Greeks face a Homeric dilemma

June 11, 2012

Odysseus would recognise the dilemma faced by today’s Greeks as they must choose either the pain of sticking with the euro or the chaos of bringing back the drachma. The Homeric hero had to steer his ship between the six-headed sea monster, Scylla, and the whirlpool, Charybdis. Avoiding both was impossible. Odysseus chose the sea monster, each of whose heads gobbled up a member of his crew. He judged it was not as bad as having the whole ship sucked into the whirlpool.

As Greece heads to the polls on June 17 for the second time in just over a month, none of the options it faces are attractive. The economy has shrunk about 15 percent from its 2008 peak, unemployment stands at 22 percent and further austerity and reform are required as part of the euro zone/IMF bailout. But the lesser of two evils is staying the course.

Some of this misery was inevitable. Greece’s current account and fiscal deficits each reached around 15 percent of GDP in 2008 and 2009, and had to be cut. But successive Greek governments have managed to make the situation worse than it needed to be.

When Odysseus had to pass by the sea monster, he told his crew to row as fast as possible and not stop. That way, each of Scylla’s heads only had time to munch one man.

By contrast, today’s Greeks have dawdled. Confidence in the country and its political class is shot to bits, both at home and abroad. Capital is fleeing, investment has vanished and tax-dodging has become even worse than it was – which is saying a lot. The government isn’t paying its bills, nor are many companies. As a result, Scylla keeps gobbling up more men.

Terrible as things are, the current situation is not hopeless. The budget deficit, before interest payments, declined by 9 percentage points of GDP in 2010-2011. The economy is also getting more competitive: unit labour costs, which shot up vis-a-vis Greece’s euro zone partners in the first decade of the single currency, had by the end of last year recouped half the lost ground. They will have fallen further since the minimum wage was slashed earlier this year.

What is now needed is a strong government. It should embark on three main tasks. First, continue the reform programme, and get serious at last on fighting tax evasion. Second, negotiate with the euro zone/IMF a longer period to eliminate its budget deficit and secure investment to boost short-term growth. Third, negotiate another debt reduction plan.

If such a government were formed, confidence could gradually return and the economy could stop shrinking. The experience of the Baltic countries – Latvia, Lithuania and Estonia – shows such reforms can work. After the credit crunch crisis, GDP in the three countries fell by between 15 and 21 percent but has since partly recovered.

But wouldn’t going back to the drachma be better? Some commentators point to countries like Iceland, which restored its competitiveness by a massive devaluation following the credit crunch and only suffered an 11 percent fall in GDP. Wouldn’t devaluation be a quicker and less painful way for Greece to get back in shape?

The answer is no – for two reasons. First, the dislocation caused by bringing in a new currency would be much more severe than devaluing a currency that already exists. The banks would temporarily run out of cash and there would be multiple legal disputes over who owes what, which could gum up the economy for years.

Second, Greece is receiving an extraordinary amount of cheap money as part of its second bailout plan: 130 billion euros, or 88 percent of GDP. This gives it time to cut its twin deficits. If Athens left the euro, it would be lucky to get a fraction of that cash. The country would then have to balance its books immediately.

An even harsher fiscal squeeze would exacerbate the vicious spiral. The alternative would be to print drachmas to fill the hole in the budget. But such monetary financing would lead to rapidly rising inflation, which would already have been given a boost by the devaluation. Lucas Papademos, the country’s former technocratic prime minister, predicted last week that inflation could reach 30-50 percent in such a scenario.

Meanwhile, Greece is hugely dependent on imports not just for final consumption but also to keep its economy going. It imports oil, medicine, food. If it had to slash imports suddenly, industry would grind to a halt. Even tourism, the mainstay of its economy, which accounts for 16.5 percent of GDP, could suffer if hotels promising a five-star experience delivered a three-star one. GDP might fall another 20 percent, according to Papademos.

Social unrest would worsen, with street battles, attacks on immigrants, vigilante law enforcement and major strikes. That would further deter the tourists. It would also make it harder to put together a sensible government. The field would be open for populists and extremists. This way leads to Charybdis.

To avoid this menace, the electorate will need to give a strong leader the mandate to pursue the current course more vigorously. Unfortunately, neither of the front runners in next Sunday’s election – conservative Antonis Samaras and radical leftist Alexis Tsipras – is a modern-day Odysseus. And neither looks able to secure a decisive win. Unless a third election can produce a better outcome, the drachma will probably return, and the Greeks will get sucked into the whirlpool.


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On paper, it may seem like the situation is not hopeless. But here in Athens, the reality is really much different. The human cost of this crisis will take generations to undo.

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Posted by matia14 | Report as abusive

“One path leads to despair and utter hopelessness. The other to total extinction. Let us pray we have the wisdom to choose correctly.”

Woody Allen

Posted by Janelasdedeus | Report as abusive

But O was just doing what Kirke told him to do, whereas, in this case, there is nobody who can give sound advice.

