Greece needs to change course and devalue and default before things get even worse

Last night there was a key vote in the Greek Parliament. That is an opening sentence that could have been written far too often in recent times as she has been plunged into economic turmoil. Unfortunately the sense of deja vu was reinforced by the fact that there was an ongoing General Strike taking place. Also the television cameras of the world’s media were able to catch a few pictures of bottle and stone throwing, although I would be interested to hear from Greek readers how realistic an image that gave or whether it was isolated. Adding to all this was yet another austerity package which in another familiar theme was labelled “the last one”.

What was this austerity package composed of?

It was composed of some 13.5 billion Euros of additional measures. If we look at her likely Gross Domestic Product for 2012 these measures will represent some 5% of it and by the time they are employed in a shrinking economy in 2013 and 14 they will represent an even higher percentage than that. These are savage measures for a country which has already had more austerity than it can take or cope with.

The bill covered a lot of measures but let me give you a flavour of them. From Kathimerini

The legislation sees the retirement age rising from 65 to 67 pensions between 1,000 and 1,500 euros being cut by 5 percent, those between 1,500 and 2,000 by 10 percent, and those over 2,000 by 15 percent. Christmas, Easter and holiday payments will be scrapped. Lump sum payments for people who enter retirement will be cut by up to 83 percent, depending on the sector.

Also there were wage cuts too.

Civil servants will lose their Christmas, Easter and holiday payments. …There will also be pay reductions for ministry staff, local authority workers, employees at the National Intelligence Service and the country’s president.

Added to this were cuts in “special salaries” given to judges and indeed workers at Greece’s central bank where I gather 40 have resigned. I was intrigued to see reports that the Bank of Greece has 3000 employees as for example in its latest accounts the Bank of England has 1800.

Whilst the measures on what might be called “fat cats” are no doubt welcome there is a fundamental problem with all this. If such austerity measures were working Greece would be the strongest economy in the world would it not? After all she has had several doses of the medicine already. This leads me to the catch which follows from the number below.

The retail trade volume index, including automotive fuel, decreased by 9.2% in August 2012 compared with August 2011.

So we see that domestic demand according to the latest data is very weak and this comes on the back of domestic consumption by households falling by 4.6% in 2011. As “compensation of employees” or wages for short fell by 9% in 2011 weak domestic demand in 2012 is hardly a surprise is it? But the brains trust responsible for policy will now by its measures give wages another downwards push which will push domestic demand even lower as we move through 2013 and 14.

Approximately 11 billion Euros of austerity will be applied to an already shrinking economy in 2013 which could easily mean that 2013 is the worst year yet for the Greek economy.

The European Commission sticks its head in the sand

You might think that some real humility would be displayed following this.

The contraction is expected to extend into 2013, a sixth year of recession, and its main drivers remain broadly unchanged.

Er,well exactly! After all the original documentation for the “rescue” for Greece forecast growth of 1.2% in 2012. But never fear the official tendency to forecast a recovery regardless of any evidence for it is still there.

The turning point of the recession is expected in the second half of 2013, leading to moderate GDP growth of 0.6% in 2014.

And even more unbelievably in the circumstances we were told this.

with the unemployment rate at around 22% in 2014.

What is the unemployment rate now?

In a coincidence of timing the latest unemployment numbers for Greece have been released as I have been typing this. So let us investigate them.

Unemployment rate in August 2012 was 25.4% compared to 18.4% in August 2011 and 24.8% in July 2012.>

So not only is it much higher than the forecast we can see that it is rising and even more sadly that it is rising quickly. If we put it another way.

Unemployed increased by 351,666 persons (a 38.4% rate of increase) compared with August 2011 and by 23,442 persons compared with July 2012 (a 1.9% rate of increase).

Perhaps the European Commission will explain to us exactly how this will convert into an improvement by 2014.

Employment is a signal

Regular readers will be aware of my theme that employment and changes in its level has been at times a leading indicator in the credit crunch era so let us examine it too.

The number of employed decreased by 327,658 persons compared with August 2011 (a 8.1% rate of decrease) and by 36,597 persons compared with July 2012 (a 1.0% rate of decrease)

So if it does continue to have some power of prescience I am afraid that the future does not look bright at all.

