Up Front

Facing Grexit Again?

Theodore Pelagidis

According to BlackRock’s quarterly Sovereign Risk Index Greece is among the countries most likely to go bankrupt.[1] That follows the relatively recent statement of the German finance minister Wolfgang Schäuble that Greece “..would have to continue to meet the troika’s demands for reforms or risk leaving the eurozone.”[2] The statement reflects disquiet among creditors to recent efforts by the Greek government to relax fiscal austerity measures to calm voter anger, following the defeat of the coalition government in the recent European elections (interpreted by many as increasing political/country risk–the radical left “Syriza” could possibly take power in the next elections). The use of such strong language is not just surprising; it also brings us back to the 2012 ‘Grexit talks’, a time in which the country was facing the real possibility of leaving the eurozone. Last week, Focus magazine reported that Nonperforming Loans (NPLs) in Greek Banks pose a serious threat to the “Grecovery” prospects, currently at the sky-high level of 33.5 percent, up from 31.9 percent at the end of 2013.

Much has been said about the results of the austerity program implemented in Greece by the ‘Troika’. Heavy taxation during 2010-2012 resulted in a cumulative inflation rate of almost 10 percent which substantially hit exports and competitiveness, undermining the internal devaluation target of increasing competitiveness at the same time.

In the meantime, the repeated postponement of hardcore structural reforms and privatizations let the burden fall almost entirely on the private sector through a storm of heavy taxation and huge wage cuts. As for the extraordinarily high level of wages in particular, these were mainly nested in the clientelistic, partitocratic state, notorious for excessive spending and corruption, and not in the productive sector of the economy. Wages were never the main problem of the productive private sector; red tape, legal ambiguity and state-sponsored monopolies were the problem.

But even for the sake of argument, we accept that one of the Greece’s deep-rooted problems was the extended malfunctioning of the labor market in the private economy: It is a textbook policy mistake to put labor market deregulation before any product–and professional–market liberalization. This is especially the case when all objective evidence suggests rent-seeking driven regulation, not wage costs, is the real drag on competitiveness. Otherwise, be prepared to see producer prices move downwards with a three year delay compared to costs, and then you will need a larger-than-planned reduction in real wages to compensate for loss in competitiveness. It is no coincidence that even today, after more than four years of austerity and 25 percent GDP decline, the creditors are asking for even greater reductions in real wages, despite a positive current account, and indeed underestimating once more the impact of falling demand to GDP and, thus to debt/GDP reduction prospects.

So, should one just put the blame on Minister Schäuble, the Troika and creditors for the mess? No, not really. The true story is that the creditors had, and still have, to deal with a very complex economic and political situation both in Greece (partly because of their policy mistakes) and in post-election Europe. However, there is still some room for maneuver to correct or recalibrate hugely misguided and lopsided policies. Furthermore, since Minister Schäuble is the master of the creditors still holding the power to put additional pressure on domestic politicians, it would be best to avoid a new round of “Grexit talk” that would only bring the productive base of the country, or whatever remains of it, back to the nightmare of 2012. Instead, he could use his power to help to bring, at last, some real structural reforms in product and professional markets and then let the markets do their job. That, in the end, will enable the country to pay back as much of its debt as possible.

[1] See more at:

[2] Focus magazine, June 1st,