Market Analysis

Greece’s Anything-But-Euro Crisis

The common currency tends to be a convenient scapegoat for all that ails Greece, but this seemingly gets the Greek situation entirely backwards.

This year, the Great Greek Contraction turns five years old. And according to the country’s Finance Ministry, it appears poised to be yet another year of sharp economic contraction—Greek GDP is forecast to shrink another -7.0% in calendar year 2012, bringing the total decline to somewhere around -20% since its pre-recession peak. That’s a decline on par with the US in 1929-1933.

Without question, this event is going to receive a ton of academic attention in future years, and to a degree, it already has. Yet many of these analyses seem to aim for super-quick ways out. Of these, a widely discussed ”solution” is to ditch the euro, reinstall the drachma and print money to pay off the debt—essentially, inflating the country’s way out of what’s presumed to be a debt crisis.

In terms of alleviating the pressures associated with debt, perhaps inflating your way out would be viable in the ultra-short run (treating the symptoms). But it doesn’t fix the real, sclerotic problems confronting Greece—it’s more like only treating a malaria patient’s fever.

Greece has been a political and economic trouble spot for decades. In fact, since gaining its independence in 1824, Greece has defaulted in six separate years. One, an 1843 default on funds extended by the then-troika of Britain, France and Russia, led to Greece being basically locked out of credit markets for decades. Of these defaults, in only one—the recent and very carefully managed restructuring early this year—was the country in the eurozone. Clearly, then, Greece has had solvency issues regardless of the currency the nation uses. Among many reasons for this stands the Greek government’s massive involvement in the economy.

Even to this day, the Greek economy is heavily state-run (either directly or indirectly) with, by many standards, low quality outputs. Utilities, Energy, railroads and banks—you name it, the Greek government’s in it. And the efficiency is questionable. For example, Greece has relatively large amounts of soft coal used commonly in Europe’s utilities. Yet the government fixes prices below market to benefit the state-run utilities—not exactly the free hand at work. The ports, which serve one of Greece’s few competitive private industries (shipping), are also state-dominated. In all, Greece’s bloated bureaucracy had hundreds of outdated or antiquated agencies. All these have costs, staffing and real estate holdings, and some compete with the private sector (to the extent private-sector competition is allowed).

These “businesses” are headed by political appointees—not necessarily career businessmen, but largely politicians—who are aligned with the regime in charge. In fact, it’s a customary practice in Greece to remove all the heads of state-run businesses (regardless of business results) and replace them with the new leadership’s devotees.

Now, the state’s domination of the economy is actually a relatively well-known issue. In fact, as far back as June 2010—before the lion’s share of Greece’s economic implosion occurred—the ECB, EU and IMF (modern troika) mandated a vast privatization movement. To put it kindly, implementation has been slow.

The privatization plan was entered into law June 2, 2010. Yet the government agency overseeing privatization (the Hellenic Republic Asset Development Fund—HRADF)—yes, a newly created public agency oversees privatization efforts—wasn’t established until July 2011. Then-Prime Minister George Papandreou of the socialist Pasok party (yes, socialists in charge of privatization—another ironic twist) appointed Costas Mitropoulos as department head. He survived three subsequent administrations until privatizing himself weeks ago.

In the intervening year, Mr. Mitropoulos began the process of privatizing agencies and designed a really nice, flashy website for the HRADF with a whole lot of active language (“Rolling Ahead”) and graphics with speedy-looking arrows. Yet, the “Completed” section of the site lists a whopping one transaction—selling off a soccer wagering business. In his resignation letter, Mr. Mitropoulos noted the fund has raised about €1.8 billion to date. Yet the still state-owned railroad monopoly loses about €1 billion a year—so, back-of-the-envelope math would show just the railroads have offset the HRADF’s privatization windfall since inception. Greece was originally slated to sell roughly €50 billion worth of government assets by 2015—a target the troika reduced to less than half that original goal recently. Yet, Mr. Mitropoulos wrote fiscal 2012 will likely hold only €300 million more in privatization. If so, then, two years in, the pace seems unlikely to reach even the troika’s vastly reduced goal. Maybe the pace picks up, but there are some hurdles.

And as it turns out, the failure to move quicker isn’t all Mr. Mitropoulos’s fault. In fact, it isn’t even all the current government’s fault. It seems the road to a more privatized Greece has been at least partially blocked by 77 pre-existing laws stymying such efforts. A bill was just submitted to Parliament seeking to eliminate these roadblocks, but it’s not passed yet and could trigger contentious debate.

Privatizing some of these firms is sticky political territory—one wonders whether Mr. Mitropoulos was subjected to pressure to avoid privatizing utilities like the PPC (the nation’s largest employer, generator of half its power and owner of 99.7% of the country’s power grid). This firm’s staff is now threatening to black out the entire country (which their huge, state-granted share may actually enable them to do) if recently elected Prime Minister Antonis Samaras’s government pushes ahead with privatizing it. Why are they so opposed to privatization? Among many factors are wage cuts and layoffs. And even beyond the privatization effort stands a labor pool, a step on the road to laying off government workers, in which impacted workers are paid discounted wages. No doubt a fear-inducing force.

Ultimately, though, appeasing Greece’s creditors is likely going to require pushing ahead with privatization, among other sweeping reforms of a structurally uncompetitive economy. But the point here is this: You can’t blame the euro for any of these developments. Perhaps it could have heightened some issues, but essentially, the euro simply served as a discovery mechanism—one that wouldn’t allow Greek politicians and central bankers to paper over the competitiveness issues (for a time) with devalued drachma.

When Greece decided to pursue joining the euro, it faced myriad difficult decisions. Leaders could have used cheaper borrowing costs to help finance a social safety net while productivity-enhancing reforms occurred. They didn’t, instead carrying forward historically common and politically popular practice of doling out many government jobs. Over time, it’s this chain of decision making that deserves the brunt of blame for Greece’s crisis. The common currency seemingly was, in effect, the messenger.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.