We can also compare the level of employed to the combined totals of the inactive and the unemployed. If we do so we see this.

The number of employed amounted to 3,726,663 persons.The number of unemployed amounted to 1,267,595 while the number of inactive to 3,375,297.

So the number of employed is only 80% of the other two categories combined or 44.5% of the total. This is getting ever harder to sustain as the numbers get ever weaker. Two years ago (August 2010) the ratio was 52.6% and in many ways this is a useful measure of the economic catastrophe that has been inflicted on Greece.

Building Activity

I have to confess I looked at these numbers with some trepidation and it turns out that I was right to do so.

in August 2012 the total Building Activity (private-public), in the whole country-which is calculated on the basis of the number of issued in the whole country -amounted to 1,210 . This figure corresponds to 265.5 thousand m2 of surface and 1,186.7 thousand m2 of volume, reflecting respectively a 48.2 % decrease in the number of building permits, a 37.3 % decrease in surface and a 27.5 % decrease in volume, compared to the month of 2011.


We have seen all of this before where rose-tinted forecasts of the future and promises that this is the last set of measures are used to get Greece to agree to more austerity. It was only on the first of this month that I wrote about the rose-tinting of forecasts and how they have proved to be so,so wrong and what do we get? Another set of fantasies.

In return for this Greece will get some 31.5 billion Euros of bailout cash from the troika but the sad fact is that the vast majority of this will keep her in the mess she is in and in fact help to deepen it as her debt burden continues to rise. I think that her “rescuers” have in fact become jailers.

What can she do? I have three immediate suggestions.

1. Leave the Euro

2. Default on a substantial portion of her debt

3. Completely change her political class who have in effect sold her out

Sometimes one gets odd allies in a campaign but here is European Commissioner Ollie Rehn quoted by Kathimerini on Greece’s debt burden.

There is no denying that it is increasingly unsustainable without further measures designed for reducing debt


29 thoughts on “Greece needs to change course and devalue and default before things get even worse

  1. Good day,

    I have no meaningful comment to offer, apart from the fact that there is huge political issue in Greece at the moment, stemming of course from the financial woes and chronic cronyism / corruption / you name it:

    There is no political power determined to do what you say, and even a power willing to present a serious plan to EU and request what is best for the Greek population.

    The current formation of ND/PASOK/DIMAR is significantly similar to PASOK’s one-party last government, trying to justify unjustifiable stuff with the mantra “This will be the last time”, until the next time comes along some months later.

    The only tangible difference of this loan installment compared to previous ones is its sheer size (>31 bn), which is attributed to bank recapitalization of course. The “problem” here is that Europe (namely, Germany, namely, Mr. Schauble) has no problem at all throwing corks into a barrel a la old West, lying on its back until it passes whatever it likes, and there are numerous reports proclaiming that “an installment of this size is unwise to be paid out, albeit agreed” et al.

    The only alternative, a SYRIZA-led government, would also disappoint people pretty fast, considering a huge portion of its electorate and appeal comes from making promises they cannot keep, sadly.

    The next step is a Golden Dawn government, as absurd as it sounds, because they will claim to be “clean” “incorruptible and honest”, and well, considering that until 2 years ago they were a negligible neo-fascist organization, never elected, they would have quite an argument.

    Hopefully the political class will change in the future, but for the time being its a choice between a rock (current status quo as-is) and a hard place (incompetent populist alternatives). Meh.

    • Hi John and welcome back.

      That possible Golden Dawn government claiming to be “clean” “incorruptible and honest”, has horrible echoes of 1930s Germany for me. That certainly would be a perversion of what I had in mind. But economic turmoil does send people to the political extremes…

  2. What a mess, with no end in sight.
    I notice that both Dexia and SocGen have either sold their Greek subsidiaries and you wonder whether this is what the politicians are waiting for, i.e. enough of the banking system has got past Greece to let the whole country go. Of course, that may be a little harder for Spain etc…
    I always like to think of cuts etc in terms of how much per person they are. Unless I have my maths wrong, the latest measures are around Euro 1200 for every single Greek alive. That is quite a tall order…

  3. I would like to point out that yesterday, from what I know, as usual there was a peaceful demonstration outside Parliament. Then, as usual, an extremely small minority (20 or less) of people started throwing rocks, molotov cocktails et al to the riot police. Then, as usual, all hell broke loose:

    The square was flooded with flashbangs, riot police hit protesters, also shot teargas canisters directly ON protesters using grenade-launcher-like equipment, people dispersed to close streets, then returned.

