easy task in the best of times, and these are not the best of times.

            The AKP can no longer count on strong economic growth to support its election campaign. For several years the party would loudly trumpet the impressive growth figures and strong currency as confirmation of its ‘brilliant’ policies. Now it is reduced to finding excuses for below-forecast growth, a rapidly depreciating currency, declining exports, and stubbornly high unemployment.

The currency has depreciated more than 10% so far this year, unemployment has risen to 10% and is much higher in the volatile south eastern region, exports are declining, and president is hammering the Central Bank to lower interest rates. The cacophony and mixed signals over Turkey’s economic policies are making investors very nervous. The prime minister and his top economic aides were in New York last week in an apparently futile mission to calm these nerves.

This is very difficult to achieve when the president insists that the theoretically independent Central Bank lower interest rates in hopes of stimulating the economy and reviving the critical construction industry that has created so many millionaires during Erdoğan’s reign. Ali Babacan, the minister in charge of the economy for the last 12 years, understands finance and economics very well. He has done a masterful job keeping the country on the rails so far, but it remains to be seen just how long his rational policies will survive the onslaught of Erdoğan and his comical presidential ‘advisors’.

On top of the economic problems there are the Kurds. No one knows precisely how many Kurds live in Turkey, but common assumptions are about 15% of the total population, or roughly 12 million people. Kurdish guerrillas, the PKK, have been fighting a low-intensity war against the Turkish state for years. In an effort to end the violence and integrate the Kurdish population more completely into Turkish society the government has begun long, drawn-out ‘peace process’. While many applaud this effort, cynics accuse the government of simply trying to buy off the Kurds to gain votes in the upcoming election.

Regardless of the ultimate reason, the Kurds may well hold the key to the June election. Bear with me for a little background on the convoluted Turkish election system. In order to enter parliament a political party must gain at least 10% of the total votes cast. In the past the Kurdish political party did very well in the Kurdish districts of the south east, but failed to cross the 10% national barrier. In the event that a party fails to get the required 10% on the national level all that party’s votes are given to the runner-up in the districts in question. In the vast majority of cases this runner-up was the AKP candidate.

In order to circumvent this rule Kurdish candidates previously would enter the elections as independents who only had to win their districts to enter parliament. This time, however, the young, charismatic leader of the Kurdish Freedom and Democracy Party (HDP), Selahattin Demirtaş, has decided to risk everything by entering these elections as a party, subject to the 10% threshold. If he wins the Kurds will gain a powerful voice in parliament. If he loses the AKP will pick up several additional members of parliament – perhaps enough to take them over the 330 needed to change the constitution.

Is Kurdish Leader Selahattin Demirtas The Country's New Hope?
The real question is whether Demirtaş can broaden the party’s appeal to the non-Kurdish segments of the population. He has been helped positive images of Kurds in Iraq and Syria defying the barbarians of ISIS. He may also get some help from what is left of the disaffected, alienated liberal bloc as well as from those who dislike Erdoğan so much they will vote for the Kurdish party. “My deepest apologies to my grandfather who is turning over in his grave, but I will vote for the Kurds this time. Just to block Erdoğan,” said a typical ‘tactical’ voter.

Turkey is in for a very bumpy ride until the June elections. Then we shall see if Erdoğan gets his heartfelt wish for an imperial presidency, or whether is left roaming around his enormous new palace looking vainly for something to fill his days.

Friday, 20 February 2015

Who Are The Real Revolutionaries?

Buried beneath the mountain of verbiage and breathless news reports about the Greek debt negotiations lies a little-noticed role reversal. While the new Greek government Syriza adopts the dramatic plumage, media savvy and rhetoric of ‘revolutionaries’ they are, in fact, staunchly defending the Greek status quo – the very status quo that brought Greece to its knees. The usually media-shy, grey and drab Eurocrats in Brussels would shiver at the comparison, but they have become the real revolutionaries who want to change Greece and bring it kicking and screaming into the 21st century.

