A Fatally Flawed Recovery Plan Greece Back on the Brink

Greece needs even more money -- EU officials estimate that a new bailout will cost over 100 billion euros rather than the previously assumed 60 billion. It will get the aid, even though the rescue strategy adopted so far seems doomed. The economy is shrinking, and ambitious privatization plans are illusory.
Protestors in Athens demonstrating against austerity measures.

Protestors in Athens demonstrating against austerity measures.

Foto: Thanassis Stavrakis/ AP

The crisis in Greece does have its upsides, at least for tourists. The Acropolis, a UNESCO World Heritage site above the rooftops of Athens, recently extended its opening hours. It now closes at 7 p.m. Before, it often closed shortly after lunchtime. "It was unacceptable for our foreign visitors," says Transport Minister Dimitrios Reppas.

In the midst of the crisis, the number of museum guards, at the Acropolis, for example, has magically increased, as have the numbers of ambulance drivers and nurses. "People are enthusiastic," says Reppas, adding: "A real consolidation is underway here."

Officials from the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB), who have a different definition of consolidation, are unlikely to be quite as enthusiastic. They approved €110 billion ($159 billion) in financial aid for Greece about a year ago, imposing tough requirements on the country in return.

Since then, Prime Minister Georgios Papandreou has tried to drastically reduce Greece's €330 billion in debts through radical austerity measures, downsizing and structural reforms. At the same time, the government is seeking to increase revenues by 8.5 percent and reduce its deficit to 7.5 percent of GDP this year.

So much for the theory. A visit to the Acropolis offers an example of what is really happening. There are more museum guards here now, a consequence of the Greek interpretation of consolidation.

Consolidation, Greek Style

Here's how it works: OSE, the national railroad, was expected to eliminate its annual deficit of €1-2 billion by slashing about 1,800 of its 5,800 jobs. But, as in other government-owned businesses, the employees were not let go but transferred to new jobs instead -- albeit with reduced pay.

Greece's partners in the euro zone are gradually losing patience with Prime Minister Papandreou and his team. A year after receiving €110 billion in international financial aid commitments, Greece has hopelessly failed to reach the agreed austerity goals. Its lenders are now questioning the government's ability to reform, the economy has declined even further than feared, and important tax revenues have failed to materialize.

The only certainty is that Greece needs more money than it was provided with last year. The goals stipulated in the bailout package can only be reached under highly unrealistic assumptions, the envoys of the EU, IMF and ECB concluded after analyzing the situation in Greece in recent weeks.

The so-called troika has remained reserved in its official statements, even saying, in a statement issued on Friday, that Greece has made "significant progress." It now appears that the payout of next loan tranche from the current aid package, which was long in question, will now go ahead. However, the team of investigators presented less uplifting news to a group of senior government officials from the euro zone countries at a meeting in Vienna's Hofburg Palace last Wednesday. The necessary measures would require extreme sacrifices from the Greek public, they said, but in light of the mood in Athens, such steps are hardly realistic anymore. In short, the troika team concluded, Greece needs a new program that will give it more time and more money to solve its problems.

The top officials from the European finance ministries seemed unimpressed, and the man from the ECB even felt vindicated. Only the German representative, Finance Ministry State Secretary Jörg Asmussen, raised an objection. At the strict behest of his minister, he called for the involvement of private lenders in the costs of rehabilitating Greece. According to other participants at the meeting, Asmussen said Germany could only agree to a new program if private sector investors assumed a substantial share of the burden.

The man from Berlin bluntly presented his counterparts with the alternative: Without the participation of the private sector, there would be no approval from the German parliament. Without that, there would be no new bailout, which in turn could lead to Greece defaulting on its debt. The meeting ended at 3 a.m. without reaching any conclusions.

When German Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union (CDU), gave Asmussen strict instructions not to agree to a new solution in Vienna without the participation of private lenders, it was not just out of respect for the German parliament's say in the matter. Schäuble is also loath to present the bill to the reluctant German lawmakers.

New Greek Bailout Costlier Than Expected

That's because the new program costs a lot more money that previously assumed. Experts at the German Finance Ministry and within the troika believe that if Greece is still dependent on foreign assistance in 2013 and 2014, it could end up costing more than 100 billion euros -- compared to the previous estimate of €60 billion. The reason for the sharp cost increase is that additional Greek government bonds, for which follow-up financing will be needed, are set to mature in the second half of both 2013 and 2014.

