Europe has bought short-term stability at the expense of long-term survival

I started work this morning aiming for productivity, by instead was distracted by yet more outlandish headlines. Yesterday the European Central Bank decided the massive resumption of quantitative easing by agreeing, for the first time, to intervene directly into public and private debt markets in the Eurozone. This is a massive departure for an institution which, until yesterday, was legally barred from purchasing government debt.

In addition to this, the Eurozone states agreed to EUR 500 bln in loan guarantees in a “European Stabilisation Mechanism”, designed to inject liquidity in panic situations. The total price of the package (including associated IMF commitments) is calculated at roughly $ 1 trillion.

It seems that European leaders can move fast when the main economies are threatened: their alacrity to announce yet new spending in the space of about 4 days is a major contrast with their dithering on Greece, which took over 4 months.

And yet, I wonder if this is really the correct way to go. We are developing yet another layer of structural stability which will be dominated by political consideration, while the dual root cause of the problem—burgeoning public debt and unrestricted short-selling—go unaddressed.

In fact, these are not root causes at all, but symptoms. The root cause is a declining economic and demographic situation in most OECD countries which is putting the post-WWII socio-economic model at risk. Pumping more money into Eurozone public administration is a valid policy response, only if there are signs that these administrations are taking meaningful and sustainable measures to change their fundamental economic and social models.

Are they? I’m in “ground zero” of this sovereign debt contagion, and I don’t many realistic solutions being promoted by the Socialist government. Greece still does not have a list of basic priorities or clusters for investment; its national educational policies does not link to its economic policy; it’s doing little to promote productivity and innovation in the economy or the workforce; it’s doing little to seriously reform the public sector to deliver lean, value-adding services.

In fact, the entire European, and to a lesser extent North American debate is being dominated by the past, not the future. Public policy seems to be oriented towards crafting a nation of placid consumers rather than producers or innovators. The link between public investment in innovation, and actual innovation delivered, is abysmal. The Common Market exists in name, but not in practice. Bureaucratic complexity across the EU is astounding: it’s still impossible, for instance, to electronically file a single corporate income tax statement for a company or individual operating in more than one EU country.

On January 19th, I posted my concern about the coming crash of 2010. The main hypothesis was that the end of quantitative easing would occur in the early spring, leading to a major financial contagion hitting the weaker Eurozone economies. Unfortunately, this scenario turned out to be true. Check my conclusions on this post:

Conclusion: we will probably (55-65% probability) see a rapid contagion in sovereign debt markets by March or April 2010 if QE ends and governments are forced to rely on the open market for funding. Public sector debt will crowd out private sector issues, exacerbating the existing liquidity crisis and leading to a renewed “flight” to alternative asset classes (such as gold) or to “safe havens” as the panic spreads. For smaller, exposed markets such as Greece, Ireland or Spain, this contagion will constitute a major barrier to future debt issues. This will lead to the need for the ECB or larger European countries such as Germany to buy or guarantee this debt, changing for good the rules of the game.

This is exactly what has happened.

If you are a follower of Paul Krugman, the answer now is yet more quantitative easing, more financial stimulous and deficit spending, so governments can buy stability at any price. Normally, I would agree with this hypothesis. But given the absolutely dismal record of most European or US administrations in deficit reduction or general economic policy in the past 10-15 years, do we really expect this to happen?

So here are my next conclusions:

In May 2010, the governments of the Eurozone in conjunction with the IMF and the European Central Bank announced a new financial stabilisation package. While this enables short-term financial stability, it risks the long-term equilibrium between public and private spending in the Eurozone and, by extension, North America. It masks the true liabilities in sovereign debt, and removes an important part of the external financial discipline for national expenditure.

The root cause of the problem—that national governments are spending too much, and are relying either on quantitative easing or financial sector borrowing—has not been addressed.

As a result, neither the United States, nor many European countries are taking the meaningful steps to cut public sector expenditure, or at least allocate it to those sectors capable of producing employment and economic value.