            The Greek state, with its bountiful patronage and rigid control, has dominated the Greek economy and protected politically loyal interests for generations. Every party in power has used the state coffers to reward voters with jobs in government or in state-owned enterprises regardless of aptitude or knowledge of the job at hand. The combination of hapless, inefficient state economic enterprises and bloated bureaucracy whose main goal was to strangle at birth any innovation that might reduce its numbers has slowly but surely deprived the Greek economy of the vitality and oxygen needed for real growth. Who in his right mind was going to spend the energy required to fight through the swamp of bureaucracy and closed professions to start something new that just might offer a lower priced, better service or product to all consumers? Far better to stuff your idiot cousin into well-protected state job.

Is he the revolutionary ...
            This is what Syriza wants to defend at all costs. It is, after all, the source of the party’s political power. And this condition is exactly what the bureaucrats in Brussels want to change. Syriza loves to play on the image of the hard-hearted Germans insisting that impoverished Greeks tighten their already tightened belts a few more notches. Greeks respond ‘What belt? I sold that long ago.’ 

Even brilliant economists like Paul Krugman weigh in against the follies of relying on austerity to bring a country out of depression. It is not every day that I take issue with a Nobel Prize-winning economist, but Krugman may be only half right in this case. I agree completely that austerity by itself accomplishes nothing but misery. How can any country, or company, for that matter prosper on a diet of nothing more than the economic equivalent of kale and tofu?

It is the flip side of the austerity coin that has been obscured in all the concern for the long-suffering Greek people. So far, Syriza and its vocal supporters have said very little about the vital structural reforms required to get Greece off the welfare rolls. What about opening up the economy to newcomers and, God forbid, foreigners? What about amending the bureaucracy to encourage instead of discouraging enterprise? We know that Syriza is firmly against selling or even leasing state assets to raise funds that could be used in much-needed social welfare programs. But why, precisely? Do the party leaders really believe that the state can run things like the railroad, ports or power corporations more efficiently than private owners? The real tragedy is that without these long-overdue structural reforms the pain of reduced spending over the last few years will be wasted. Greece will remain mired in a welfare trap, unable to claw itself out of debt and unable to grow.

Or is he the real revolutionary?
The revolutionaries in Brussels want to change the story line. They are well aware of the desperate state of many Greeks, but they would like to help Greece grow out of the welfare trap rather than remain on the EU’s life-support system. An obvious deal is on the table. Greece’s debt conditions are eased in return for real movement on the economic reforms. Will Syriza pick up this deal? Or will it continue to play the role of the defiant revolutionary defending the barricades with cries of ‘national sovereignty over all else’? One wonders if Greece’s rulers have ever explained that the price of joining the EU and then the Euro was a loss of total sovereignty. The club has rules that one is supposed to obey. One didn’t hear much about a ‘loss of sovereignty’ when EU funds were flowing in to improve the country’s antiquated physical infrastructure. But now when the club secretary reminds members that the club is joint enterprise with certain obligations we hear cries of anguish from many Greek politicians.

If there is no agreement in Brussels in the next couple of days Syriza could possibly elect to hold a referendum on the Euro. It could ask the Greek people to decide if they want to stay in the Euro even with the ‘odious’ conditions imposed by heartless Germans -  or do they want to return to the ‘proud and sovereign’ drachma regardless of the economic pain that might cause. Such a step could give Syriza political cover regardless of the outcome. In any case, we won’t have long to wait for the end of this melodrama.

Thursday, 5 February 2015

Rigid Ideology Trumps Welfare Of The People

Nothing better illustrates the ‘profoundly unserious’ nature of Syriza’s plan to revive the Greek economy than its position on the sale of state assets. Syriza’s new ministers have gone out of their way to condemn the practice and say they have absolutely no intention of pursuing any more privatizations. So much for the claim of helping the long-suffering people of Greece. If the party was genuinely interested in easing this suffering it would relax its rigid ideology and use these state assets to generate the necessary funds.

