Here is an example of truly heroic statesmanship.
When the Greek parliament convened this week to act on legislation implementing a tough austerity program, they were literally under siege. The whole nation was shut down by a general strike called by the unions. Pitched street battles raged literally around the parliament building between the police and a large band of anarchists.
The members of that parliament were caught between a rock and a hard place.
No austerity program is ever popular. The austerity program will force hundreds of thousands to be shed off the public payroll, sharply bringing up the unemployment rate. As the inevitable consequence of that program, the Greek economy will go into recession. State assets will be sold in what, given the contingencies, will be fire sale.
If the austerity program is not done, however, Greece could not avail of the EU bailout package. That means the country will be bankrupt in a month or two. If the country defaults on its debt service, interest rates will shoot up the roof. Even private companies will be unable to access refinancing. A generalized capital drought happens. The task of reviving the Greek economy will be a thousand times more challenging after such an episode.
The choice was stark: it was between bad and worse.
Without the austerity program, no one would dare lend to the Greeks. That will be like flushing good money down the toilet.
A veritable revolution in governance and civic life needs to happen in Greece. The old statist arrangement where government was expected to lay out subsidies, underwrite the social safety net, provide social services and yet not sufficiently tax the people has proven unsustainable. It simply could not go on like this, government borrowing heavily while enjoying the political profit from low taxes and large dole-outs.
The enforcement of fiscal discipline certainly comes as a shock for the Greek people. For decades, they basked in populist policies and routinely expected their entitlements to increase. That was how civilizational progress was understood.
Before the inevitable financial crunch happened, life was good in Greece. Unemployment was low, concealed by the large public sector payroll. Growth was good, although fueled largely by debt-driven public spending. Services were abundant, but people were not paying for it.
Soon, however, reality bit.
The debt needed to be serviced. The economy was not driven under enough of its own steam to allow servicing of the debt without borrowing more to do so. There was little real investment made and too much reliance on the gift of antiquities that drew in tourists.
If Greece stood alone, its financial troubles might have caused its economy to simply sink into a hole, pulled down by dramatic currency devaluations. Greece, however, is part of the European Union, including its common currency framework. If the country sinks, it will bring down the European financial system with it. The euro itself would have been forced into worthlessness.
This is why the Greek problem is a European problem. Because a major devaluation of the euro has global significance, the parliamentary crucial vote this week was closely observed across the globe. Because a Greek default could torpedo the big banks that lent to the country, the specter of a second-round financial meltdown haunted the world’s markets.
When the vote produced a victory for the Greek government and the austerity program it courageously espoused to save the country, the world’s markets heaved a sigh of relief. Stock markets, including our own, recovered some lost ground. Currencies stabilized.
The unwinding of the Greek financial predicament will require many years of tough economic management and the enforcement of inherently unpopular policies. A default still looms further down the road if the painful but necessary measures are not fully implemented. At least, we are sure a meltdown will not happen in two months, as the European Union rushes in a bailout package.
The painful episode Greece is going through at the moment should not be alien to us. This happened to us before.
In the early eighties, we reached the point of default due to heavy borrowing and a weak revenue system. Foreign currency had to be rationed. Investments evaporated. The domestic economy contracted. The peso devalued nearly every day. Poverty expanded rapidly; misery multiplied.
Those of us who are of a certain age remember that horrible time. Inflation, running at double digits, discouraged savings. As the savings rate plunged, so did the investment rate. Our companies could not refinance; neither could our government.
We were forced to accept a brutal structural adjustment program in exchange for short-term, expensive financing. Political discontent quickly spiraled. The regime tripped and did stupid things, such as assassinating a returning politician. The rest is history.
For two decades after that, we had to accept low growth and runaway poverty rates as we painfully worked down our debt problems. Rabble-rousers chose the easy, but suicidal, way out by peddling the opium of debt repudiation. That option will cut us off the global financial mainstream and condemn us forever as an irresponsible borrower.
If we continue to be pictured as the Sick Man of Asia, it is because we still fail in meeting even the regional benchmarks in the savings and investment rate, the tax effort, the size of the corporate sector, the magnitude of the capital market and others.
Sadly, nothing was said about this and the economic roadmap it entails in the President’s anniversary speech last Thursday. As the President went on his usual verbal orgy, attacking personalities and dishing out generalities, he was silent on the long view of economic management.