HIDDEN STRUCTURE DEFICIENCIES

GREECE

UNDERLINING HIDDEN STRUCTURE DEFICIENCIES

FAR FROM VISIBLE SITUATIONAL FACTORS

By Didier BERTIN – 6 MAY 2010

I-OVERVIEW

After the independence war, Greece was recognized as an independent State from Ottoman Empire in 1830. Greeks spent near four centuries under Turkish domination whose among others culture, religion and language were very different.

Greek identity was at risk under Turkish influence. Greek Church was sufficiently tolerated to maintain a Greek identity based on religion and language conservation but instillating by the same token regressive considerations. Ancient Greek civilization was also visible trough remaining monuments attesting the root difference between invaders and people under occupation.

The ancient Greeks and the country geographic situation still provide a substantial life financial pension to Greeks in the form of Revenues from Tourism: 15% of GDP.

After WW2, Greece suffered from a violent civil war opposing leftists and rightists whose traces are still visible. From WW2, Greece was geographically isolated since it was surrounded by Communist Countries until their collapse: Yugoslavia, Albania, and Bulgaria and by Turkey: its traditional enemy. Maintaining Greece in the Western countries during the cold war was an important issue. USA thought erroneously to do it in supporting the Coup of Colonels in 1967 and by depriving people of Freedom. The dictatorship made uneasy the relation with European Western countries.

In 1974, Turkey was ready to face a war with Greece to defend the interest of the Turkish minority of Cyprus endangered by Ultra rightist Greeks wishing to impose “Enosis” i.e. merging with the Greece under dictatorship. The Colonels, who were very courageous in matter of fight against Democracy and against their own people, were afraid of the powerful Army of Turkey and preferred to surrender and permit democratic recovery.

Paradoxically Turkey, the former invader, hasted the return of Greece to Freedom. Turkey was ruled by Bulent Ecevit who was considered as a bright man of progress in the Turkish context.

Greece freed of Colonels became an acceptable potential member of European Community (EC). EC was an opportunity for the economic development of Greece and a way to stabilize it among Western Countries. Greece was finally admitted as tenth member of EC on 1st January 1981 and received from EC its second major financial support after Marshal’s Plan following WW2.

France was a favorite partner of Greece and helped from Paris, the modernization of the first commercial Bank with the support of Crédit Lyonnais and Indosuez in the eighties.

After EC membership, Greece succeeded to gain an unbelievable challenge by joining Euro currency area in 2001, one year after the first participants. As a matter of fact economic figures which were not satisfactory in 2000 became one year later sufficiently good to join Euro area. It is often admitted that figure were dressed purposely and were unfair.

The benefit of joining Euro’s area was probably for the ruling class of Greece, to pass from a conditional financial support of European partners to a compulsory support from EURO partners since defense of EURO involves it. We may see today that this strategy works as expected. However joining EURO is a double edge sword since it assumed the following of constraining rules demanding an economic development.

If for solidarity reasons the support of Greece is necessary, it is not evident that Greece should remain in Euro’s area in both interests of the people of Greece and of Euro partners.

The extremely bad situation of Greece is not so much due to the International crisis than to structural weaknesses, which are well known and well explained by the Greek Economic Agency: ICAP. We do not understand the ignorance or pretended ignorance of French Press and French politicians in this respect. The French president has even presented the loan to Greece as a good business and not as we think as a duty for social reasons and solidarity. In fact the heavy interest imposed will deteriorate more the budget deficit and Greece will not be able to repay the loans in due date unless they are renewed as this will be probably done. The fact that Greece is a major debtor of French Banks is probably a more real motivation of the French Government.

This is another example showing that tax payers support Banks inadequate policy. The future Bank Profits will be the result of reduced provisions permitted by the tax payers effort to improve the risk of a Banks debtor.

This should be kept in mind by French opposition when social progress will be requested above the sole defense against social regression.