           The Wall Street Journal ran an interesting analysis of the Greek debt situation in the 20 February edition. Stephen Fidler points out clearly that Greece has the resources to tackle its debt, but the government chooses not to. This analysis would seem to be supported by comments from two leading government officials regarding the controversial privatization program.

            Finance Minister Yanis Varoufakis opined in one of his carefully-calculated sound-bites that “it is not very clever to sell off the family jewels in the middle of deflationary crisis. It is wiser to develop state property and increase its value using smart financial resources to strengthen our economy.

            Panayiotis Lafazanis, leader of the hard-left faction of Syriza, added that the Public Power Corporation “will return to the state as a state-run company which will operate as a driver of economic growth.” Are they kidding??!!

           These comments demonstrate clearly that neither of these people has ever been involved in selling or running anything, and has absolutely no idea what they are talking about. First, when is a better time to sell assets than when you need money? The government can set the minimum price it will accept and work to attract bids. Because assets like the Public Power Corporation, the Port of Piraeus, and the railway are potentially valuable for the right buyer the bids could easily exceed the state’s minimum price. The cash received by the state would come in very handy to meet some of the legitimate social needs in the country. This much is elementary, not even Economics 101. 

Fashion statement or finance minister?
            Second, the idea of the Greek state ‘developing’ these assets or having state-run companies becoming “a driver of the economy” is ludicrous. Over the past several decades the Greek state, regardless of the party in power, has demonstrated convincingly that it cannot run a car wash let alone something as sophisticated as a major port or energy company. Just look at the sorry record. Olympic was a decent airline until it was nationalized, starved of investment, over-staffed with political patronage, and ultimately went bust. The airline was well known for people getting paid and never bothering to show up for work. The railroad could be a very valuable asset by connecting with a potentially efficient Port of Piraeus and offering a much quicker way to the heart of Europe than taking a ship all the way through the Straights of Gibraltar and up to Rotterdam or Hamburg. But, under state ownership the railroad never even began to reach its potential. All you have to do now is contrast the part of Piraeus Port owned by the Chinese company Cosco with the state-owned section to see the difference. One bustles with activity and productivity while the other stagnates

Furthermore, all these state assets require millions of Euros of investment to make them productive and efficient. Under state ownership where is that money going to come from? The Treasury is already empty, and there will be intense pressure to spend what little money there is on re-hiring people or boosting pensions rather than buying things like a new crane for the Port of Piraeus.

            One would hope that Syriza would at least be honest with the Greek people. One reality they do not touch upon is that the party is beholden to powerful unions. And these unions have always been opposed to privatization. Such a move away from state-ownership could seriously weaken the unions’ influence. In addition, continuing state ownership guarantees Syriza’s grip on the levers of economic power in Greece. Friends can easily be rewarded while enemies can be left outside the charmed circle. One gets the distinct impression that the last thing Syriza wants is strong economic growth led by a private sector that it cannot control.

            Another way to generate some cash for much needed social programs would be to cut the bloated defence budget which is still one of the highest in NATO as a percent of GDP. Surely, if Syriza were seriously interested in helping the people of Greece it could divert some this money into much needed social spending.

             But what do we get instead of serious proposals? Grandstanding helicopter flights by the new minister of defence over disputed islets close to Turkey where he dramatically drops a wreath for all the cameras to witness. Why? What on earth was he trying to do other than provoke another problem that Greece does not need? Despite deeply entrenched Greeks fears to the contrary, Turkey is not about to lunge across the border and grab some territory

            Greece does indeed have the ability to help itself.  But the government has to get serious about generating sustainable income rather than simply bleating about Europe’s ‘obligation’ to reduce the country’s debt. If Syriza really wants to prove its 'anti-establishment'  tendencies it could actually do something to help the people of Greece rather than rely on trivialities of costume design and grand, theatrical -- but ultimately empty -- gestures

Monday, 26 January 2015

Will Greece Become Venezuela -- But Without The Oil

One can only say ‘Well Done’ to Syriza after running an energetic campaign promising the long-suffering Greek people a return to the good old days and an end to the struggle, however muted, of dragging the country into the 21st century with much-needed structural reforms. He successfully kept voter attention focused on the hated word ‘austerity’ instead of ‘reform’.  Something no one seems to want. By comparison, the former leading party New Democracy was effectively absent-without-leave during the campaign and ceded all the high, self-righteously indignant ground to the insurgent Syriza. As one observer noted New Democracy seemed tired, worn out, and basically conceded the election before the campaign even began.

