A Bluffing Game European Politicians in Denial as Greece Unravels

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Part 2: The Dismal Greek Economy


The Greek economy is not productive enough to generate growth. Aside from olive oil, textiles and a few chemicals, there are hardly any Greek products suitable for export. On the contrary, Greece is dependent on food imports to feed its population.

"Greece has been living beyond its means for years," an unpublished study by the German Institute for Economic Research (DIW) concludes. "The consumption of goods has exceeded economic output by far."

Especially devastating is the assessment that the DIW experts make about the condition of an industry that is generally seen as a potential engine for growth: tourism. According to the DIW study, the Greek tourism industry concentrates on the summer months, with almost nothing happening throughout the rest of the year. There is almost no tourism in the cities, which translates into low overall capacity utilization and high costs for hotel operators. By contrast, capacity utilization in the hotel sector is much more uniform in other Mediterranean countries.

According to the study, a key cause of the problem is the relatively poor price/performance ratio. In Mediterranean tourism, Greece has to compete with non-euro countries like Croatia, Tunisia, Morocco, Bulgaria and Turkey, which can offer their services at significantly lower prices. The per-hour wage in the hospitality industry was recently measured at €11.39 in Greece, as compared with only €8.49 in Portugal, €4 in Turkey and as little as €1.55 in Bulgaria. The study arrives at grim conclusions, noting that the drastic austerity programs will not only remain ineffective, but will also stigmatize the country as "Europe's problem child" for a long time to come.

Others in Europe are also noticing that the transformation of the Greek economy is not progressing. This translates into resistance within national parliaments against approving new aid for Athens.

Resistance Mounts in Berlin

This also applies to Merkel's center-right coalition government in Berlin, in which the first Greece package and the European Financial Stability Facility (EFSF) bailout fund were already hotly contested. Since then, resistance to additional German aid for debt-ridden countries has only grown. "Greece would be the most difficult decision by far for the parliamentary group," says Florian Toncar, the FDP's deputy parliamentary leader, who is a member of the party's pro-European wing. It is already clear that significantly more parliamentarians will refuse to go along with their leadership in the future.

Bavarian FDP member of the Bundestag Erwin Lotter, for example, who has voted for all euro bailout packages until now, would no longer do so in the case of Greece. "I was of the opinion that the Greeks needed time," he says. "Now I assume that there will be a national bankruptcy, and that the problems cannot be solved with more money."

There are also serious concerns within the CSU, which has only supported Merkel with great reluctance until now. "The CSU rejects new aid for Greece beyond the approved programs," says CSU Chairman Seehofer. The CSU wants to hold a European conference on Monday to discuss the subject of Greece. Seehofer has already set the tone: "If the Greeks do not implement the reform programs, there can be no further aid."

Doubts are also growing within the CDU. "I will not vote for new aid to Greece," says CDU domestic policy expert Wolfgang Bosbach. "The Greeks don't lack the political will, but they do lack the economic strength to get back on their feet." Anxiety is also spreading through the party's European wing. "A great deal of irritation has spread through the party," says Gunther Krichbaum, the chairman of the CDU's Europe committee. "All Greek parties must finally show the unconditional will to make fundamental changes."

The displeasure at the party base has now reached the leadership of the coalition too. In a move designed to generate good publicity, CDU/CSU parliamentary group leader Volker Kauder has called for sending a European state commissioner to Athens. His FDP counterpart, Rainer Brüderle, is also not mincing his words. "Solidarity is not a one-way street. In this sense, the European Community must remain tough and demand the necessary structural reforms," says Brüderle. "Only if the Greeks also offer proof that they are serious, can and might we, as the European Community, come to their aid."

Restructuring with a Crowbar

Perhaps the only purpose of the sharp tone being taken by the parliamentary leaders is to pave the way for the next aid payment. According to the deal these statements are trying to prepare for, Greece will receive new money if it bends to even stricter requirements and conditions. The country is to be restructured with a crowbar.

Experts believe that this recipe is just as unlikely to get the country's ailing economy back on its feet as the other form of radical therapy currently being discussed: Greece's withdrawal from the euro. "It is naïve to believe that the problems will be solved if Greece reintroduces the drachma," says Ansgar Belke, director of macroeconomic research at the DIW and a professor at the University of Duisburg-Essen. The country's products would become cheaper, but at the same time, the turbulence caused by currency reform would send thousands of companies and banks into bankruptcy. Interest rates could rise, and a bankruptcy would also infect other countries. As a result, says Belke, "the problems of Greece and the euro zone could even become worse."

Instead, economists recommend finally doing what is already unavoidable: sending the country into an orderly insolvency. Greece's government creditors, which include the ECB and, most of all, the partner countries that have lent the country money until now, would have to abandon about half of their claims so that the country's mountain of debt could be reduced to a tolerable level. Then the measures that can return the Greek economy to growth on its own can become more effective: reforms in the labor market, more competition in the service industries and foreign investment.

The majority of European politicians still refuse to recognize reality, though. This is understandable, given that abandoning portions of their claims against Greece would translate into substantial losses. But some government representatives are at least willing to approach the first warm-up exercises. When Luxembourg Prime Minister Jean-Claude Juncker was asked by German financial newspaper Handelsblatt last Friday whether the euro countries should also forgive Greek debts, he replied that such proposed solutions are "not entirely absurd."

Translated from the German by Christopher Sultan

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sylvesterthecat 01/30/2012
1. Let it go
There are times when it's kinder to let a bad idea die. So let it be with the EU/EZ.
tnt_ynot 01/30/2012
2. Smell of Default is in the air.
The smell of "D" is in the air. Not the D as in Davos or Deutschland. Its all about Default. And that is the only thing that will eventually save Greece and make other problem children in the EU starighten up and fly right as described at: http://euro-meltdown.blogspot.com/ Anthony
johnwerneken 02/01/2012
3. bye bye greece
i don't think Germans should take the blame for it, but Greece is a good example of all that is stupid and crazy about nations, governments, sovereignity, and democracy...best flushed down the nearest toilet.
alfredmifsud 02/03/2012
4. Germany must export solidarity not just austerity.
Germany seems to have forgotten that when deep austerity was forced upon it by the Versailles treaty it shamefully lost it's way in the world. When it was served solidarity through the Marshall Plan it was rendered great, strong and a respected world player. Forcing austerity whilst feasting on the problems of the oppressed is a very short sighted approach. See: www.alfred-mifsud.bloodspot.com Fiscal pact:right measure at the wrong time.
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