Posted by AussieYank | Report as abusive

Great analogy, Hugo. However, it appears that the Greeks are, timidly, rediscovering their ancient political ethos. Never have I witnessed more external, blatant, threat scenarios, intimidation, and interference in a national election, than what I am witnessing from the European community in this election.

Fact is, Greeks are not buying it. Clearly, the continued rise of “Syriza” is a case-in-point. Clearly, intimidation by European states is backfiring. It was not till “Syriza” raised its ugly head on the Greek political scene, that the German-led EU began to even consider the renegotiation of the failing, hasty, harsh, austerity measures of loan agreements. Clearly, the world is practically universally condemning the experimental, first domino, “lash and hammer” austerity measures that resulted in a constricting economy, the reduction of the income and tax basis (you can only reduce 500 euro salaries and pensions so much), disastrous unemployment (closer to 25%, now), the reduction of investments, the compounding of debt, and, great social and political unrest.

The two, former-leading national parties, Nea Demokratia and PASOK that corruptly governed for the last 30 years, accepted the austerity measures with little effective negotiation, and led the country to this impasse. It is, therefore, no small wonder that the Greeks are turning to other parties for leadership. Note, though “Syriza” has actively campaigned on a platform that calls for the renegotiation of the austerity measures, it has never stated any intent to leave the Eurozone. The “drachma” option appears to be an option that the EU continues to raise, and will materialize only if the EU continues to bury its head in the sand. Clearly, since austerity measures are failing, the prudent thing to do is to renegotiate and establish attainable goals. Clearly, a moratorium, as you suggest, will also be necessary.

Although Homer is a great analogy, many of the social and economic ills that plague Greece are most-likely straight out of Hugo; that is, Victor Hugo.

Posted by lepantos | Report as abusive

Greece’s problem is that, like every other country, it is a part of a system that doesn’t work. And im not referring to the effect so much as the cause. The money for labor system doesn’t work, it is a system that should have disappeared at the beginning of the industrial age but instead has been kept and forced upon people by those who use it for power. Greece as an example, the best thing for Greece would be to leave the euro as it does nothing more than give power over the country to a foreign bank whos interests are not the peoples best interests. an un-democratically elected leader to approve a hundred+ billion dollar loan to a country that can not afford to repay it? Its time we truly chose people over money as we no longer need it and people are a far greater asset.

Posted by colelions | Report as abusive

The assumption regarding the collapse of imports assumes non e of the huge amounts of flight capital will make its way back into Greece as future working capital.

I expect that in the event of a Grexit once some stability returns so will quite a bit of capital.

It will be very rough on the poor and people without and externally denominated largess.

Posted by AlisdairWilkes | Report as abusive

I am not Greek. But over 20% unemployment is depression era figures. Therefore, belt tightening is out of place, unless one wants violence and security costs. There needs be temporary rules speeding the work around and supporting the unemployed by make work programs so they say they have work experience. Since Greece is a small nation that must trade she has to trade for many things but only with those nations that allow export subsidies and other restrictions on trade like embargo on importing of luxury goods.

German trade and fiscal rules are not suitable for a basket case like Greece.

Posted by SamuelReich | Report as abusive

The two belt tightening things that nations like Greece and Spain needs are: High real estate taxes and high mortgage rates. They got into the mess to large extent but borrowing to do things that only in long run raise real estate prices.

That no one talks about. Other nations with big real estate binges need it also such as the USA and Ireland remember the sub-prime recession here.

Posted by SamuelReich | Report as abusive

(quote) “two belt tightening things that nations like Greece and Spain needs are: High real estate taxes and high mortgage rates.”

that would be a surprisingly pleasant development
taxing speculative profiteering is good blood sport

Posted by scythe | Report as abusive

(quote) I expect that in the event of a Grexit once some stability returns so will quite a bit of capital. (end quote)

That has got to be the most laughable comment I have ever seen. Perhaps you genuinely believe that capital is inherently stupid, equivalent to dumb cattle who obediently go where they are told to go, but I believe that is far from the case. As an investor I look first and foremost for stability, followed by closely scrutinizing potential investment recipients to see if their governance fits with my philosophy of wise and LIMITED government intervention, good governance and recognition that it is the private sector that creates wealth and which must be left unfettered by harmful, misguided and damaging government policies.

Why in God’s name would I, an investor, willingly choose to invest my capital in a place governed by a radical socialistic / neo-Communist regime that coddles militant unions, smothers the economy in harmful regulation, doles out cushy government jobs with guaranteed LIFETIME employment to its incompetent supporters and refuses to cut spending or make even the most halfhearted attempts to balance its budget?

I would sooner take my money and put it in my mattress, burn it in my wood stove or make paper airplanes out of $100 bills, than invest it in a place whose Communist leaders clearly regard me as an idiot and a cash cow to be ‘milked’ dry.

