Every time I turn on Sky News, a Greek Debt negotiation is stalling. And frankly, no one should be that surprised. Having grown up in a Greek community, I can empirically say that the Hellenes are a fan of two things:
- Their right to voice their opinion;
- Their right to storm out when someone opposes it.
This leads to a lot of storming. And a lot of factions, in elevating levels of prejudice:
- First, and foremost, it’s the Greeks against the world.
- Then, when we’re just talking about the Greeks, it’s my island against the rest of Greece.
- Then, when we’re just talking about my island, it’s my village against the rest of the island.
- Then, when we’re just talking about my village, it’s my family against everyone else.
- Then, when we’re just talking about my family, it’s me-and-the-family-I’m-currently-speaking-to against the side of the family that I’m not speaking to.
But I’m getting distracted, and ahead of myself. I have a bit of a personal fetish for fiscal deficits and fiscal policy. It’s a bit bizarre – but thanks to my Zimbabwean heritage (I’m a Zimbabwean-Greek half-breed), I have seen some pretty exciting things happen with Fiscal Policy. And actually – now I’m a bit grateful for it – because the First World is suffering from some serious fiscal crises.
So Greece. Well, my Greek friends on facebook have a lot of theories for the current crisis. My favourites:
- The Germans are trying to take over
- The politicians are in the pockets of a subversive Troika
- Greece is a scapegoat for the United States
- Turkey wants to replace Greece in the European Union (?)
- The Aliens are coming
Actually, I may have invented that last one. But regardless, I am constantly amazed by the number of Greeks that comment on these wall posts with “You make it all so clear” and “I see it now”. I shake my head, roll the eyes at the sky, and start a facebook fight with:
At which point, the argument descends into fierce rhetoric and the casting of genetic aspersions. But I think that I may have the data on my side (always assuming that the data sources aren’t also part of the shadowy conspiracy to destroy Greece). So I went on a bit of a data search, and with the help of www.economywatch.com, I have this graph of the Greek National Deficit:
|Greek Fiscal Deficit (Billions of Euros)|
A key definition:
- Fiscal Deficit: is the amount by which government spending exceeds government revenue. Or, in individual terms, it would be the amount by which my spending exceeds my salary.
In the popular press, I regularly see the period after Greece entered the Euro described as “a spending spree”. Certainly, looking at the above deficit graph, it seems that the deficit was maintained (and even reduced) leading up to 2000 (Greece’s entry to the Euro). After that, Greece springboards deep into an ocean of deficit, somersaulting briefly in 2005, and coming out of that nicely into swallow dive.
And how does one dive into deficit? One of three ways:
- You get worse at collecting taxes (a salary cut – or you get fired);
- You start to spend more (there’s that spree); or
- Both 1 and 2.
Now Greece has traditionally had a history of poor tax collection. In fact – that’s quite an understatement. The story is that tax evasion became a form of political protest during the 400 years of Ottoman Occupation, and the Greek people have never really abandoned the concept. After all – why pay taxes when you don’t support the government in power? Although, I am a bit sceptical, because I think one would be somewhat incentivised to find a reason to complain, and thereby rationalise tax evasion.
Personally, I see this tax evasion tendency in the historical movement in the supply of money (for the pre-2000 data, I have the ECB website to thank):
|Greek Money Supply (Money and Quasi Money Stock Outstanding)|
If I can refer back to my “What is: Inflation, and why is it a tax” post – where governments stuggle to tax appropriately, and have limited access to further borrowings, a fiscal deficit can be financed by printing money (this process is commonly referred to as “monetising the debt”). The above increase in money supply suggests high/chronic levels of inflation. I then went to look at inflation (thanks to the World Bank for this data):
|Greek Inflation/CPI (% Change)|
There are high/chronic levels of inflation occurring throughout the 80s and 90s, but being brought down to below 3% by 2000 (one of the requirements for Greece entering the Euro). At this point, Greece enters the monetary union, and the inflation level begins to approximate inflation in the Eurozone as a whole. This certainly suggests that the authorities were printing money to finance their deficit while they still had control of the Greek drachma, and weren’t trying to persuade the EU that they wanted in.
And then, as Greece enters the Eurozone, it suddenly has access to all this extra credit – off the back of its recent fiscal success, as well as the stability of the Eurozone. And it loses its mind (it doesn’t look that hectic, but we’re talking about billions of Euros):
|Greek Revenues and Expenditure (Billions of Euros)|
The widening gap between revenues and expenditures in the post-2000 era has to be financed somehow. And the real problem? Well, now that Greece is part of the Euro, it can no longer monetize its debt – after all, it has surrendered its monetary autonomy to the Eurozone. So it looks like we’re sitting at option 2 – the spending in overdrive (hooray for the extra credit!). And if you consider her inflationary activities as a type of tax collection, Greece has now lost a key source (if not her principal source) of finance.
And after the spree comes the long dark cold of austerity. And the Greeks are not happy. And I guess that’s human – we like to have fun, but it’s not fun to pay the cost afterward.
Can we have a moment for the really scary part of this story? I’m going to plagiarise a projection from the latest IMF Country report (it’s officially titled the “Article IV Consultation”). Greece has an aging population coupled with costly State pension plans (for example, Greek pensioners are entitled to 13th and 14th cheques every year). The IMF projection for government expenditure (driven by expected pension or “aging” costs) against revenue is the following graph:
|IMF Projection of Greek Government Revenues VS PRIMARY Expenditures (ie. excluding debt repayments and interest) through to 2060|
My question: HOW is Greece going to pay for it?
And just a small reminder – Primary Expenditure is before the cost of interest. The more Greece borrows, the higher its interest cost. That primary deficit (the gap between Revenue and Primary Expenditure) is going to be magnified by the inclusion of an increasing interest expense – as every year more has to borrowed to pay off the growing primary deficit, as well as the previous year’s interest cost.
It’s not sounding sustainable.