    The police continued to beat them and attack using an ever increasing quantity of chemicals and even water cannons.

    Finally, the crowds gave up, mostly due to the torrential rain that poured on their heads yesterday evening.

    The catch: The people causing the riots casually strolled near the square before the “riots” “begun”, with backpacks to hide the molotovs in. They were not “anarchists” or “extremists”. They just waited until a certain time to wreck havoc and make the riot police “justify” its actions.

    I say it openly – Greece is on the way to fascism, a junta thinly disguised as a democratic government, even today! No Golden Dawn is needed to make that happen. For more details, read on the Guardian several articles referring to police brutality and human rights violation which happens daily nowadays.

  4. Hello Shaun,

    Does make you wonder what is needed for any change in Greece!

    The bailouts as I understand it are to bail out the French and German banks and as our banks lent to them , bail out our banks

    Will only utter poverty drive them out of the Euro ? or will the people wait until the banks have bled them dry ?

    Sorta reminds me of the collapse of the Rover group here. the fab 5 sold of everything ( mahinaery , molds , names , plans ,etc ) filled their boots with gold , and pushed off – nothing to save was left …


    PS: nothing sadder than to sit here eating popcorn watching whilst good people are sacrificed to ideology – I cannot convey the utter disgust of the politoco classes for allowing this to happen!

    • Hi Forbin

      The Rover group sell-off is a good metaphor for what is happening in Greece. Some get wealthy whilst assets are stripped and politicians look the other way sounds familiar to Greeks except we are discussing Rover in the UK.

      I will get around to writing about the German banks at some point and for now my suggestion is that their banking was not,ahem, very Germanic in principle.

      • If you are looking at German banks, you might care to start with IKB (Industrial Capital bank, I think, in German). I believe (but please check your facts) that
        1. It was supposedly the long term holder of industrial stakes in the mittelstand; but
        2. Was the first European bank to have to be bailed out because it, ahem, strayed into more exotic instruments

  5. Surely the crux of the problem is their membership of the Euro? Of course all the other points re unemployment and the difficulties of the population are correct. However, the previous Greek governments followed policies which provided a standard of living and welfare which was an illusion. As soon as the debt burden became too high the inevitable contraction of GDP and thus living standards, would have occurred anyway. However, the real tragedy is that because everyone (apparently including the Greeks) insists on retaining the “integrity” of the euro, the necessary economic corrections are being administered without any hope of future improvement due to the policy of taking on more debt so as to pay off older debt. Default and withdrawal from the euro are absolutely imperative for them – and will inevitably happen in my opinion.
    The leaders of the eurozone are risking major political upheaval and fragmentation of whole nations in their bloc by trying to continue with this failed experiment.

    • That to me is the crux of the problem. Anyone with an ounce of common sense would have dtiched the Euro and reverted to their legacy currency. This goes for Spain, Portugal and even Ireland (who are on track for another bail-out too not that you would know it from the MSM).

      Yes there will be pain (there was going to be anyway) the problem is no one in Greece, from top to bottom is prepared to countenance the fact that there entire way of life for the past twelve years was/is an illusion and they are headed back to the standard of living enjoyed by their Grandparents.

      • I agree their lifestyles are an illusion – same for us in UK and most of the West.

        But the choice is

        1. Take German assistance and accept you will be quite a bit poorer with little hope of improvement.

        2. Refuse German assistance and accept you will be MUCH, MUCH poorer with the hope (but no guarantee) that you might eventually get back to the level in option 1)

        To be fair what democratically elected politician can deliver that message to a population that been told that economic growth is the norm and things will always be better for their children. This is the situation much of the West is in.