Better yet, I could simply take my money and invest it in bellwether currencies are the hallmark of financial safety and stability – the British pound sterling, the German government bonds or what is still the world’s benchmark currency, the United States Treasury bill.

Posted by WillyWonka787 | Report as abusive

Clearly, gentlemen, an accomplished individual as Mr. Hugo Dixon is, would enjoy reading the comment I posted on this article. Apparently, some very small-minded individual on your staff decided otherwise. Why do you not at least forward my comment to him, and allow him to make that decision. I will respect Mr.Dixon’s decision and mention same to him, next time I see him.

Posted by lepantos | Report as abusive

(quote) “I expect that in the event of a Grexit once some stability returns so will quite a bit of capital.”

I am frankly mystified as to why anyone would seriously expect such a thing to happen. Capital may be many things, however “foolish” and “stupid” generally are not among those things. Capital furthermore has a long memory for having been slighted. Why capital would be in any way, shape or form even remotely willing to return to a country that has a long history of reneging on promises, lying about its finances, stiffing foreign investors, nationalizing (stealing) businesses without compensation, firebombing businesses, murdering private-sector businesspeople and electing rabidly anti-western, anti-NATO, anti-capitalist governments is a mystery which no one seems to be able to answer.

Capital is not a flock of brainless cattle that dutifully flee when necessary only to turn around and come back wne ‘ordered’ to. If there is no worthwhile or compelling reason for capital to run the enormous risks of investing in a corrupt and disintegrating Greek economy, then capital simply will not do so. The investment returns to be had by investing in stable, comparatively risk-free economies may be low, even zero, but even a near-zero rate of return on German bonds is preferable to investing in a Greek drachma that will quickly be competing against Kimberly Clark and Procter & Gamble to supply the European continent’s need for toilet paper.

Even assuming that Greece’s return to the drachma is less catastrophic than is widely expected, at the end of the day, after the traumatic currency changeover has occurred, what realistically will have changed? Greece will still be running a current-account deficit; they still spend more than they take in, so much so that they cannot even fund their government’s basic operations. Their tax collection efforts will still have hit a wall of resistance. Their tangled thicket of oppressive anti-capitalist and anti-business regulations will remain uncleared. Their heavily socialized labor market will remain over-regulated, uncompetitive and held captive to special interests, chiefly the Communist-led labor unions. Their whining and overly coddled populace of professional victims, accustomed to champagne tastes on a beer-and-vinegar budget, will continue to blame capitalism, banks and foreigners for their situation rather than making rhe painful but substantive changes that are necessary to fix the problem. In short, little to nothing will have changed; the currency will be different, but the problems that led to the crisis will still be there, because the Greeks refuse to grasp the fundamental fact that they cannot realistically support a Northern European lifestyle in a country that is rapidly becoming the Cuba of the EU.

As a seasoned investor, I look first for safety and stability, followed by investment returns. Given a choice between investing in an economy possessed of financial transparency, a functioning legal system, acceptance of the rule of law and the welcome recognition that the private sector and capitalism are the greatest force for generating wealth on the planet, versus investing in a collapsing economy governed by a corrupt political class, I would sooner drive down Wall Street throwing $100 bills out the window of my car or paper my bathroom with currency than invest in Greece. There simply is no reason to take the risks of investing in worthless drachmas for little to no reward while being hated by the Greeks for that very investment, when I can invest in any number of ffinancially sound currencies – the pound sterling, the German government’s bonds, or what is still the world’s reserve currency, the U.S. dollar.

Posted by WillyWonka787 | Report as abusive

People of Greece,

What you endure now is what we had endured in 1998, Indonesia, currency crisis coz of the country debts, jobless & then came May’98 riot where people killed, raped & burned alive. But infact it was only the beginning of the rotting nation…here’s the phase you will experience on next; the country will recover at swift, companies re-opening their offices, stores are at more, manufactures run their machine, people working, why?…coz everything seems cheaper for investors to invest, more opportunities wide open for multinational companies than before…but self employees, local stores, local markets, home industries, farmings, were lessen & mid-lower class people are grew bigger & mostly living as underpaid employees, but happy coz crisis is over, but only a harder environment, but still can work & live..but where does the money go??? once again the multinational companies take their margin out of your pocket abroad, domestic companies take loans again & government kills local stores, local markets, home industries & farms by letting more companies to take over the businesses & the lands…1 thing you people must take a look at…your politicians/ ruling party…more corrupt over the budget, killing own economy backbone than ever & the worst, letting go 1 generation to fall under non budgeted education plan. There must be a tough law authority to control politicians on budget, projects & politics (just shoot them if you had to), bank rules tightening, trade house commission to protect local/ mid-class businesses & local economy sector activities as the major tax payer. SELF EMPLOYEE IS THE WAY TO THE INDEPENDENT FREEDOM & FINANCIALLY INDEPENDENT..NOBODY CAN MAKE YOU BOW TO & NOTHING CAN LET YOU DOWN.

Posted by laimenaboy | Report as abusive