Greece on the run..by Ektoras

During the last year structural reforms have taken place in Greece. While these reforms are noteworthy, they have been little noted by markets and the political world in general. the country continues to undergo a painful adjustment and the challenges stemming from unfavourable debt dynamics and a debt overhang issue are still in place. Greece has to adopt significant structural reforms in order to keep existing!

Over the course of the last year, the Greek government, under the guidance and supervision of the so called "troika" introduced a set of large-scale reforms addressing structural issues that have encumbered the Greek economy for almost thirty years.

In less than a year, the Greek government has:
-completely reformed the pension system, raising the pension age to sustainable levels, cutting down on pension costs and separating pension from health care costs, and is set to bring to the parliament large-scale reforms to cut down on health care costs, including the mergers of hospitals and the electronic registry of prescribed medication.
-reformed labour markets allowing for more flexibility in the hiring/firing process and significantly reducing the power of the collective bargaining processes.
-started and will soon complete a full liberalization of product markets eliminating barriers to entry and minimum compensation laws for 150 professions.
-reformed and centralized prefectures, halving the size of local administration.
-announced large-scale restructuring of loss-making corporations, significant privatization plans and a shift toward more proactive use of public-sector assets.

The size and scale of reform over such a short period of time is noteworthy. Despite some popular dissent, the government still enjoys a comfortable (by Greek standards) majority in the parliament and remained the leading party in the recent local government elections in November.

The government seems determined to proceed with continued reforms in the year ahead. Specific items on their agenda are likely to be the increase in tax revenues through higher tax yield and the increase in efficiency/reduction of costs and size of the public sector.

The markets, by common sense, expect that there will be a shift in the economy’s overall structure, productivity and competitiveness in the years to come. the government's bet is the growth factor which need to turn positive in 2012-2013.

it is unfortunate that the markets seem to be skeptical and this may be noted on the Greek government debt spreads. hΔopefully in the years to come the -expected- positive outcome will push spreads down and will allow greece to reach the markets again.

the financial and economic reforms are a must. politically wise the problem is bilateral. on the on hand the government has not explained to the Greek people what it really aims and on the hand the opposition is sinking into populist speeches blaming the government for any measures that it takes.
worth noting though that theoretically the opposition is supposed to be a central right,liberal and market friendly party...as said..theoretically..

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The Germans are back.. By Ektoras

Athens, Greece might look like the focus of the first euro crisis, but the real center is northwest in Berlin, Germany.

The most infamous monetary crisis resulted in the collapse of the pound during 1992 when Soros, supported by a host of good economic reasons, drove the pound away from the ERM. Although the pound was devalued by 30%, UK began the longest uninterrupted economic boom in the country's history. In 2002, London was the financial center of the world. A more recent currency crisis is the one being experienced in Latvia where an effort to hold the lat within its narrow ERM bands has resulted in extreme economic distress that has caused the economy to contract by 20%. Although Latvia has its own currency which is tightly tethered to the euro, the events there could be very similar to those that will unfold in Greece. Unfortunately, Greece is in a worse spot. The Latvian economy is very open and the Greek economy is relatively closed and its exports equal only 28% of its imports. Latvia can become a mini-exporting powerhouse, saving themselves, but Greece cannot.
Another issue is that Latvia has a rather terrifying next door neighbor who occupied the country for 70 years and still looks threatening. For them the euro is a security blanket that will protect them from being re-absorbed by Russia, but the Greeks have no reason to starve themselves and lose their savings, just to be part of a super-state run by far-away overlords in Brussels and Frankfurt.

Although the Greeks are faced with choice of penury and diminished prospects for the future, the instigators of the Greek financial crisis, and the crises to come in Portugal, Spain and Italy, are the Germans. It is the dramatic increase in German productivity that has driven the current account balances of these countries into deep deficit. To balance its books against the rest of the EU, Greek domestic demand would probably have to drop by about half, an obvious impossibility in a modern democracy. Stark, both German and a member of the ECB board, commented this week that Greece had overspent and their budget deficit was at fault; "Greece needs to catch up on its homework." Maybe the Germans have been studying too much, as their productivity growth far outshines that of France, Italy, Spain, and Portugal as well as Greece. All of these countries have seen their current accounts decline against the Germans, and all will end up in similar spots as Greece at some point in the future. The single currency structure means that any adjustment in relative competitiveness must come out of productivity growth, which is very difficult to manage. As higher productivity implies more work for the same wages, it is a deflationary concept and needs to be offset by the money illusion. This persistent inflation makes labor feel it is gaining at the same time 'capital' is gaining through productivity growth. The balance between productivity and inflation is a very tricky one, but when inflation is eliminated, productivity growth becomes drudgery at best and the seed-bed of social discontent at worst. With nothing but deflation ahead in its effort to dramatically increase productivity, the Greeks will see political and social unrest. The odd-man out here is not Greece, which is joined by many other countries, but Germany. If the euro is going to survive, it is Germany that must change its policy and UN-flexible way of imposing economic and budgetary restrictions..

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