The medium-term impacts of this decision will be to:

• Increase inflation as central banks resort to printing more money and expand their balance sheets radically;

• Place the basic credit policies of the ECB and the Fed under question;

• Increase the sense of moral hazard in the financial sector, as both banks and economies (or sovereign debt) became “too big to fail”;

• Increase the trend in public sector expenditure and unfunded liabilities, leading to a vicious cycle of higher taxation and unproductive spending, at a time when demographic changes were leading to an inexorable change in the basic social and economic fabric of most countries;

• Increase the total national debt (public + corporate + household) of most European countries as well as the United States;

• Cause business investment to increasingly be channeled to offshore or lower-tax locations;

• Increase the political power of Germany and, by extension 2-3 other Eurozone countries at the expense of the entire European Union. Rarely has decision-making in Europe been dominated so extensively by Germany, and the previous occasions when this occurred were not happy times.

I believe that with this current decision, the Eurozone has bought time and stability, without a real commitment to fundamental public sector reform. The root causes of the problem are firmly in place, and accelerate as demographics change and Asian economies become more competitive. An alternative solution should be found, before the potential scale of the cost of dealing with these root causes becomes prohibitive.

Why bring business to Greece?

This is an email sent this morning to my project partners, a leading business school, with whom we are organising a 2-day project meeting plus weekend for 10 people in early June in Athens. Given yesterday's events, my inclination this morning is to cancel and take the business to a more serious country. Let's see.

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Dear XXXXX,

You will probably have heard that yesterday, 3 banking employees were killed by anarchists throwing Molotov cocktails in the centre of Athens yesterday. While Greek protests are often rowdy, they rarely turn violent to the point where innocent bystanders are killed.

This violence and the entire mind-set of marches, occupations, strikes, and protests is condoned and supported by certain political parties, primarily the Communist Party of Greece and the so-called Coalition of the Left. The trade unions associated with these two parties have, in the past two weeks, prevented tourists from entering their hotels in central Athens and a cruise ship in Piraeus; occupied the Acropolis and hung banners from its walls; and otherwise disrupted the social and economic life of the country. The student unions associated with these two parties have, in the recent past, attacked university professors, occupied university grounds, destroyed or looted university property, and otherwise done everything possible to disrupt and abuse the benefits of the public education system.

The hotel we have chosen for the project meeting is the XXXXXX. It’s in an isolated, quiet spot in Kolonaki, removed from the square, but about 600-800 metres from Parliament. Violence or protests rarely spill over into this area (the politicians would be prevented from drinking their EUR 5 coffees if it did), but as with all things in life, there are no guarantees.

The future is also highly uncertain. While I don’t expect the same intensity of protests, there is nothing to say that they won’t continue, even sporadically.

Unfortunately, neither I, nor my company, nor the hotel can guarantee the public safety of its guests, either within the hotel grounds, or outside it.

I estimate the chances of something untoward happening at less than 1%, I would like to ask, given the circumstances, whether you would prefer to organise the project meeting in another country. If we decide to meet in Athens, an alternative would be to organise the event outside the city centre.

Please let me know what you decide, so I can make timely arrangements.

Thanks and best regards,

Philip

Athens burning

Sitting in the lobby of the Hilton hotel in Nicosia, writing a business plan for a Ukrainian packaging manufacturer, I’m a long way from the swirling smoke and flames of Athens, where three people died in a molotov attack today. And yet, despite the distance, and the very removal from all things Greek, I cannot work. It’s difficult to understand what is more surprising: that three people died today, or that more people have not died?

I reflect that Molotov cocktails and lots of other weapons, have been regularly used by demonstrators for years now. Cobblestones, marble slabs, crowbars, and smoke bombs are all part of the well-prepared demonstrator’s arsenal these days. The university community has discovered any number of incidents where, taking advantage of university immunity, these “anarchists” use university classrooms to prepare their arsenals.

And yet nothing is done. The tolerance of political violence has become de rigeur in modern Greece. At the everyday level, you see it in the roiling mob trying to break through a police cordon—to do what, exactly? It’s not clear.

At the extreme level, it’s seen in the large number of self-styled “terrorist” groups, with absurd names like the “Cells of Fire”, who bomb, shoot or otherwise attack car dealerships, banks, police stations and any other symbol of “oppression.”

What we saw today is nothing more than a natural culmination of generations of stupidity and incompetence. For years, political parties have woven a mantra of exceptionalism over their supporters, and over Greek society as a whole. We could borrow money, without having to pay it back. We could pack the public administration with legions of incompetents, and never pay the price. We could allow dim-witted social failures to bring violence into the university community or the union movement, and never suffer the consequences. Somehow, we were the one country in the world were normal laws did not apply.