The structural change of Greek Economy is an urgent challenge, which should not lead Europe and IMF to impose stringent and unbearable conditions to the Greek People itself victim of its ruling class. The logic withdrawal of Greece from Euro‘s area in which it should not have been admitted initially will ease the economic rebuilding and the life of Greek People.

Fund application to economical structural changes should severely be controlled from outside taking into account the risk of diversion by corruption. We recommend incentive to foreign corporate investments as we did for Palestine future economic development as opposed to dry subsidies.

II-EUROPEAN SUBSIDIES

From 1981 to 2005, Greece has received from Europe annual subsidies equivalent to 4% of its GDP and 1.5% thereafter. Subsidies from Europe mean also money taken mainly from French and German workers to be given to Greek businessmen from private or public sector. The application of funds was made according to opinion and interest of these people and we see today that it was far from being optimal. Economy is far from being sufficiently modernized and strengthened to face undiversified volatile markets.

European workers gave Greek Businessmen € 240 billion i.e. $ 360 million i.e. more than the whole 2009 Greek GDP. This amount represents 24 000 Euro per Greek Citizen.

III-BUSINESS SPIRIT OF RULING CLASS

The Economy is still substantially based on life pension inherited from the geographic situation and from the ancient Greek patrimony in the form of revenues from tourism which constitute 15% of the GDP as well as from the traditional revenues from shipping and thus no major changes were achieved in the way of direct production of goods. The Greek merchant fleet represents a major part of the world merchant fleet but a substantial part of it is registered in fiscal paradises and utilizes staff from emerging countries. A substantial part of Greek assets is thus outside of Greece, but nevertheless transport and freight revenues still remain a substantial component of balance of Payments.

Before requesting support from European workers, Greece should make the necessary steps to avoid the traditional wide tax evasion organized by many people of its business class.

Many Greek success stories are based on tricks and tax evasion as those of the most famous ship-owners, who utilized almost out of order vessels registered in countries not imposing technical controls and taxes. These stories were based on insufficient protective rule and fortunately will not be possible today.

To illustrate the spirit of business class we will give the paradoxical example, of one honest Greek businessman. In the eighties Eleftherios Mouzakis President of a very profitable Textile Group did not practice tax evasion and as a consequence was ranking first among the Greek tax payers. The Greek Press and many business people gave him also the first rank  above the national imbeciles. Honesty used to be assimilated to lack of intelligence and ruse in business. In the same period another Greek businessman built fortune on diversion on subsidies from Europe towards Greek agriculture; he lived in this time in Switzerland and bought a manor on the left bank of Paris. Another very rich businessman used to buy luxuries abroad and transported them in the middle of merchandises in his trucks to avoid paying custom taxes.

With European incentives Greeks have increased their level of consumption of products they do not produce and the import companies, in fact simple import agents, were flourishing. Some import agents increased their profit by making local production related to their imports as finish and packaging and appeared in the Greek context as Industrial companies. These numerous companies used to finance their activities on the basis of funding from Banks and suppliers and were thus fragile, not competitive and not able to renew their productive assets.

Business class and ruling class belong too often to the same families. New people should run new corporations; new politicians should run the country. The fact that the prime Minister is the son of a former famous prime Minister is meaningful. Unfortunately the real elite are attracted by the life abroad where they may find more opportunities in line with their ability.

 

IV-REALITY OF GREEK INDUSTRIAL SIZE

 The few big Greek corporations are in fact small companies. The biggest company of Greece is Hellenic petroleum whose sales amounted to € 8.5 billion as compare to € 137.5 billion for the first French company: Total (in similar field of activity) and € 130 billion for the first German company: Daimler. Only 4 Greek companies have sales of more than € 5 billion. OPAP is the 4th Greek company selling the dream of easy money and Banks traders’ spirit in offering Lotto, Protto, Kino, Jocker, Keno and many other chance games.

