I read an interesting report this morning, which resonated with some other work I had…
Greece is back in the news as the IMF, the Germans and the European Commission slug it out pretending to talk tough and propose solutions to the Greek tragedy. There is no solution of course. All the debate about whether the primary surplus target should be 3.5 per cent of GDP (European Commission position) or slightly lower (IMF position) is just venal hot air. Anybody who knows anything and isn’t protecting their past mistakes would assess that a fairly large and sustained fiscal deficit is required in Greece to rebuild some of the lost capacity and to provide an inkling of hope to the youth who are facing a lifetime of diminished prospects as a result of the decisions the adults around them took. All the talk about ‘deficits mortgaging the grand kids future’ – sick. The austerity has meant the grand kids might not ever emerge given the constrained circumstances their would-be parents will face as they progress through adulthood. The reality remains – firmly – Greece should exit the Eurozone, convert any outstanding liabiliites into a new currency at parity, and stimulate its domestic economy with expansionary fiscal policy. It should continue to impose capital controls. As part of the stimulus, it should introduce an unconditional Job Guarantee at a decent wage to provide a pathway back into employment for the many that the Troika have rendered jobless.
In last year’s – Greece: Staff Concluding Statement of the 2016 Article IV Mission (released September 23, 2016) – the IMF said:
Looking forward, growth prospects remain weak and subject to high downside risks, and unemployment is expected to stay in the double digits until the middle of the century.
Yes, remember that little piece of understatement – the Greek unemployment rate will remain in double figures until at least 2050.
33 years to go.
Some young people in Greece may never have the opportunity to work.
Yesterday (February 7, 2017), the IMF released its so-called – 2017 Article IV Consultation – which is its annual review of the Greek economy, is pretty dire reading. The IMF loves to sugar coat the disasters that it has often been at the centre of creating. We read that Greece’s “economic situation has stabilized since” the last “confidence crisis in mid-2015” – stabilised at the bottom of the depression ocean! Drowning at a stable rate.’
The IMF acknowledges that:
Despite significant progress in unwinding its macroeconomic imbalances, Greece’s economy has not yet recovered.
But fails to attribute causality. It is exactly the unwinding of these so-called imbalances that has caused the problem.
And, in part, its external deficit is better understood in the context of the German external surpluses (which continue to breach the European Commission rules but go on without sanction).
Remember this Reuters report (March 23, 2010) – Broke? Buy a few warships, France tells Greece.
We read that:
In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.
I have written in the past about how the Germans had been pushing Leopard tanks and other weapons onto Greece at the same time as claiming the Greeks were lazy and were spending too much.
Please read my blog – Hyperdeflation, followed by rampant inflation – for more discussion on this point.
The blackmail element in the so-called negotiations between Greece and the Troika is not a new development.
The Reuters report said:
“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.
Apparently, when the Greek prime minister was negotiating at the time about fiscal austerity, the French we pressuring them to go ahead with billions of euros of military ships and helicopters. They agreed!
Germany has continued to flog submarines to the Greeks and has put those expenditures outside the austerity net in its demands through the Troika.
How far do you think Germany would have got if all the importers stopped buying German products as part of some German-inspired thrift (austerity) measures.
And the assessment that Greece’s fiscal deficit was an imbalance depends on what benchmark one uses. For the IMF and the rest of the Troika, the benchmark is the Stability and Growth Pact, which contains rules that have clearly been demonstrated to provide neither stability nor growth.
My benchmark is whether the labour market is generating full employment and by that standard the current fiscal situation which the IMF lauds is a massive imbalance – a perversity.
By my benchmark, Greece should be running large primary deficits and the only way they will be able to do that is if they leave the Eurozone.
The IMF though are obsessed by ‘structural reform’ – aka hacking into health care, education, pension, public employment, wages, job security, and the rest of the programs that define a civilised society.
The IMF wants further fiscal cutbacks, but they admit that:
Cross-country evidence suggests that few countries having managed to maintain such high surpluses for extended periods of time, and even fewer (one in Europe) have done so while also experiencing double digit unemployment rates … [and] … that double-digit unemployment rates are expected to persist for several decades.
They have normalised that unemployment prediction now – it doesn’t seem as shocking as it did last year when it first entered the IMF spin.
This sort of slippage in our attention is how neo-liberalism has created the disaster that befalls the world after three or more decades of the regime.
We become anathematised to this sort of dire prediction – ‘oh, well, Greece is going to have 20 per cent unemployment or thereabouts until 2015, what’s next’ – that sort of complacency has allowed them to get away with this agenda which has allowed the top-end-of-town to prosper at our expense.
Here are two graphs based upon National Accounts data to remind us of the Greek situation.
