I am sure you have heard all about Greece’s remarkable turnaround, its metamorphosis from basket case to success story, from Europe’s laziest student into the best in class.
However, this article is not about Greece. It is addressed to Europeans who might suffer what Greece has if they are conned into emulating the Greek “success story.”
Today, Greece is the money men’s new El Dorado. They travel to Greece, buy a distressed mortgage for 5 percent of its face value, evict the family living in the mortgaged apartment, sell it for 50 percent of the loan’s face value and, presto, they have made a 10-fold return. Then they plow some of the returns into Greek public bonds to collect a nice little risk-free spread over German bunds, thanks to the European Central Bank’s continued support of Greek government debt.
Europe’s big businesses are basking in Greece’s golden glow, too. With money lent by Greek banks, which Greek taxpayers recapitalized with huge loans from other European taxpayers, a German state-owned company bought 14 lucrative airports (including those of Mykonos and Santorini), refurbished them with free European money earmarked for Greece, and is now collecting spectacular returns that are repatriated to Germany via Luxembourg.
Meanwhile, a new Greek debt bubble is powering real growth rates higher than the EU average, propelling the country back to the inanity of the debt-fueled mid-2000s, when the entire Western financial press was celebrating Greece’s arrival at Europe’s “hard core.”
If you are in the business of using money to make money without producing any real new value, what is not to love? Greece is the apple of your eye. Why allow the grim reality of most of the Greek population to get in the way of your elation? Why care that, although national income in euros is about the same as it was in 2009, aggregate disposable real income is 41 percent lower and real wages are down 30 percent? Why fret over citizens’ arrears to the state, which have skyrocketed from 21.5 percent of GDP in 2009 to 49.2 percent today, or over the price of electricity, which, following privatization, has risen by 85 percent over the same period, or over rents shooting up 93 percent?
Other development indicators paint a similar picture. For example, the number of births crashed from 118,000 in 2009 to fewer than 63,000 last year, and Greece dropped 53 places in the Reporters Without Borders’ World Press Freedom Index.
To financiers and big business, these sad numbers seem like extraneous noise around a beautiful signal: their fabulous rates of return. And Greece could be anywhere, which is why this article is not really about the Greeks. It is, rather, a reminder and a warning for my German friends.
Following the introduction of the euro in 1999, money markets decided it was a good idea to induce debt-fueled but unproductive growth in a Greek economy already in the process of deindustrialization. At first, they were rewarded handsomely with elevated returns reflecting high, but unsustainable, growth rates — a phenomenon that caused the world’s financiers to flock to Greece and slap “triple-A” ratings to its public and private debt. Then came the reckoning, which turned into a tragedy in 2008, when the subprime mortgage crisis in the US nearly crashed the global economy.
Cut to Germany now. Following a decade of almost no net productive investment, the country has been deindustrializing for a while already. This week, the German government, having torn up its constitutional debt brake in March, persuaded the European Commission to rubber-stamp Germany’s budget, which will require 850 billion euros (US$988 billion) of new debt (equivalent to 20 percent of GDP) over the next four years. That debt build-up is a problem, because the money will be spent on things that will not generate new incomes (such as weapons, and essential maintenance and replacement of railway infrastructure).
To persuade the commission to sign off on this gross violation of the debt limits contained in the EU Stability and Growth Pact, Germany did something extraordinary. In the early 2000s, Greece persuaded the EU and the credit rating agencies that unproductive investments that exceeded the EU’s debt limits were a great idea. Today, Germany’s government has persuaded the commission to factor in its higher growth projections — even though those projections assumed the commission’s approval of its massive new debts.
Can they be serious? Have they learned nothing from the Greek debacle of the 2000s? Although a growth spurt will certainly come as the torrent of new debt enters Germany’s markets, can they not see that these billions in extra spending will not generate sustainable new long-term income?
Maybe Germany, unlike Greece in the 2000s, will be spared a new global crisis. Even so, at a time when Europe is being squeezed between US President Donald Trump’s tariffs and China’s surging quantities of high-quality, technologically advanced exports, it is sensationally irresponsible for Germany to display the same indifference to the quality of its debt-financed investments as Greece did 20 years ago. It was the wrong policy for extricating Greece from its backwardness then, and it is the wrong policy for extricating Germany from its malaise now.
However, that is not where the lessons from Greece end. Recalling the inhuman terms of surrender Greece’s creditors imposed after the country’s bankruptcy, it is not hard to imagine a fallen Germany becoming global financiers’ new, much more lucrative El Dorado. There, too, the vast majority of the population will suffer impecunity and indignity, while the financial press celebrates the newest “success” story.
Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 party and a professor of economics at the University of Athens.
Copyright: Project Syndicate
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