The necessary funds should not solely come from government coffers, Schäuble recently told a group of advisors. The finance minister senses that he can only trim the aid to a tolerable level if the private lenders agree to waive a portion of their claims. Schäuble's is scheduled to meet his European counterparts again on June 20, but no one doubts that the Greeks will receive additional funds in the end.

Whether it makes sense to lend the Greeks more money that they may never be able to repay is a question the politicians prefer not to address. That's because the alternatives and their consequences -- a drastic debt restructuring and possibly even a return to the drachma -- seem even more horrific.

Nevertheless, there are growing doubts over whether Greece can be rehabilitated through austerity measures alone, and whether the drastic treatment being prescribed will truly cure the patient or make its condition even worse.

The Greek public, at any rate, is becoming increasingly furious with its government and the creditors in Brussels and Washington. Public demonstrations against the austerity measures are held every evening. Lawmakers in Athens have been spat at, and protesters have hurled stones at politicians on the island of Corfu. Many hold the Germans, in particular, responsible for their plight.

Experts are also critical. The draconian EU and IMF requirements are like a "new Treaty of Versailles," says Athens-based economist Yanis Varoufakis. "In the end, they harm both the strong and the weak."

Like many of his colleagues, Varoufakis is convinced that if Greece is ever to become economically independent again, the economy will have to be rebuilt and stimulated with a targeted investment program.

'We Are Back Where We Started'

The outcome of the efforts to date, at any rate, has been sobering, despite everything the Papandreou government has done. It has trimmed the salaries of government workers, increased taxes considerably, raised the retirement age and publicly denounced tax evaders. Nevertheless, the country is still on the brink of disaster. There is a growing sense that it was all for nothing, says Dimitrios Daskalopoulos of the SEV employers' association, "and that we are back where we started."

Daskalopoulos doesn't believe that the government did everything it could. In fact, he says, it failed in its most pressing task: reforming the massive government bureaucracy.

His attack is directed against labor leaders like Nikos Fotopoulos, 48. He is a union leader with the partially state-owned electric utility DEI, a former Trotskyist and, for the last 33 years, a member of Papandreou's PASOK Party. "We aren't eating with silver spoons here," Fotopoulous, an electrician by trade, says defiantly. His office is decorated with posters of Che Guevara, Karl Marx and Leon Trotsky.

Since 1999, his union has received close to €31.3 million in direct and indirect financial subsidies from its employer. In a particularly absurd twist, the utility has paid the union €115,000 in the last three years for demonstrations -- against its own shareholders, and against the government and its austerity measures.

Companies like DEI or the partially state-owned Hellenic Petroleum are still viewed as workers' paradises. The roughly 2,500 employees of the oil company are paid 17.8 monthly salaries a year, and even drivers and doormen earn annual salaries upwards of €90,000. Chairman Tassos Giannitsis nonchalantly attributes the high salary levels to his company's "highly specific business and substantial dependence on international price and profit margins." Besides, he adds, personnel costs make up less than three percent of revenues.

Many Greeks are angry about the special treatment of government employees. While labor representatives like Fotopoulos staunchly defend the many benefits enjoyed by workers in government-owned businesses, the draconian austerity measures have plunged the rest of the population into an economic crisis that has brought hardship to many people.

Social Upheaval

More than 200,000 jobs were lost last year. All of a sudden, middle-class citizens are waiting in line outside Athens soup kitchens. People are moving out of the sprawling capital to places where the cost of living is cheaper, or to work as farmers on land owned by their families.

More and more Greeks are also tapping into their savings, either because they need the money or to move a few euros to a safer place, just in case the drachma is reintroduced. Deposits in private bank accounts have already declined by €31 billion since the beginning of 2010.

Recently, the European Commissioner for Maritime Affairs & Fisheries, Maria Damanaki, became the first official representative of her country to mention the the possibility of a withdrawal from the euro. But Prime Minister Papandreou remains rigorously opposed to a return to the drachma. He is banking on additional money from the euro zone partners, more austerity measures and a privatization program that seems fairly unrealistic.

