Why should anyone invest rationally in Greece?

Debate financial crisis in Greece: like a beaten cow

In Greece, the crisis is far from over - especially because the euro zone is constantly threatened with “bankruptcy”. This creates a vicious circle.

Athens: A euro flag flies in front of the parliament Photo: dpa

During the euro crisis, Greece was always good for a legend. The latest version is that the country is now "saved"! The aid packages expire on August 20th, after which the Greeks are supposed to finance themselves.

Two facts are enough to shatter this wishful thinking: Greece has the weakest growth in the euro zone - but has to pay the highest interest rates if it wants to borrow from banks. That can't work. High real interest rates can only be financed if growth is also high.

This connection is so simple that even the German government could not ignore it. So the euro zone tried to pimp the Greeks for the financial markets.

First measure: At the EU summit on June 21, it was decided that the Greeks would receive further easing of debt servicing. Interest and repayments were partially deferred until the end of 2032 and the terms stretched so that the last payments are not due until 2056.

The intention is clear: when public credit gets cheaper, bankruptcy is less likely - which in turn depresses private banks' risk premiums and makes lending rates more affordable. Theoretically. In practice, the interest rates that the Greeks would have to pay on the financial markets are still too high.

A “treasure chest” for Greece

Secondly, it was therefore decided that Greece would receive a “treasure chest” worth 24.1 billion euros. These funds would be enough for the Greeks to meet all payments by mid-2020.

So Berlin and Brussels know exactly how unlikely it is that the Greeks will be able to finance themselves. Otherwise they would not have offered a treasure chest. But no one wanted more bailout packages, so one would rather hope that Greece will somehow see rapid growth by 2020.

Never before have a people had to save as much in peacetime as the Greeks

Unfortunately, precisely this growth is unlikely because the eurozone is still making absurd austerity targets. The key figure is the “primary surplus” - that is, the plus in the national budget if interest and repayments are not taken into account. This primary surplus is expected to be 3.5 percent of economic output in Greece by 2022 and then 2.2 percent per year by 2060. A country has never produced permanent surpluses of this magnitude. Why, of all places, should poor Greece succeed in what is not possible even in rich Germany?

The International Monetary Fund therefore soberly states that the Greek debt is “unsustainable” in the long term.

The idea has always been: Greece should save itself from the crisis. Although this strategy did not work, the next round of cuts is imminent. In January 2019, pensions are expected to fall again, although they have already shrunk by 60 percent - and often feed entire families because the unemployed children have moved to their old parents.

Government spending fell by 30 percent

Never before have a people had to save as much in times of peace as the Greeks. The Austrian economist Stephan Schulmeister has compiled the figures in his new book “The Path to Prosperity”: In Greece, government spending fell by 30 percent between 2008 and 2016. In Portugal and Spain, on the other hand, there was a small increase of 2.8 percent, in Italy of 6.2 percent.

In Germany, government spending even increased by 24.3 percent between 2008 and 2016. Converted into billions: If the Germans had to save just as much as the Greeks, the public budget would now be missing 587 billion euros. Germany would have sunk into chaos long ago, and the AfD would have taken over the government. The real miracle is that the Greeks are still holding on in an orderly manner.

The core mistake is that the German government regards the economy as a zero-sum game: if you have debts, you should pay them back. Unfortunately, we lose sight of the fact that only those who have income can pay. Without high growth, Greece cannot pay its loans, but nobody is interested in how the Greek economy can be stimulated. Berlin behaves like a farmer who doesn't feed his cow but expects plenty of milk. In truth, Berlin is behaving even worse - like a farmer who also beats his starving dairy cow. Many of the difficulties in Greece are not homemade - they are created by the euro zone.

State bankruptcy threatens

The main problem: There are constant threats of bankruptcy if Greece does not finally get on its feet. But this creates a vicious circle. Because bankruptcy is conceivable at any time, the financial markets demand risk premiums. Real interest rates are promptly far higher than the growth rate, which makes a sovereign default likely. A “treasure chest” of 24.1 billion euros cannot help. On the contrary. The treasure chest reinforces the impression that bankruptcy is to be expected as soon as the billions are used up.

One has to start with the cause that is causing Greek interest rates to skyrocket - and remove the uncertainty. The euro zone must clearly signal that it will not send any member country bankrupt. The instrument actually exists and is called the ECB.

Central banks were once established to prevent panic among investors. This includes buying up the papers of your own governments if necessary. The ECB also purchases the government bonds of all euro countries - except the Greek ones. So investors act rationally when they consider Greece unsafe and demand risk premiums. Because the euro zone is doing everything to keep Greece insecure.