Despite the small size of the biggest companies Athens Stocks Exchange (ASE) includes about 100 companies, which would be for most of them considered as micro-companies in the usual Stock Exchange places e.g. it includes an importer of electric appliances and other companies in the field of retail trading.

The size of the country does not prevent the creation of European size companies e.g. Nokia was created in a country half smaller than Greece in population (Finland).

See in appendix one a comparative table of the major Greek companies with France and Germany.

V- STRUCTURAL INSUFFICIENCIES OF GREEK ECONOMY

See appendix 2 - (3 parts)

1-GDP: RICHNESS AND POVERTY

As we have indicated in the case of Brazil, the accumulation of production shown by GDP is not always meaningful for international comparison since it depends on pricing policy, industrial and organizational efficiency, profit policy and of course on the reliability of National accounting.

The lack of reliability of Greek National Accounting was reported by many Rating Agencies and CIA fact book.

As a matter of fact GDP per capita is with $ 32 000 similar to the German and French level. This good figure obviously does not reflect the substantial weakness and inadequacy of the Greek Economy.

Part of the distortion might be explained by a very unequal society. Gini index is an indicator but is also questionable since it is officially similar to the one of France when a large portion of Greek population lives under poverty line. A number of rich Greek citizens lodge their assets and revenues abroad and the GINI might be difficult to assess.

This difficult assessment concern also  the population below poverty line which is 20% in  Greece as compared to 6.2% in France and 11% in Germany and which would be much higher if German or French threshold criteria were applied . As a matter of fact threshold is often 50% of local median revenue and 60% in Germany as recommended by the European Commission. The population under poverty might be paradoxically smaller in poor countries than in rich countries. The difference between France and Germany is only due to the difference of criteria and to a better repartition of revenue in Germany.

Another example of Greek insufficiency is the inadequacy of figures in agriculture where 12.4% of the population generates 3.4% of GDP as compared in France where 3.8% of the population generates 2.1% of GDP and this despite the European subsidies paid to Greece since 1981.

2-THE KEY PROBLEM OF GREECE

THE KEY PROBLEM OF GREECE IS NOT WHAT FRENCH PRESS AND SOME FRENCH POLITICIANS REPORT.

Of course the international crisis has severe effects on most of national economies. These effects are also effective in France and Germany but did not generate a Bankruptcy as in Greece. Greece has accumulated weaknesses which did not enable the country to resist the international crisis. These weaknesses generate the core of the crisis and not the contrary. This is not sufficiently underlined in France when the decision to grant loan was made.

 If support was appropriate the reasons given were not.

Two main reasons of the crisis might be identified:

A-BALANCE OF PAYMENT PERMANENT DEFICIT AS A RESULT OF LACK OF CORPORATE EFFICIENCY INSIDE AND COMPETITIVENESS ABROAD

Greece does not produce sufficiently goods and then imports a lot of them in compensation. In 2008 imports represented 27% of GDP. Greece made already a big effort taking into account the plummeting of revenues from abroad by substantially reducing its imports from $ 94 billion in 2008 to $ 64 billion in 2009. But Imports still represent near 19% of GDP. This might be a threshold and additional decrease may freeze the economy and generates bigger social disorders. Many companies work on the basis of imports of goods and oil is still a basic need to provide energy.

Exports of Goods already far to be sufficient decreased by 28% to 21 billion and cover only one third of imports. The trade deficit was thus decreased by $ 22 billion to $ 43billion but still represented twice the amount of exports in 2009. This huge gap was usually and dangerously covered by undiversified revenues of services which became eventually volatile.

This shows again than the European subsidies were not applied adequately to increase a productive and large scale industry and Greece remains dependant of its traditional revenues like Tourism, freight and transfers to face its needs from abroad.

a)      International crisis has affected the volume and price of freight and the current ecologic challenges do not permit anymore the utilization of unsafe and cheap vessels.

b)      The global demand for tourism also decreased but this was probably amplified but the new very cheap touristic destinations around Mediterranean Sea when Greek prices increased and are invoiced in Euros.

c)      The unrequited transfers from Greek Diaspora might have been also affected by the general crisis and are volatile.