    • Hi Ernie and welcome to my blog

      In essence the answer is simply yes. The main caveat being that the Euro is at the wrong exchange rate for her. Whilst it has been drifting lower recently Greece needs a move to maybe parity versus the US dollar or the equivalent of and whilst she is shackled to the German economy that seems very unlikely.

  6. If Greece exits and defaults, then how will she fund herself – obviously no Drachma bonds will be issued. Historically at this point the IMF would step in and provide emergency funding in exchange for AUSTERITY – but thats what they are doing now as part of the Troika.

    If Greece exits because its tired of Troika austerity then its possible the IMF would not help. Its also possible that it could not help because it would set a precedent if the other dominoes of Portugal,Spain and Italy fall – the knock-on consequences of a Greek default are not predictable. The IMF may have the funds to bail out Greece (not sure because its still big compared to previous defaults) – it definitely can’t bail out Spain.

    So yes they can default, the debt burden will be lifted – but they won’t be able to borrow any more for quite some time. Effectively the Troika is paying their debt interest for them now and funding their deficits.They may eliminate debt interest but without being able to borrow they will have to monetise or eliminate their deficits. Its self-imposed austerity or its QE. I think the first thing they will do is borrow Mervyn’s printing press and monetise their deficits. It hasn’t worked for UK…………

    No doubt the drachma will collapse, and theory says it should help them regain competitiveness in the long term. But their drachma salaries and pensions will be worth a lot less than any cuts being proposed by the troika. Greeks will be MUCH poorer and they will likely face hyper-inflation if the printing presses roll. That is going to put tremendous strain on their society. if anybody has any doubts then read some of the commentary about what life was like for many Argentinians after their default. Their is no guarantee that they would maintain social cohesion – its easy to imagine the far right gaining power.

    And what if devaluation doesn’t work – I can think of many reasons in a world of $10 a day labour why it might not. There is no evidence of it working in the UK and we are a major manufacturing nation – unlike Greece. Exactly what will they export – how will they grow their GDP ? The world economy is fragile now, Greek exit and worse Euro breakup is going to make it more uncertain – not a good time to rebuild a historically weak economy to compete in a globalised world.

    I feel as bad as the situation is now in Greece, they are effectively on German welfare – without it things might get an awful lot worse.

    • Hi DaveS

      You make a good point but as we stand Greece’s need to borrow if she casts of her debt is very little as she is getting even closer to a primary surplus. I also hope/plan that such a move would give her society a good shake-up and get rid of many of her economic rigidities. So a sure thing? Of course not. Much better than the current spiral downwards? Yes I believe so.

      Put another way we would be moving towards and old-style IMF programme which had some successes rather than the modern style which so far has only failures.

  7. Hello Shaun,

    Interesting late development from Minitru – BoE refrains from more QE and pension schemes put more money into bonds…….

    I wonder….


  8. Dave S, AFAIUI, Greece is almost solvent on its current account, there’s not too much deficit. So she only needs the bailouts to pay the existing debts plus punitive interest. If she defaults she won’t need the outside funds. of course the germans will be very cross but so what? By devaluing her tourism-biased economy becomes viable again. They are only lending to prop up German banks and the ECB/IMF who own toxic collateral. It’s a disgrace to keep heaping more debt on Greece, she’s bust, what’s the point?

    • Thanks Andy – good point – was surprised to see the current account has moved into surplus. Maybe there is hope then ! But after all its the Troika austerity thats forcing them to reduce the deficit. Remove that constraint and I think it likely they will deploy QE – after all its now the favoured choice of responsible central bankers.

      Greece is bust, but so is Portugal, Spain, France, UK etc. and I would argue USA.

  9. No way, nada, zip, zero chance that Greeece will be changing course; since as foretold in bible prophecy by the prophet Daniel, the global empire Of UK and US hegemony is giving way to the ten toed kingdom of regional governance; and as foretold by the Apostle John, where Greece is the lynchpin, that is the centerpiece of the economy of the economy of God, for the beast regime of totalitarian collectivism, that is rising from the Mediterranean Sea to replace the Banker regime of Crony Capitalism and European Socialism.

