By George Koumoullis
FIRST I would like to clear up certain confusion that seems to exist between fiscal or budget deficit and national debt.
The first is the amount by which expenditure by the state exceeds its revenue over a year, while the national debt is the accumulation of budget deficits.
If a state was established today and each year, over the next 10 years, it had a budget deficit of €50 million at the end of the decade it would have a national debt of €500 million.
In order to ensure against misleading comparisons, the national debt is given as a percentage of GDP because it is possible, for example, for the debt to decrease in absolute numbers but increase as a percentage of GDP as had been the case with Greece recently.
According to the Maastricht Treaty, the national debt of a healthy economy should be less than 60 per cent of GDP or head in this direction (it could be a higher percentage but have a downward trend towards this target) and the budget deficit less than 3 per cent of GDP.
The last figures released by Eurostat, for the third quarter of 2014, were disheartening for Greece. The national debt, in spite of the sacrifices, the poverty and despair of Greek people, has risen to 176 per cent of GDP (€280 billion) compared to 171 per cent in the previous year. Greece is top of the national debt table and is followed by Italy (131.8 per cent), Portugal (131.4 per cent ), Ireland (114.8 per cent ) and Cyprus (107.5 per cent ).
What caused Greece’s national debt to skyrocket were the soaring budget deficits of the New Democracy government.
For 2005, 2006, 2007 and 2008 the deficit was 5.2 per cent, 2.9 per cent, 3.7 per cent and 7.7 per cent respectively. As for 2009, it should go down as the year of statistical alchemy. The mandarins of the finance ministry did everything they could to keep the profligate spending (relating mainly to salaries, pensions and assorted benefits) and appointments in the public sector that brought the Greek economy to the brink. Their actions provide ample material for a very funny comedy.
Initially, New Democracy announced a deficit of 4 per cent, only to revise it subsequently to 6 per cent. The governor of the Bank of Greece, however, intervened and claimed the deficit was between 8 and 9 per cent, only to be accused by New Democracy of living in a fantasy world. The next government, of Giorgos Papandreou, after a “thorough audit”, raised it to 12.7 per cent and a bit later, Eurostat pushed it higher – to 13.6 per cent but with reservations. Finally, Eurostat sent its own officials to Greece and they discovered that the real deficit was 15.4 per cent, which was the highest recorded in the EU since its establishment.
I am no lexicographer otherwise I would have introduced a new word that would have enriched not only the Greek language, but also English – Stallinicos (in English, stahellenic). The dictionary entry would be the following: composite word made from ‘statistics’ and ‘Hellene’ that refers to the person that through the use of statistics 1) mocks shamelessly; 2)lies blatantly; 3) deceives ruthlessly.
Recently, particularly after the elections, there is much broad discussion of the possibility of a write-down of the Greek national debt. For this to happen it must have the approval of the lenders, but as Chancellor Merkel made clear recently, this was not an option. Unfortunately, for the Greek economy, Greek wishes are not compatible with Merkel’s commands.
If, in the end, the Syriza government persuades everyone that the debt was not sustainable there is a possibility a part of it could be written off. In such a case, and on the condition that the extra money would be invested, the much-desired development that would bring the smiles back on Greek faces could be achieved. There are however three reservations.
First of all, there is the moral dimension of the issue. Is it fair for the taxpayers of other countries to pay for the Greeks’ sins of the past? When the haircut of the Greek debt (€107 billion) was decided in 2011, the Cypriot economy was dealt a big blow because our banks were excessively exposed to Greek government bonds. Overnight, we lost €4.5 billion or 25 per cent of our GDP. In effect, the savings of Yiorgos the pensioner, Eleni the widow, Anna the disabled octogenarian were transferred to Greece so that some Greeks could play the big-spenders at bouzouki nightclubs, so that a hospital with a garden of 400 square metres could employ 4 gardeners and so people that died many years ago could carry on receiving pensions. Even a five-year-old could see the gross unfairness of the Greek haircut.
Perhaps, equally important is the domino effect. If part of the Greek debt was written off (for a second time) it would encourage other countries of the eurozone that have a big national debt to demand ‘equal treatment’. By what rationale would the EU and ECB reject their a demand?
In addition, it is doubtful whether another debt hair-cut would, in the long term, be beneficial to Greece. A country with two haircuts in four years would have to pay much higher interest, when it borrows money from the markets over the next decades, than other countries with a prudent (and historically proven) fiscal policy.
Greece could, justifiably, hope to negotiate more favourable terms on its foreign debt. For example it could secure a longer repayment period for the loans it has be given, from 30 to 50 years and a reduction of the interest rate by 50 points, as the Tsipras government has been demanding. But at the same time, there is a pressing need for the structural reforms that would radically improve the education system, the public sector, the justice system, the environment, which would new investment, competitiveness and tax collection.
Only if the structural reforms turn into a Pool of Siloam would Greece be able to emerge trustworthy and have the ability to resist the recurring economic crimes.
George Koumoullis is an economist, social scientist