            Winning the election is one thing. Transforming the rhetoric into reality is quite another. The Greek treasury is essentially empty. It is not altogether clear just how Syriza’s bold election promises will be met. The glow of victory could quickly fade once the next prime minister, Alexis Tsipras, has to deal with the twin problems of intractable creditors and an extremely fractious party whose more radical elements view the election as revenge for losing the civil war almost 70 years ago. Memories die hard in Greece. Will he be able to tame the parts of his own party that want to replicate Argentina and rip up the debt agreements and repudiate all of Greece’s debt? It’s much too early to tell.

Syriza leader Alexis Tsipras
            His campaign was filled with promises to renegotiate Greece’s debt burden, restore pensions, roll back structural reforms, and essentially remove the influence of the creditors on Greece’s internal policies. By the way, all of this is supposed to happen with Greece remaining in the Euro. Crowd pleasing stuff. Exactly what the Greek people wanted to hear. Unfortunately it has the real impact of one hand clapping.

The creditors wisely remained largely silent during the campaign. It will be interesting to see how they react when presented with Syriza’s ‘demands’. Probably not all that well. There may be room to adjust terms at the margins – possibly extend maturities, be flexible on interest rates, etc. But I expect the creditors to remain firm, initially at least, on demands for continued structural reforms to free up protected professions and reduce the highly politicized over-stuffed bureaucracy that stifles any economic initiative.

The creditors, led by the Troika of the  IMF,  European Central Bank and the European Commission, should be careful, however, because Tspiras is very skillful at changing the nature of the debate and winning the critical public relations battle. The debate will no longer be about the serial failures of Greek policy makers over the last several decades. Their inability or unwillingness to create an economic system that relies on more than state hand-outs to favoured clients will be pushed aside.

Tsipras will no doubt attempt to turn the debt negotiations into grand statements about ‘Greek sovereignty’, the ‘will of the people’ vs. narrow-minded accountants. He will attempt to broaden the argument far beyond Greece and become the spokesman for all the ‘beleaguered, debt-ridden, down-trodden’ people of Europe. Nowhere will there be any acknowledgement that the ultimate responsibility for this current Greek tragedy lies squarely with the Greek political class, or that perhaps billions of Euros of loans just might come with a few conditions. All these unpleasant facts will be buried under tons of ‘anti-bailout’ rhetoric.

This strategy just might work. He knows his opponents’ weakness very well. The bureaucrats of the so-called Troika are not very good at public communications. They act like small woodland creatures caught in the glare of head lights when confronted with media attacks. They either become road kill or retreat rapidly behind bland, bureaucratic statements that Tsipras will tear apart as he backs them into a public relations corner. He will turn them into heartless accountants intent on stripping the hapless people of Greece of their last shreds of dignity and welfare. Hedge fund managers could possibly stand up to this onslaught. But European bureaucrats and political leaders are made of less stern stuff. They will be looking for a way out. They would undoubtedly cover their retreat by saying they acted to preserve the Euro and the concept of European unity. The Germans hate the idea of bailing out what they consider the ‘feckless Greeks’, but even they may wind up bending rather than be painted as the bad guys of Europe once again.

Unfortunately, the actual welfare of the Greek people could be lost in all this upcoming theatre where high-pitched melodrama replaces real substance. Tsipras has a real opportunity to lead Greece out of its quagmire and demonstrate just how he intends to kick-start the Greek economy to provide the jobs and income the people deserve. Can he change the mind set of his countrymen from relying on state hand outs that have a short shelf life? Will be do something like this? Or will he be content with the colourful theatrics of opposition? This is by no means clear.