    Michael Rozeff writes in Lew Rockwell British have invaded 90 Percent of the world’s countries “Britain has invaded all but 22 countries in the world in its long and colourful history, new research has found.” So says new research. Was this culture and/or genetic predisposition handed on to the U.S. via the British colonists? Or does the geography of the two countries that are essentially islands foster taking to the seas? Or has the advanced private property system produced the wealth that could be turned to extensive warfare? Or have advanced tax-collecting and money systems been essential to gathering wealth and focusing it on conquest?

    On May 1, 2102, Al Jazeera reported Map reveals bases encircle Iran US military installations in the Middle East serve to keep an eye on Iran, but securing oil resources, guaranteeing the security of the state of Israel (by) surrounding (with a) globe-spanning American archipelago of bases.

    News reports communicate that a political and economic coup d’etat is underway in the Eurozone. Charlie McGrath writes The Greek crisis. Bloomberg writes Samaras wins Greek austerity bill in race to secure aid. Greek Prime Minister Antonis Samaras mustered the support of enough lawmakers to secure approval of austerity measures needed to unlock bailout funds, after more than 50,000 protesters ringed Parliament. RT writes Chaos in Athens: Greece in for new round of austerity as protests rage. Gary of Between the Hedges shares Passauer Neue Presse reports Peter Bofinger, member of the economic panel advising German Chancellor Angela Merkel, says Europe’s debt crisis is worsening, citing an interview. The crash that happened in Greece may follow in Spain, he said. The actions of the ECB don’t change the fundamental problems, Bofinger said. A fundamental problem in all countries is that the business cycle is heading into recession. Reuters reports Merkel warns Britain against European Union exit. Germany’s Angela Merkel on Wednesday warned Britain not to turn its back on Europe ahead of talks in London with Prime Minister David Cameron aimed at overcoming divisions that threaten to block a European Union budget deal later this month. Cameron has said he is ready to veto the EU’s seven-year budget and has attacked its “ludicrous” spending plans, in comments likely to fuel a view among many in Europe that London is drifting away from the 27-nation union. Christoph Dreier of WSWS writes Greek parliament approves drastic austerity plan amid mass strikes. The Greek Parliament voted in favor of the country’s fifth austerity program within the space of the last three years.

    The dream of Nebuchadnezzar, interpreted by the prophet Daniel in Daniel 2:30-33, reveals the Statue of World Empires, and foretells that the iron rule of the twin legs global hegemony of UK and US, will give way to the rise of a iron diktat and clay democracy of a ten toed kingdom of regional governance, where ten toes of regional governance will dominate in all of the world’s ten regions. Regional political and economic blocs, that is regional governance, will rise in power to replace crony capitalism and European Socialism in the current dispensation of empires; the entire globe will be headed by a cadre of ten economic zones, Revelation 17:12-13. In Europe, public private partnerships will oversee the factors of production and manage the economy. The schemes of debt securitization will be replaced by the schemes of regional framework agreements, Daniel 8:23. And these regional framework agreements, will empower a little horn, one of seemingly little authority, to rise to be Europe’s sovereign leader, Daniel 8:7. The Troika will rule from Brussels and Berlin, and a monetary pope, possibly Mario Draghi, operating through the monetary authority of the ECB, will provide seigniorage, that is moneyness, through diktat.

    Church of God Writer relates Europa, the Beast, and Revelation Where did Europe get its name? What might Europe have to do with the Book of Revelation? What about “the Beast”? What is ahead for Europe?

    Jesus Christ is at the helm of the economy of God, Ephesians 1:10, pivoting the world from prosperity to ruin, so as to introduce his sovereign rule from Jerusalem for a thousand years, Revelation 11:15, and Revelation 20-4-5. The current fiat money system will be replaced by the diktat money system, where diktat serves as both money and credit. The scope and power of the Beast Regime, that is rising out of the profligate peripheral PIGS, especially Greece, to replace the Banker Regime, will be recognized as unconquerable; John The Revelator, writes that people will actually worship this monster, Revelation 13:1-4.

