Euro Dogma or Greek Drachma?

Euro Dogma or Greek Drachma?
July 14, 2011 Joseph Paris

The nation of Greece is bankrupt.

Let’s just say it plainly and simply.  Let’s not use “poli-speak” words aimed at soothing the sting or trying to maintain someone’s self-esteem such as; “insolvent”, or “challenged”, or “bust”.

And let’s be even more plain, any manner of restructuring of debt, other than “arm’s length” transaction, is the admission of such – whether it’s called; “restructuring”, a “haircut”, “rescheduling”, or a “voluntary roll-over” (how “voluntary”, I wonder).

But the “root cause” of the present crisis in Greece is not to be found in finance – this is only a symptom as much as it is a clash of cultures.  The Greeks, and as a result Greece, embrace traditions and live a lifestyle that is incompatible with the countries who are the primary economic drivers of the Eurozone.

The choice is simple; a) Greece, and the Greeks, must change their culture so that it is more symbiotic to those countries which are the economic drivers of the Eurozone or b) Greece should leave the Eurozone and re-introduce the Drachma.

This is not to be interpreted as casting Greeks or the Greek culture as being the “lesser” or in any way disparaging.  On the contraire, having recently been to Greece, I can say without reservation that the Greek way of life has a great deal many merits.  But it is like oil to Germany’s vinegar – naturally separated unless shaken.  And even then, they will naturally revert to its separated state once the shaking stops.

Having lived in the States for almost all of my life (New York to be specific) – and now having spent a great deal of time in Germany over the past year – I can say, unreservedly; that the level of intensity brought to the job in New York is far greater than in Germany, and the level of intensity brought to the job in Germany is far greater than in Greece.  I am quite certain the average German in the workforce looks at the Greek and wonders “how can they get anything done” in much the same way as I, being American, look at the Germans and wonder the same.

However, the culture of Greece renders a long-term and permanent solution – where Greece stays in the Eurozone – as close to impossible as one can possibly fathom.  Consider the following facts and figures, as well as some first-hand observations.

    Public Debt is at 144% of GDP.  This is the 5th largest Debt to GDP ratio in the world behind only Japan, Saint
Kitts and Nevis, Lebanon and Zimbabwe.  And of these “Bottom 5”, only Japan has a significant industrial base.

    GDP per Capita is ranked 47th in the world at $29,600 (2010est).  This GDP per Capita compares
to Germany’s 33rd spot at $35,700 (2010est) and the United States11th place at $47,200 (2010est).

    GDP real growth is ranked at 212th in the world at -4.5% (2010est).  Ranking only 216 countries in the
world, this ranking is just one place above Haiti.  Even if this trend were to reverse itself and Greece would turn
this -4.5% to a +4.5%, the debt burden would still be overwhelming.  Besides, the austerity measures being
imposed by the creditors make this impossible to achieve.

    GDP generation by Industry is only 17.6%.  Compare this with Germany at 29.7% and the States at
22.2%.  The macro-economics of this means that Greece’s ability to pay-down the debt will rely most heavily                 on the service sector and agriculture (4% of GDP – 2010est) rather than industry.  With the primary macro-
economic service of Greece being “tourism”, and there being many alternatives which might be more attractive
from a value / convenience perspective, means that tourism (under the Euro) cannot be competitive enough to             grow at the rate necessary to solve the situation.

I would like to dispel one inaccuracy – that Greeks get to retire under much more favorable conditions than their other European counter-parts.  As the graph and accompanying notations below clearly shows, Greeks (both men and women) retire under no more favorable circumstances than their German, French, Italian or Dutch counter-parts.  The only real exception to this is the “special consideration” given to Greeks who have contributed for 35 years and who can retire at 58 years old.  However, the French, Belgians, and Italians have similar rules – so this is not unique to being Greek.  Besides, with fewer young people being able to enter the marketplace in countries where the present labor laws result in a natural delay (including Greece, as well as most EU countries), the age at which the average young Greek would start contributing to retirement will naturally push their ultimate retirement age towards the legal limit (presently age 65 for men and 60 for women).

  Unemployment is at 16% (up to 42% if you are younger than 24).  This certainly would explain why there are so many people available to protest in Athens – what else is there to do?  But the cautionary tale is what has occurred in the Middle-East and Northern Africa under similar conditions.  Fortunately, Greece is a Democracy – for as long as people believe it is.

The bottom line is – by the numbers – Greece just simply cannot pay its debt.  A restructuring of the debt is required to give Greece a fighting chance at being able to properly service the debt – the write down should not be to 50% of GDP, but 50% of the existing debt load.  Not only is it required; it’s inevitable.

On the softer side of the argument is, “What does the average Greek want?”

… The simple answer is to “Live like a Greek.”

I recently had the opportunity to visit Greece for the first time this past June.  I had organized a couple of days in Athens for the leadership group of my firm (www.XONITEK.com) – followed by a week of team-building exercises learning to sail yachts around the Greek Isles in the Aegean Sea and having a series of strategy development sessions.  All the while, we had to endure being captive to one another in close quarters.

We were there during the height of the protests; when the Eurozone was balking at providing the next tranche of first bail-out while determining the requirements for the second bail-out – and the Greek government was debating whether they could contrive and deliver the austerity measures demanded by their creditors.

On television, the situation with the protestors looked rough and tumble on the days before and after we were in Athens.  But other than the obvious security detail (not unlike you would see at the average American Embassy), the average person would not be able to tell there was a crisis.  Even the conversations were on the order of, “business as usual”.  The level of outward complacency and detachment by the average Greek was directly at-odds with what the media was presenting.

