The Carthaginian Bailout

March 10, 2012

A tourist does not experience the real Greece, but that does not mean that he or she doesn’t have an opinion.  Sheltered from real misery and prevented by language from understanding what is going on doesn’t stop a tourist becoming an instant expert.

Recently, sitting around a pool at a boutique hotel in Santorini, I meet some of these instant experts.  One complained about the bus station, staffed by three men, none of whom was willing to provide simple information on the timetable.  Once on the bus, the driver waved people on board, where they found a separate ticket seller walking up and down the aisle, proving how overstaffed the public service was.

Another told a story of being pick-pocketed in Athens near the Acropolis.  Hotel staff told her that she needed to report the incident to the tourist police, which was located nowhere near the Acropolis. She had to wander down some narrow side streets, and, despite a lack of signs, finally tracked down the tourist police.  After climbing to the second floor of a nondescript building, she found three policemen uninterested in her troubles watching soccer.  She concluded that they were a lazy lot, unwilling to get on the beat to catch the pickpockets.

A third story, told by a young German backpacker, involved the men sitting in waterfront cafes in Piraeus playing dominos.  Not so old, he concluded, that they were retired and living off a generous state-pension, for which his country was footing the bill.

It is not that the observations were incorrect, but stories like these have become the justification of why Greece needs to be punished for its lazy, profligate ways.  The bailout plan, however, will cripple Greece for a generation and has uncanny parallels to the Treaty of Versailles, in which the allies extracted heavy reparations from Germany for starting the First World War.  The result destroyed hope and nurtured the rise of the fascists.  Little wonder that John Maynard Keynes called it the “Carthaginian Peace.” Did the Germans owe the allies reparations?   Legally, a case could be made.  But it ended up costing the allies much more when they were dragged into another costly war twenty years later.  Having learnt their lesson after the Second World War, there were no reparations to be paid.  Instead the Marshall Plan helped rebuild Germany.

But what to do with Greece?  Unfortunately, it does have a corrupt political system and a public service that is self-serving.  Reform is necessary and even selling off government assets is warranted.  But the choices should be governed by how to create a healthy economy, not how to pay of debtors.  That ship has sailed.

Take the example of privatizations.  If state assets were sold off tomorrow, which is what the European Union wants, I can guarantee that they will be sold off in a fire sale, partly because this is not the time to sell when world economies are flat, but also because it will be overseen by corrupt officials.  Done this way, expect to see a repeat of what happened in Russia during the 1990s when oligarchs emerged as the owners of large parts of the economy.  That brings me to my second reason for delaying sell-offs. Many of the assets are monopolies that private owners will exploit to gouge consumers.  Rather than creating a more efficient economy, a sell-off under these conditions will be a disaster.  What is needed is to create a regulatory structure to manage natural monopolies, break up other assets, and encourage competition.

My conclusion is that Greece needs help to not only to maximize returns from those assets it must sell off, but also restructure its economy so it can recover quickly.  What is required is a new Marshall Plan with experts called in, not to watch over a fire sale, but to help create a new economy in which the Greeks will have a future.  In the interim, and this is the hard part, money needs to be pumped into the economy to provide a social safety net, which will help unemployed Greeks survive these adjustments.  In return, the government will have to bite the bullet and accept outside help. Any loss of sovereignty will be a small price to pay for a better future, certainly one better than is currently on offer.

At the moment, the average Greek faces an abyss with little hope of every climbing out.  Little wonder they are protesting.  Given a pathway that offers hope, they are much more likely to embrace reform, which will work out well for everyone.

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