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Do you believe in miracles? Well I don’t. Or maybe I once did, but stopped as soon as I realised that keeping on dreaming would be way too painful. Greece has found -or dug if you prefer- itself in a very deep hole, an unfortunate situation of epic proportions.

It is an unfortunate situation because Greece was the weakest link and thus the first to be targeted in a global financial system, or at least a Eurozone non-union that needed to change a few things around in order for it to become more sustainable. (For more debate on the EZ from real pundits please refer to Yanis Varoufakis’ blog- should be a good starting point). In that sense the “hole” was already there and mind you it is very big and very deep, but boy did we make sure that we were the first ones to go head first into that hole.

Maybe ten years ago would have been a good opportunity for the Athens administration to start changing things around in Greece, or even two years ago when the great public deficit, sovereign debt and lack of liquidity were first exposed to the general public. I believed they would; However as the Greek society is about to find out, you can’t teach an old dog new tricks.

Fig1 : Sovereign Debt / GDP ratio over time (thanks to LOLGREECE for the graph and the influence; data from IMF and Eurostat)

Post 1981 the Greek GDP has been largely growing due to public spending and a subsequent increase in internal consumption. This is the reason that Greek GDP has been contracting that fast since the start of the crisis – a large part of it has been attributed to Kostas, your average public servant, getting his forever guaranteed monthly paycheck from the Greek government and spending it in his local bar (καφενείο – καφετέρια), hair salon (κομμωτήριο), and 24/7 off licence (ψιλικατζίδικο). Then Roula the hairdresser would spend her hard-earned money in similar services and government taxes (if she didn’t evade taxes) and this way life would continue so they lived happily forever after and we lived happily forever after. Only we didn’t.

Sounds familiar Greek readers? Well stats are here to support you. Unfortunately the Greek economy is mostly based on micro businesses – micro businesses by design are more often than not destined to offer non competitive services both in terms of quality and cost. They are likely not to perform important functions in the system, so in times like these they will be the first to go.

Fig2: Employment Breakdown by enterprise size in Greece with many thanks via Macrotragedy, all stats from Eurostat.

Fig3: Employment Breakdown in EU-27 , micro business / total employement with many thanks via Macrotragedy, all stats from Eurostat.

By now it should be obvious to the reader that Greece has the largest / per capita number of micro businesses in Europe and that those micro businesses have been the backbone of the Greek economy for the past 30 years. Now don’t get me wrong. Back in the not so distant 1981 starting this sort of business, with money flying all over the place, was the logical thing to do.

The Greek GDP contraction this far, in my humble opinion can be seen mostly as a classical liquidity trap rather than as a direct effect of reduction of government budget reductions. Of course government cuts, or the expectation of cuts, have created this psychology, however financial speaking cuts were not enough to create this kind of effect.

It is very well documented that the so called Troika (IMF/EU/ECB) is asking for drastic cuts in order for it to go on with the bailout package (that should be seen as a period of grace to help Greece restructure its economy). Unfortunately I have come to believe that Greeks simply can’t do this. You can’t teach an old dog new tricks, and unfortunately in every day Greek vocabulary very old Ottoman words indicating a distorted perception of citizen/state relations such as Peskesi (meaning: gift / gr Πεσκέσι / Tr peşkeş) , Rusfeti (meaning: bribery / Gr Ρουσφέτι / Tr Rüşvet) and Haratsi (meaning: unfair tax /Gr Χαράτσι / Tr Haraç) are very prevalent.

Greeks will not be able to adjust to this kind of harsh and sudden cuts. Sure, in theory, they can educate themselves, look at their distant past for inspiration and once again become entrepreneurial and active, build collaborations and save themselves and their country. However this is just theory, for they simply have been taught otherwise.

Had the Greek government had control of its monetary policy, we could have printed inna Keynes stylee our way out of the crisis. Or at least keep living under the current model for a bit more as we slowly changed the economy. Of course such measures would result in a great devaluation of the currency and contraction of the GDP. How much would the GDP have to contract for Greece to start turn the climate around and start growing again? We’ll see that in a second.

Right now of course Greece does not have control of its monetary policy, will have to cut the budget and make the market implode even further. I hear you asking when will it all stop?

LOLGREECE in a moment of absolute brilliancy combined the recently released data for sovereigns’ global competitiveness ranking with their respective GDP per capita figures. This is what you get.

GC Rank Country GDP per capita @ PPP dollars
78  Guatemala 4,885
79  FYR Macedonia 9,728
80  Rwanda 1,217
81  Egypt 6,354
82  El Salvador 7,430
83  Greece 28,434
84  Trinidad &  Tobago 21,239
85  Philippines 3,737
86  Algeria 6,950
87  Argentina 15,854
88  Albania 7,453
Average ex GR 8,485
Average 10,298
Table1: Global Competitiveness ranking for sovereigns and GDP per capita.with many thanks via LOLGREECE

All this means that one way or the other, and unless a small – okay, large- miracle happens, (or a massive shift in EZ policies) Greece is headed for a massive GDP contraction (which to some extent will occur regardless of Greece’s efforts) which will bring the GDP on par with that of the states directly competitive to Greece. If the country does not manage to turn things around, this is where the downwards spiral will end. Of course there is some creative thinking in this assumption, however it is one realistic answer.

Unfortunately I don’t believe in miracles, at least not right now. As a person very close to me recently said, luck (and miracles) comes to those that work hard. Greece is working hard, but seems to be doing so with a wrong mentality, so now all we need to do is to pick our poison.