This was even more the case once we got out of Athens and onto the Islands.

… Some casual observations.

  Almost nobody cares about time.  There was no mention of the time of the day.  It was morning when we woke-up, afternoon when we went swimming, and evening when we had dinner and drinks; any more detail was just “trivia” – knowledge without value. The only exception to this rule was in Hydra.  I found a watch whose style was what I was seeking – and the shopkeeper called the “Mayor’s Son” down to the shop so that he can set it and explain it to me.  Evidently, he was the only “expert in time” around.  And while we waited, the shopkeeper insisted on giving us some juice to drink.

  There are hardly any cash-registers and almost nobody takes credit-cards.  Of all of the shops and restaurants I visited (either on the mainland or on the islands) over the week we were in Greece, I only saw a handful of cash registers.  Most business made change right where you were.  Once, I was taken to the back of a store so that change could be made.  The owner reached into his pocket and pulled-out a wad of cash (I guessed a few thousand Euros) to make change – no receipt.  People did not like to take credit-cards and would offer you a discount so that they didn’t have to pay the fee (2%-ish) or the taxes (VAT at 13% or income tax).

  They did not trust their banks.  Consumer deposits in banks, through a declaration by the Greek Government and following Ireland’s lead, are guaranteed up to e20,000 in each bank.  However, the average Greek does not believe the government and does not trust the government, so many avoid the banks.  Besides, if you keep your money in the bank, it’s harder to claim you don’t make any.

  Corruption is pervasive.  As an example, one night, we stopped in port, tied the boat to the dock, and attached the shore-power.   But we didn’t have to pay anything because – instead of the normal fee to dock for the day – the skipper just paid the local authority in cash for what amounted to two visits per month.  This one payment was for all THREE of the yachts which stopped at the port at least once per week.

So, between the hard numbers and the culture of the people, I believe;

  Keep emotions (such as pride) in check.  It was a mistake for Greece to join the Eurozone.  The Greeks certainly did not accurately represent their finances at entry and the Eurozone should have performed better “due diligence” before allowing the Greeks to join.  Emotions took control of the situation then – it should be guarded against now.

  Allow Greece to declare Bankruptcy and to restructure the debt.   It is a mistake to try to keep Greece in the Eurozone under the restructuring program (that’s what it is – don’t kid yourself otherwise) as it is being proposed.  With the debt-levels already being carried by Greece (not to mention the additional debt it will soon be required to endure), a simple restructuring of the existing debt will not solve the problems.  Such an approach merely “kicks the can down the road”.  If keeping Greece in the Eurozone IS what is wanted – by the Greek people, by the Greek politicians, and by the Eurozone – then there must be a write-down of debt to where it is 80%(+/-) of GDP.  Otherwise, this drama will continue to play-on.

  Greece, and the Greeks, must be willing to embrace fundamental cultural and fiscal change.  It is a mistake to try to keep Greece in the Eurozone unless the Greeks (their politicians and their people) are willing to embrace the cultural and fiscal changes necessary to be a viable member of the Eurozone including; the privatization of companies (without “Golden Shares”), elimination of red-tape for business and real-estate transactions, reducing the public workforce (currently at 40% of all those employed), and a liberalization of the labor market.

  However, most likely Greece will leave the Eurozone – what then?  Since I believe that this situation will not change the Greeks or the Greek Culture, then the best way forward is to; allow Greece to default (they are there in deed presently – it would just need a verbal recognition of the facts), write-down the amount owed to creditors so that it is manageable, use the money presently pledged to fund the bridge necessary to go from the “Old Greece” to the “New Greece” – and along with that, a departure from the Eurozone and a reintroduction of the Drachma.  Before this is dismissed out of hand and for your consideration: what if the markets wrote-off $200-Billion of debt to bring the Greek debt burden to 80% of GDP?  How much more or less is this than the ADDITIONAL that is being proposed as a loan?  A loan where the markets are already factoring in a 70%+ probability of default in the next two years…

The Eurozone, and the markets, should be prepared for a replication of whatever solution is had in Greece by the Greeks to be replicated in Portugal; and perhaps in Ireland, Spain and even Italy and Belgium.  These countries (their politicians and citizenry) will be looking at what happens in Greece and say, “Why not us too?”

Remember the words of Donald Trump.  “If you owe the bank $1-million dollars, it’s your problem.  If you owe them $1-billion dollars, it’s THEIR problem.”

… what about $440-BILLION?

A few months ago I was at a conference for bankers and other financiers.  During the event, I met the Deputy General Manager of a bank headquartered in Greece.  Our discussions drifted towards “processes and compliance”, as one might expect.  I shared with him one of my recent experiences where I had to bend several rules – and even break a couple of minor rules – so that I could accomplish what I needed to be accomplished.

At the conclusion of my story, his head went back and he gave a mighty laugh.  He looked at me and said, “You must have Greek blood in you.”

To which I responded, “No, my heritage is mostly Italian.”

He laughed again and said, “Ahhh, yes…  But it is the same.”

Hmmm…Now the only real question now is; ”How much the same?”

 

Joseph F Paris Jr is the Chairman of the XONITEK Group of Companies.  With over twenty years as entrepreneur, academic and professional instructor, and strategic consultant – he is a champion of Operational Excellence (Lean Six-Sigma and Leadership) who has devoted himself to increasing stakeholder-value for his clients and constituents.

Contact him at parisjf@xonitek.com

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