For example, Papandreou hopes to raise €50 billion by 2015 through the sale of more than 30 fully and partially government-owned businesses. The privatization list includes water companies, the ports of Piraeus and Thessaloniki, the Athens racecourse, the Postbank, a casino and the OPAP lottery company. The government is also seeking an investor for the chronically money-losing government railroad, while Papandreou hopes to raise large sums of cash with the sale of a wide range of government-owned real estate.

Since the planned sell-off of government assets was announced, the public's mood has shifted once and for all. In their headlines, the daily newspapers have called it the "looting of a people," a "recipe for impoverishment" and "blood and soil for the fifth loan tranche."

Doubts About Privatization

Even economists who have been deeply critical of Greece's generous welfare system are outraged at the proposed sale of public assets. "You can't just sell everything so quickly," says former Finance Minister Stefanos Manos, noting that such privatization programs must be carefully prepared and the investments tied to conditions, in some cases.

Economist Jens Bastian, who has lived in Athens for the last 14 years, doubts whether the Greek bureaucracy can even handle such a massive sell-off. The country's government agencies are not only considered to be vastly overstaffed, but Kafkaesque in their bureaucratic complexity.

Because there is no comprehensive property registration system, the Greek government has no idea how much land, buildings or yacht harbors it even owns, concluded a study by the Institute of Strategic and Development Studies (ISTAME) in Athens. The institute, which has close ties to the government, values the state's assets at about €270 billion, but is quick to point out that this figure is only an initial estimate.

Nevertheless, in February the Greek government optimistically promised its international overseers to provide an initial list of available real estate by the end of June. Soon afterwards, it was scrambling to find consultants to conduct a large-scale inventory.

In early March, the finance ministry official in charge of privatization issued a job advert that was hardly more than a page long. Given the time constraints, his requirements were not particularly stringent. He wrote that "relevant" knowledge of real estate was necessary, and that experience in the Greek market was considered desirable. Interested parties were to respond to the notice within 10 days, providing all the information "they consider appropriate."

The team of consultants now has until the end of 2012 to compile a complete database, but according to one member of the team, most of the details are still unclear.

The problems the government is likely to face in its privatization program can already be envisaged. Because detailed land records are often missing, landowners are regularly involved in disputes over property lines. At times, plaintiffs file claims derived from ancient property rights.

Trade Unions May Thwart Sell-Offs

Just how difficult it is to turn government properties into cash recently became apparent on the grounds of the old Hellenikon Airport in Athens, which is on the coast near Piraeus and is valued at about €6 billion. Investors from Qatar have been trying to secure the rights to use the land for years. Now all of their efforts appear to have failed in the face of opposition from citizens' groups and adjacent communities which would prefer to see the site turned into a park instead of a commercial complex.

A number of state-of-the-art arenas, built at great expense for the 2004 Summer Olympics, occupy a portion of the giant waterfront property. Now the facilities are fast turning into ruins.

Meanwhile, the unions organized within the government-owned companies are getting ready to deter potential investors. Union leader Fotopoulos says he would consider shutting off the nation's power supply if the government goes ahead with its plan to privatize the electricity company. "We want to protect our poor customers," he argues outlandishly.

Panagiotis Koutras, the top labor representative at the OTE telephone company, is planning a number of strikes for June and is also indicating that there will be other reactions meant to "surprise" people.

German telecommunications giant Deutsche Telekom owns 30 percent of the company. Now the Greek government is exercising an option that forces the German company to acquire more shares of OTE. But for Deutsche Telekom the investment, once praised as an asset in the southeast European market, has been nothing but trouble. The OTE share price has fallen by more than half since the Germans made their initial investment.

The experiences of foreign investors aren't exactly a selling point to attract investment in Greece. Intractable union leaders aren't thre only culprits. The notoriously cash-strapped government, for example, has an extremely poor reputation when it comes to payment. It still owes German companies several hundred million euros. Last year, state-owned hospitals offered to pay their debts to pharmaceutical companies with Greek government bonds.

Prime Minister Papandreou says Greece has neglected to develop a modern economic structure over the last 30 years. Now it is expected to catch up quickly, but reforms take time.

Economist Varoufakis ran a simulation to see what would happen if the country had to continue along its current austerity course. He concluded that even if Greece fulfilled all requirements and privatization goals, and the recession came to an end, the country's mountain of debt would continue to grow. It would be more than double the national income by 2020, which means that a default would be practically "guaranteed."

That outcome, he noted, was based on optimistic assumptions.

Translated from the German by Christopher Sultan
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