The first graph shows real GDP indexed at 100 for the peak period before the crisis (it varied by a few quarters in different nations) for the 19 Eurozone nations, Germany, Greece, Italy, Spain and the US. The data for Europe is from Eurostat. The US data comes from the Bureau of Economic Analysis.
In general, the data goes to the third-quarter 2016 (although the US and Euro19 data covers the period ending the December-quarter 2016).
Prior to the crisis, Greece was growing in line with the rest of the Eurozone. The turning point from the peak is identical for the Eurozone in general.
The downturn and the slight recovery that followed (as the fiscal deficits grew to attenuate the loss of private spending) was shared across the Eurozone – Greece followed the same pattern in Greece of the other Eurozone nations.
Then the break point came – March-quarter 2009 – and from there the Greek disaster began and has continued to the current period.
The break point came when the Greek government started to impose fiscal austerity in an environment when private spending was extremely weak and deteriorating further.
A sequence of events including the Troika bailouts built on that austerity and caused real GDP to fall by around 26 per cent.
The IMF initially claimed the austerity would boost growth but then had to admit that it has bungled its modelling of the expenditure multipliers and, lo and behold, their revised parameters were telling them that austerity would cause considerable damage to growth in Greece.
And that is what happened – and was always going to happen – despite all the nonsensical narratives about “growth friendly austerity” that became the norm for IMF and European Commission officials etc.
The difference experiences of the Eurozone in general and the US reflect the imposition of austerity in Europe relative to the US, where the fiscal deficit was allowed to remain at relatively higher levels for longer to support growth in private spending.
The result was that US real GDP recovered more quickly and is now 11.6 per cent above the pre-crisis peak. And, remember, that this is a relatively weak recovery by US historical standards.
The EU19 real GDP took 29 quarters to pass its pre-crisis peak. It has only grown by 2.4 per cent in the last 9 years (36 quarters since peak).
Spain and Italy remain below their peak levels.
The Greek economy might have “stabilised” in the IMF’s assessment but is skating along the bottom having shrunk by 26.3 per cent since the crisis began.
That is, Greece has lost more than a quarter of its production and income generation.
The next graph shows the evolution of Greek private spending (Consumption and Investment) from the March-quarter 2006 to the September-quarter 2016. The index equals 100 in the March-quarter 2008.
Clearly, investment led the crisis in 2008 and 2009 as financial markets froze in the wake of the American housing disaster. As employment fell and incomes started falling, private consumption started to fall.
The government started to cut spending in 2009 and then accelerated the cuts in early 2010 at a time when private spending was still deteriorating, meaning fiscal policy became pro-cyclical when responsible policy conduct should see counter-cyclical fiscal intervention.
In other words, when the private spending cycle is contracting and unemployment is rising, public spending should expand, and vice versa.
The conduct of Greek fiscal policy, once the crisis hit, was irresponsible and the austerity that was imposed exacerbated the contraction that was led by the collapse of private investment.
Household consumption has fallen by 25 per cent and shows no signs of picking up given the on-going income losses being incurred.
But, business investment is now 74 per cent lower than it was in the March-quarter 2008. That scale of collapse is almost without precedent.
No advanced nation has endured such a massive collapse in productive capacity building.
The IMF, the European Commission and the ECB have conspired to destroy the prosperity of this nation for many decades to come. There should be criminal charges laid.
While consumption expenditure can pick up fairly quickly, the problem of such a decline in business investment is that it has undermined the future growth potential of the nation.
It will hit the inflation barrier much more quickly than in the past because full capacity is now likely to occur at much lower levels of spending growth.
The Troika, by vandalising the economy, has also provided very little scope for the youth of the nation to be absorbed back into productive employment unless very carefully planned, large-scale public employment schemes are implemented that do not strain productive capacity.
This Newsweek report (July 13, 2015) – Greek Crisis has seen a rise in Suicides and Depression – while a bit dated provides a glimpse of how bad things have become within the health system in Greece.
After more than 9 years of recession and stagnation we know that in Greece:
1. The OECD Health Statistics database shows that in 2010, Greece spent 9.9 per cent of GDP on health care (all areas). By 2015, this had fallen to 8.2 per cent.
The OECD remarked in its Health Statistics 2014 Report that:
Health spending in Greece has dropped in each of the years since 2009, driven by a sharp reduction in public spending as part of government-wide efforts to reduce the large budgetary deficit. Greece saw double-digit percentage reductions in health expenditure in both 2010 and 2012, leaving the overall level of expenditure around 25% below its peak in 2008.
2. “the observed 12 percentage point rise in unemployment during the austerity period … largely accounts for the overall suicide increase in working-age men during this period”. Suicide rates have risen sharply – in 2007, the suicide rate per 100,000 was 2.93. By 2012, it had risen to 4.56. (Source).