Today, three innocent employees suffered the consequences. They paid for this political fantasy with their lives. You can imagine them waking up in the morning, getting ready for work, worried about beating the traffic, or making the bus, or finding a parking place. You can imagine them thinking of the weekend, or of getting home at night. Their ordinary, everyday lives were ended in a moment of panic, a breathless flight into asphyxiation, trying to escape the smoke and flames lit by a pack of social retards. One of them was apparently a young mother, 4 months pregnant.

Perhaps the political parties and unions of the left will reflect that they have lit a fire which cannot easily be put out. But I do not expect this to happen. I expect more obscene rhetoric of how all this is somehow necessary in the cataclysmic struggle against the forces of evil, the IMF, the bankers and other various groups intent on subjugating Greece. I expect the Prime Minister to make some meaningless gesture, harp some vapid words. And I expect the media to go into their usual frenzy. In the meantime, three families mourn the meaningless, irrevocable loss of their loved ones.

There will be no solution to Greece’s problems until a new, post-ideological political movement is formed which will offer specific solutions and sweep the political deadwood from power. There are no solutions in the parasitical duopoly of today; not even a semblance of real-world rationality in the remaining three parties. The sooner we understand this and begin doing something about it, the better.

An open letter to Dominique Strauss-Kahn and the IMF

Dear Mr. Strauss-Kahn,

Congratulations, for lack of a better word, on the recent intervention of the IMF in the Greek stability and growth programme. I am one of the small minority in this country who believe that without the IMF, the government will have neither the political will, nor the technical skills, to pass meaningful public sector reforms and gain control of its drastic debt situation.

In the many details of reforms that have been considered or adopted since this crisis began, I see that the most important one has not yet been raised: Parliamentary Immunity. As you are no doubt aware, all serving Members of Greek Parliament enjoy full immunity based on Articles 61 and 62 of the Constitution while the Parliament is in session (except in very narrow cases of criminal acts). You may not be aware that this immunity continues indefinitely after the end of a Parliamentary term unless the full Parliament votes in favour to waive it. In practice, this never occurs.

The result is that the major public sector corruption scandals since the restoration of democracy have for the most part never resulted in the single criminal conviction of a member of Parliament, or a single party official.

Contrasting this to France where for instance Charles Pasqua was just handed a 4 year sentence for bribery regarding arms sales to Africa, or Germany, where Helmut Kohl resigned over a funding scandal, and one can easily see the difference in the culture of public administration. This is not to say that France and Germany are perfect, but the differences with Greece are significant.

Regrettable, even with this current crisis, I do not believe the Greek Parliament will vote to change the constitution. It will be imperative, however, that the “troika” of the IMF, the European Central Bank and the European Commission devise ways of improving the transparency and accountability of the political system that has brought Greece—and the Eurozone—into this position.

This calls for a rigorous monitoring of all public sector expenditure, both on and off the central government balance sheet, and perhaps a condition that a technical team be stationed at the Ministry of Finance over the long term to assist with reforming the conditions of public procurement and disbursement. Alternatively, the financial loans granted should only be used for debt re-finance, rather than regular public sector expenditure, and the troika should use its power to name and shame examples of egregious or corrupt public sector expenditure.

I am afraid that the time for normal courtesies and protocols is over. The majority of Greek citizens are disgusted with the corrupt, ineffectual and nepotistic practises of our political parties and our public administration, but we are essentially powerless to change them. We only hope you will be able to succeed where we have failed.

Sincerely yours,

Philip Ammerman

Schinias Beach Cleanup: Sunday, April 25th 2010

In honour of Earth Day, the Friends of Schinias are participating in a cleaning of the National Forest of Marathon-Schinias on Sunday, April 25^th, 2010.

This event occurs within the framework of a wider volunteer initiative launched bv the Hellenic Ministry of Environment, Energy and Climate Change named Green Action – Clean Action volunteer campaign, and the National Park of Schinias-Marathon is one of the two regions in Greece chosen to pilot the campaign.

As a result, we hope for a high turnout on Sunday, to help clean areas of the forest which we have not been able to access before. We will be working with Elix, a company with long experience in volunteering activities, has been chosen by the Ministry to coordinate the event.

We will be meeting at 09:30-10:00 at the parking lot of the Olympic Rowing Centre, and will clean from 10:00 – 13:00. A picnic lunch will follow at 13:00.

