Why the European Commission should not grant additional technical assistance funds to Greece

The European Commission President Manuel Barroso was recently quoted by press sources (Kathimerini: EU sweetens deal for Greece, pushes austerity, 25.06.2011) as outlining a new policy initiative in which Greece would receive an additional EUR 15 bln in aid to “boost growth and employment.” While this initiative is praiseworthy, it is exactly the wrong way to deal with the current crisis in Greece. EU aid has been among the major sources of corruption and patronage in Greece since its entry to the European Community in 1981. This corruption traditionally has two forms:

·       Development subsidies for companies or entrepreneurs are usually based on a kickback of 5-15% of the total fund value awarded. Ironically, this even includes the award of research and development funds: one senior official once informed me that a state research institute had been reduced to bribing the tender evaluation committee in the Ministry of Agriculture to receive EU funds. I don’t know many other countries where one state organisation has to bribe another to access EU funding.

·       Project support, such as infrastructure, IT development, or other works or goods procurement, is typically over-valued by 20-30%, with the balance being paid to the civil service and elected officials in charge of the project, and very often directly to the political parties in charge. This has been amply demonstrated in the Siemens bribery case by the Hellenic Parliament itself, but is also common knowledge among the contractors involved in EU-funded procurement of this kind. 

The fact that numerous EU audits have uncovered major irregularities and lead to demands for fund reimbursement should have been a warning to President Barroso why this approach might not work. It remains a mystery why additional audits are not undertaken: they are clearly needed.

Besides the obvious corruption, however, the use of EU funds for development carries with it a range of additional, insidious effects:

a.     The major projects are usually awarded to a small group of construction firms which are usually linked by cross-shareholdings to powerful media and ancillary interests (e.g. shipping, real estate development, retail operations). This small group of firms exercises unparalleled power in their specific sectors, and were famously referred to the former Prime Minister, Konstantinos Karamanlis, as a group of 4-5 davatzithes (pimps) during a ND party dinner in Monastiraki. Given that these firms now face major economic problems, and that they dominate the main broadcast and print media, it is impossible to see how any future aid could be efficiently and transparently disbursed.   

b.     These projects have a major distortionary impact. Besides the fact that they result in vastly over-priced projects (view my earlier post on the Hellenic Parliament’s million Euro website), they typically feature high capital expenditure which cannot easily be amortised in a normal market environment i.e. outside the distorted, high-cost world of Greek public procurement. In other words, the initial capex, distorted by the fact that it is “free”, leads to an investment which is often impossible to amortise at normal commercial operating terms. We see this most visibly in hospitals which have been expensively outfitted but where the Greek state cannot afford their operation. We also see this in the distorted terms of certain PPP-financed infrastructure projects, which encourage their operators to inflate their expenditure and engage in unnecessary further capital expenditure to justify their operating margins.

c.     Most funding of this sort will inevitably be channeled through state organisations. This will amplify the effects of patronage, lead to yet more losses due to waste and improper procurement, and will carry an unduly high administrative cost versus the actual benefits in “growth and development” delivered. In other words, it will be used to prop up a corrupt, nepotistic and inefficient public sector and its ancillary private sector contractors and consultants, delaying the inevitable work-out and restructuring which must follow.

d.     Finally, it is clear that the EUR 15 bln will not be disbursed immediately, but over 3-5 years, judging by previous technical assistance programmes. By that time, Greece will almost certainly be bankrupt once again, so the impact of this aid will be diminished.

In fact, there is a far easier solution for this EUR 15 bln which is apparently available: use the funds to purchase Greek debt on the open market. Greek 10-year bonds are trading at a 45% discount. This would immediately retire EUR 23.25 bln in debt, which is about 6.8% of the outstanding EUR 340 bln in debt. There would be no possibility of corruption in Greece, provided that the deal was handled through the European Financial Stability Facility, which is already in operation in Luxembourg. The transaction will have to be handled with the utmost secrecy if it is to be successful.

This would have a triple beneficial effect:

a.     EUR 15 bln could immediately retire EUR 23.25 bln in outstanding debt (45% discount)

b.     It would remove a further interest rate burden of at least EUR 1 bln per year

c.     It could, under some circumstances, partially reverse the negative sentiment affecting Greek debt.

Unfortunately, I see next to now chance that such a solution will be adopted. As with the European Investment Bank’s EUR 1 bln loan to the Greek Railways Organsiation, or the Eurozone’s insistence on a 5% initial interest rate on the EUR 110 bln bail-out, it is painfully clear that one of the greatest sources of policy error in terms of the Greek debt situation is the European Union itself.

The Greek debt problem can only be solved by a combination of policy initiatives which:

·       Replace short-term, commercial debt with longer-term debt (by longer term, I mean 20-25 years) at zero or concessionary interest rates (e.g. up to 2%)

·       Lead to greater rates of investment in Greece, either from foreign or domestic sources;

·       Radically streamline the Greek public sector while making it more productive in certain areas;

·       Implement a range of structural adjustments in justice, education in other sectors.

So far, the IMF and Eurozone have been replacing short-term debt with short-term debt, in many cases at higher interest rates, without taking any measures to deal with the cost of interest. This approach is doomed to failure.

© Philip Ammerman, 2011