Greece wanted to solve the problem of its lack of international competitiveness towards big countries by concentrating its efforts on the weak emerging Balkans countries as this was initiated by the main commercial Bank. The economies of Balkan countries are also fragile, exposed to international crisis and Greece is not the only one to be interested by this area. This policy has generated investments abroad which have affected negatively the Balance of Payment.

The balance of Payment is thus currently dependent on volatile inflows of money. Without a substantial structural change, this volatility makes uncertain the repayment of loans which were granted by France and Germany unless they are automatically renewed and increased on maturity as it will be probably the case.

The accumulation of deficits involved a continuous increasing external debt. Over the sole  6 months from 31 December 2008 to 30 June 2009 external debt increased from 504 billion to 553 billion i.e. an increase of 20% per annum.

Taking into account these elements the rating decrease of the country is correct. Notation Agencies are generally not reliable for forecasts but are reliable to observe the present situation as anyone. Nevertheless ICAP made a good analysis and as a Greek Agency is assumed to be aware of Greek situation.

B-PUBLIC DEFICIT

1 -Public Debt and sector

Greek public sector represents 40% of GDP. Public debt amounts to approximately $ 385 billion i.e. 113% of GDP and 70% of the global external debt.

In France Public debt represent 1688 trillion i.e. 33.6% of the global external debt, and these figures are respectively 2170 and 41.6% of GDP for Germany.

The difference with France and Germany is that the Greek State should serve most part of the country’s debt. The Greek public budget includes thus approximately 70% of the financial cost of the global external debt. Most of the Greek companies being too small, the State is the main borrower abroad.

As a result the State is particularly sensitive to the volatility of the Country’s economy. The public expenses reached $145 billion in 2009 as compared to revenues of only $ 109 billion. The deficit is thus 36.5 billion i.e. 33.6% of revenues as compared to 17.6% for France and 10.1% for Germany.

Budget deficit represents 10.5% of GDP as in France but risk is much higher for Greece and more difficult to manage because of the size effects of economy i.e. an increase by 10% of French public revenues, which is feasible,  may could reduce the French deficit to 3.4% of GDP. The small size of Greece Economy give less flexibility since it appears that country is  often near threshold levels and slight modifications might have heavy social effects.

VI-CONCLUSION

The integration of Greece into European Union should have involved two phases: The economic integration followed by the monetary integration.

The first phase was not really achieved to permit the access to second phase despite the very high European subsidies.

Greece did not make the necessary changes regarding economic structures to face the monetary integration. Public sector is still dominant, and no Greek corporation has a European size regarding production scale, products sophistication, market efficiency and borrowing capacity abroad. Trade deficit continues to be out of proportion and the dependence of the country to external debt is amplified by the volatility of restricted services and transfer assumed to compensate the trade gap. Greek Government did not control the debt by structural industrial reforms and reached Bankruptcy point. The traditional tax evasion and lodging of revenues abroad worsen the State resources.

Despite €240 billion of European subsidies, Greece still depends on insufficiently diversified traditional resources as shipping, tourism and transfers which became all volatile.

People of Greece should be supported by way of investments from abroad since the local business people did not show a sufficient ability or motivation towards their country.

Bankruptcy should be avoided for social reasons but Euro is detrimental to Greece. Euro affects the competiveness of local companies for the time being and involved a lack of flexibility regarding economic and currency management. The figures provided in 2001 were probably not reliable to permit Greece to join Euro’s area and the return to a local currency should be thus viewed as very exceptional and simple correction of an initial mistake and should not affect the other Euro partners.

The People of Greece should not suffer of the inability of its ruling class by too many stringent conditions that IMF and Europe want to impose.