Please remember to bring:

a. A hat and long-sleeve shirt or jacket and mosquito repellent

b. Water to drink

c. Food to contribute to the picnic, if you will participate.

We look forward to seeing you on Sunday, April 25^th!

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The OASA (Attiki Bus Network) is supporting the Schinias Beach Cleanup on Sunday, April 25th. It is providing buses with free transport for volunteers to and from the event.

Departures will occur between 09:00 – 10:00 to Schinias, and from 13:00 – 15:00 from Schinias back to Athens. There are two departure points:

· From Platanos Square in Kifissia (πλατεία Πλατάνου)

· From Doukissis Plakentias Metro Station in Halandri (Δουκ. Πλακεντίας)

For further information, please call the OASA call centre 185, or check their website

http://www.oasa.gr/index.asp?PAGEID=461

Mirages over the Corinthian Gulf

Our family vacation house sits on the northern shore of the Corinthian Gulf, about 20 km after the town of Galaxidi on the coastal road towards Nafpaktos. My parents bought a plot of land in 1976 or thereabouts, cleared it, and after great trouble, built a small, red tile-roofed house. Their dream was to have a house by the sea, and I remember the work we did, filling 40 liter plastic kanates by the village spring and bringing them by car to water the olive trees we had planted. Some 25 years later, those little spindly olive saplings that were whipped so mercilessly by the maestros wind have grown into large, green-silver trees that block the view the sea. But I still remember how we toiled to water them.

Nearly every day out here, we see 2- or 3-aircraft flights of the Hellenic Air Force, about 400 metres off the deck, practicing strike runs over the mountains. Aging A-7 Corsairs; Mirage 2000s, sometimes even F-16s. They streak up from the Corinthian Gulf, gain altitude to clear the peaks, and disappear somewhere to the north, towards Giona mountain.

Each time I see them, I stand a little taller. These are the flyboys on which the freedom of Greece literally depends. They hurtle through space on aging airframes, practicing for a day we hope will never come. They are paid a ridiculously low salary, put themselves at risk every time they strap a plane on their back, and are largely unrecognised by a society more concerned with the doings of Julia Alexandratou or Eleni Menegaki than by the real world.

Whenever the planes go by, I reflect as well on the meaning of patriotism, and the vast contrast between these men and women in uniform, and the politicians that purport to lead this country. I reflect on the party cadres from both PASOK and ND that have dealt with various weapons suppliers, and on the deals that have been made. I reflect on the fact that in Greece, our politicians have not just gotten kickbacks on weapons sales, but even on the issue of public debt to fund their purchase.

In the democracy we claim to have, I often wonder whether the chronic problem of political corruption and incompetence is a symptom or a cause. In other words, has the political class brought about a society where Eleni Menegaki’s divorce has become a dominant issue, or has this society created and tolerated a political class which reflects its true self?

In either case, a growing share of the population—particularly among those educated professionals that view the Greek government and its political elites as a source of Greece’s problems rather than its solution--do not have a real choice among political parties today. The tired slogans of PASOK or ND no longer conceal the moral bankruptcy of either party, or of the country itself. Fundamental questions, such as whether the state should be responsible for spending up to half of national GDP while Greece’s ranking in nearly every international benchmark continue to decline, are never asked, or never acted upon, by either major party.

Unless a fundamentally new political movement is started, we will be condemned to hearing the same rubbish and watching our economic position deteriorate, while social problems multiply. Such a movement should reflect and reinforce the fundamental values of the century we live in: transparency, mobility, volunteerism, entrepreneurship and involvement. It should be open to Greeks of the diaspora as well as citizens of other countries living in Greece. It should develop the tools needed for competitiveness and individual self-realisation in a globalised society. The politics of generational nepotism, of rural party barons delivering subsidies and government jobs, must be eliminated.

Perhaps this sounds unrealistic, or naïve. After all, who wants to go to the trouble of getting involved in Greek politics? I certainly don’t, and I can’t imagine many other people do either. But I see no other solution to the systemic problems that affect this country. If we take a systems analysis view of Greece, it’s clear that the problem starts with the political parties: how they are financed and governed; their impunity to prosecution while in Parliament; their inability to offer real solutions.

We are on the brink of national bankruptcy, which has been exacerbated by the fundamental, chronic inability of either political party to deal with the major social economic issues which count. We do not have Sweden for a neighbour, and where economic weakness leads us, the erosion of political sovereignty follows.