Syriza cannot do it

Ignacio de la Torre. Professor. IE Business School

16 July 2015

The Greek tragedy is the story of a load of bunkum written and presented by the Mediterranean country and its creditors in an effort to escape their true destiny. But the time has come to face up to the truth. 

In a memorable passage from “A Man in Full”, Tom Wolf describes a scene at the end of the seventies in which a previously successful real estate promoter brings his team together in a meeting with bankers to whom he owes large sums of money. His star project, a massive office tower on the outskirts of the city, has been a failure. While he travelled to the meeting in his corporate jet, his team prepared a series of slides on changes in strategy and proposed new results to win some time from the bank. Given that it was not the first meeting held with the bank, and the company had on several occasions delayed paying the debt saying that there was a delay getting occupants into the building, there comes a moment in the meeting when the banker says that the game is over. He orders the boss to sell his jet, luxury cars, real estate and everything else in order to pay back the debt, ending with a popular saying in Georgia: “money talks, bullshit walks.”

Unfortunately, Greece’s tragic situation is the result of a whole lot of the same brown stuff. The Greek debt figures were pure bluster, given that they were successively prostituted by means of the blatant use of derivatives. Talking of prostitution, the Greek government used it, along with gambling, to calculate its GDP in 2006, thereby increasing its economy by 18% overnight (a measure that has since been adopted by the remaining EU member states). It is a fallacy that Greece was the first country to be bailed out after the crisis. In reality it was Germany, and to a lesser extent France, when the ECB launched an offer to buy the massive portfolios of Greek bonds held by German and French banks, which were really worth far less.  This measure prevented a financial cataclysm in the European banking sector, but in practice it transformed a loss that was 100% German and private into a public and European loss (German weighting in the ECB is 29%). Greece came out with all types of bluster when applying for its bailout. It is also nonsense that Syriza is the only populist party in Greece. Conservatives (New Democracy) and socialists (PASOK) left the country in tatters. PASOK had to implement the first austerity plan, opposed by New Democracy, and when PASOK fell and New Democracy got in, it blatantly championed the plan that it had previously criticized, showing the extent of its hypocrisy against a backdrop of the tragic circumstances that by then prevailed Greece. Lastly, it is ridiculous to think that giving more drugs to a drug addict is going to improve the situation.   The Troika  mistakenly planned a system whereby new credits could be awarded to pay for old ones, while GDP levels continued to plummet (by over 20%), bringing about a situation in which part of public debt could not be paid, while pretending that the opposite was happening.

As Herodotus the Greek used to say, the Persians educate their children based on two main sentiments. First that they shouldn’t lie, and second that they shouldn’t get into debt, because everyone who does ends up lying.  Two thousand five hundred years have passed since Herodotus wrote this in his “Histories”, yet nobody has grasped what he was writing about, nor have they learnt the lesson.   

Today, the populism perpetuated through Syriza has reached its very own “Minsky” moment, which is the moment the credit cycle changes in the face of a message very similar to the abovestated Georgia saying.  Syriza followed a contradictory program based on keeping the euro but rejecting the austerity plan designed to ensure the viability of its economy within the monetary union. The Greek voters ratified this “Alice in Wonderland Plan” by subscribing to the contraction at first, confident that “Syriza can do it”.  

The reality is that Syriza cannot do it.  

It cannot do it because of lies that have accumulated over decades, spun by themselves and by their predecessors.  It cannot do it because with public debt ratios standing at over 150% there is no room for maneuver to embark on populist political action. It cannot do it because human beings, both as individuals or as groups, have to face up to the truth, and the truth here is that you cannot get yourself out of an abyss by blaming third parties for your problems, and it is not possible to solve a problem without recognizing your own mistakes. In the words of Count Leo Tolstoy: “Everyone thinks about changing the world, but nobody thinks of changing himself.” or those of Epictetus: “The ignorant man never looks to himself for benefit or harm, but to the world outside him.”

A Greece that voted “no” and left the eurozone would be risking having a highly questionable political and economic system. Inflation would take off, coupled with horrendous levels of unemployment (in Greece far less than a third of the population work, which means that the system is unsustainable.  We can deduce the “poverty index” from these facts, which affects the poorest most, and which would remain at a high level for a long time, because nobody took any notice of Tolstoy or Herodotus.

After the American War of Independence, Congress discussed the non-payment of debt as a way out of a very tight fiscal situation. The conclusion of this passionate debate was that the nation’s honor hinged on meeting its commitments, meaning that said nation’s future credit depended on said commitments.   Given that the word credit comes from “credere”, which is Latin for trust, the US has benefitted from very low rates of interest for centuries, which has resulted in a system that is capable of creating Jobs (unemployment at 5%), low inflation (1%, resulting in a “poverty index,” based on the sum of inflation and unemployment, of just 6%) and wellbeing (GDP per capita of €50,000).  The Argentine congress, on the other hand, when it declared bankruptcy in 2001 and reintroduced the peso, gave itself a round of applause.  Today Argentina has a poverty index of around 30%, with a GDP per capita of €12,000.  Greece, in 2004 for example, had a GDP per capita of € 21,000 and a poverty index of 14%, while in 2015 it has an income of €16,300 and a poverty index of 22%, these indicators show the situation before and after the crisis, but it is worth noting that both are better than before Greece joined the euro.

It remains to be seen how the Greek parliament will react over the coming days, with applause or honor.  

The consequences of one or the other of these attitudes are more than obvious. 

 

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