    • Hi theyenguy and welcome back

      As to the “Britain has invaded all but 22 countries in the world in its long and colourful history, new research has found.” Please dont tempt us! More seriously the story about a US drone being fired upon by Iran does make me wonder if we are bein warmed up for a war in that area. I hope not but we have now had the US Presidential election.

  10. Hi Shaun,

    A gloomy but hard hitting blog today.

    We all know what Greece needs to do apart from the Greeks?

    With such levels of austerity being applied, so there is less money in the economy how can there be anything apart from contraction? Austerity only works if the public sector contraction is less than or equal to private sector growth. Otherwise taxes and unemployment just make it a downward spiral.

    The Trokia cure of multiple rounds of economic leeching to bleed the patient is progressively bleeding the patient dry and killing them.

    Realistically, it is more and more apparent that “the project” is all that matters to the EU and human misery as the result of an economic collapse is collateral damage and irrelevant apart from a few platitudes here and there.

    Greece will not be allowed to leave the Euro or the EU, as the EU politicians know that would be the beginning of a domino effect and the failure of “the project”.

    Once Greece is totally on its knees with mass poverty and starvation and / or civil breakdown, then an EU technocratic administration will take over under the guise of disaster relief, stability and growth. Greece will become the first of many countries ruled from Brussels directly and this is the real fate that awaits the PIIGS as part of “the project” and ever closer union. Reparations to the IMF and EU will then keep Greece in its place for many years to come, a German run civil service will enforce the rules and collect the taxes with ruthless efficiency.

    I can see no other rational explanation for the continued reinforcement of this failure.

    • Hi Rods

      You may be right about the EU plan- which is to my mind both amoral and depressing- but as John has pointed out there are plenty of dangers out there such as Golden Dawn and matters could spiral out of their control. I hope in many ways that they will but that a peaceful democratic government will take over but it is getting harder and harder to see a route through to that. Sad but true.

      • Oh Shaun you forgot to mention youth unemployment in your stats… Now it’s up to 58%!! Very shortly, when the next batch of school leavers hit the figures, this will mean roughly two thirds of Greek kids thinking they have no future. Terrible figures leading to who knows where?

  11. If you believe, as I do, that a Greek default is inevitable then, if the ECB/Eurozone/IMF etc., are serious then they should be planning right now for a managed default.
    If you believe in the European project, as I do – though my faith has been shaken of late, then the whole of the EU should assist in getting the Greek economy back on its feet.
    If none of this transpires then I have to take Forbin’s advice and watch as the train wreck ensues; pass the peanuts.

  12. Roger – why do we have to believe in a “European project”? Communists believed in their “project” even when it was clear that such a thing was ruinous to both economies and freedoms. And look where that got them.
    What worries me most is that these people have taken the “project” and turned it into a cult. I actually think there is a serious risk that they will try and use the current catastrophic situation to engineer more centralised power for unelected officials/bureaucrats
    There is no connection of any kind between this EU project and the advertised “peace and freedom” kind of phrases which they all use. They will continue to try and frighten people with the idea that withdrawing from the cult will result in certain damnation/destruction etc. Their words and deeds are the opposite of the truth.

    • Hi Ernie, I share your reservations about over centralization – what happened to subsidiarity – and the total lack of leadership currently. But we are all Europeans with a lot of shared history, we can and should cooperate. Ideally I’d like to see a return to the common market and get rid of notions of the united states of Europe,
      The paradox currently is that although the “leaders” keep on about wanting “more Europe” they’re actually creating mechanisms that rely more and more on decisions by the Council of Ministers, thus giving more power to the individual States rather than the centre. As Shaun keeps pointing out all these sticking plaster fixes just make everything more and more unstable.
      But I will cling to the belief that as good neighbours we should be helping each other out in hard times. Perhaps George Soros’ idea for helping the Greek population should be a starting point.

  13. Hi Roger
    Ok I see we share almost the same views. I voted for a common market (free trade area if you will) not a European Union. Their current policies seem certain to me to lead to greater fragmentation and indeed the break-up of some nations altogether (Spain,Belgium?). I’m afraid I have very little faith that human economic/governmental systems will truly co-operate as you would like. Economic self-interest in fact may be the better way to go in that it should be what drives real capitalism rather than the strange hybrid we have now.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.