Some data on the labour market disaster
I investigated some of the age-related Labour Force data from Greece the other day to document how bad things have become – underneath the headline unemployment rates, with the IMF and European Commission like to tell us are falling.
Detailed data is available from the March-quarter 2008. So we can trace the changes since the crisis.
Dramatic decline in employment
The first graph shows trends in employment for the Youth (15-24 years) and All workers in Greece from the March-quarter 2008 to the September-quarter 2016. The indexes are equal to 100 as at the March-quarter 2008. They exclude the official underemployed.
For youth, the decline in employment has been dramatic – 54 per cent (from 273.2 thousand to 125.8 thosuand). The Employment-Population ratio for this group has fallen from 21.6 per cent to 11.9 per cent over the time examined.
Even if we add back the underemployed workers which have risen from 13.3 thousand in the March-quarter 2008 to 23.7 thousand in the September-quarter 2016, the decline in employment is still of the order of 48 per cent.
For all workers, the decline has been of the order of 22.2 per cent (or 19 per cent if we add back the underemployed).
Massive labour wastage
The youth unemployment rate has risen over this period from 23.3 per cent to 44.2 per cent. Overall, the national unemployment rate (all workers) has risen from 8.4 per cent to 22.6 per cent (September-quarter 2016).
The Troika likes to tell us that these rates have fallen. Youth unemployment peaked at 60 per cent in the March-quarter 2013 and has steadily declined since then.
But over the same period, the participation rate has fallen from a peak of 31.2 per cent in the September-quarter 2009 to 25.3 per cent in the September-quarter 2016.
In terms of the working age population that is equal to 63 thousand odd young workers exiting the labour force as a result of no job opportunities.
In scale terms, here were 118.1 thousand young people unemployed in Greece in the September-quarter 2016, so another half of that (about) have dropped out.
Including them as hidden unemployed would push the unemployment rate up to 54 per cent which means it hasn’t come down all that much at all over the last 8 years.
The Greek Statistical Office estimate that 23.9 thousand of those Not in the Labour Force are currently available for work but have given up looking.
Adding them back in would give an adjusted unemployment rate of 48.7 per cent.
There has also been a sharp rise in underemployment (part-time workers who desire more hours of work but cannot access them).
We consider this group to have dual qualities – on the one hand, they are employed but the extra desired hours are conceptually equivalent to being unemployed.
That is why national statistical agencies are starting to publish broad labour underutilisation data – the unemployment rate is a so-called ‘narrow’ indicator of labour wastage.
Depending on how we treat the participation drop (that is, we use my method of computing what the labour force would be at recent peak participation rates OR we use the estimates from the Greece agency of workers who are available but not looking) we find that the broad labour underutilisation rate for youth in Greece is 57.6 per cent (using El.Stat method) or 63.7 per cent(using my method).
The truth is somewhere in between, given that several people will adopt marginal status as not in the labour force but will indicate they are neither available nor looking but would take a job if one was offered.
The underemployment rate for youth has risen from 3.6 per cent (March-quarter 2008) to 8.8 per cent (September-quarter 2016).
The next graph shows the broad rates for youth and all workers (using the Greek El.Stat method of assessing hidden unemployment).
Once we aggregate official unemployment, underemployment and hidden unemployment we see that there has been no improvement over the last three to four years for workers (all). The broad labour underutilisation is at 29.9 per cent and has been stuck around there since 2012.
A similar situation exists for the youth.
This is the legacy that the current generation is leaving their children and their children.
The lack of jobs, the cutbacks in education and training, the lengthy periods of unemployment, the rising underemployment, the loss of participation, and all the attendent consequences are the legacy.
This is directly the result of the austerity which was imposed in the name of providing a brighter future for young Greeks.
The reality is that their future looks very bleak indeed.
Greece is now a failed state – a colony of Germany and a plaything of the IMF.
If there was any semblance of political courage they would get out of this bind immediately and start building from the ashes.
Life will continue to be tough if they did leave – but improvement would come much more quickly than anything the current policy mix is likely to provide.
And my comments have nothing to do with the question of Greece’s debt burden. Obviously, they will never be able to pay that back in Euros. But debt relief, which the IMF is now trying to use as a means of distancing itself from the German obsession with more Greek punishment, will not help much at all.
What is required is freedom to increase fiscal deficits and start a public sector led recovery. They will never be able to do that while they are within the straitjacket of the Eurozone.
So in a few weeks, the next debt-bailout saga will hit the headlines and the talk will be the same. But I suspect the IMF will not pull the pin and force a Grexit. Mores the pity.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.