Greece votes “No,” leaving us where?

When Yanis Varoufakis left academia to take up his position as Greece’s finance minister after the far-left electoral victory which brought Syriza to power, he said words to the effect that – if things didn’t work out – he could always go back to university.

“I mean, I really don’t want to be in this office … I will go back to my book about Europe, which is half-finished. It’s very difficult to find an ending when I am still in this job.”

I took away from that soundbite that he, akin with many of his ivory-tower colleagues, is unsuited for the real world and would abandon the consequences of his actions as soon as he got bored.

Today, he did just that, saying, “I wear the creditors’ loathing with pride.”

Along the way, the behaviour of Syriza has baffled everyone. Not their concerns about the impact of austerity in Greece, but their way of negotiating with their EU- and Euro-area partners.

Consider that, until just over a week ago, there was very little difference between the negotiated positions of the EU and Varoufakis and Prime Minister Alexis Tsipras. Then, calling the Germans Nazis and fascists, they called a referendum to ask whether Greeks agree with the EU proposition. They told their countrymen to vote no. They defaulted on their IMF loan repayment, while the IMF was trying to get the EU to compromise in the Greeks’ favour. They declared their EU partners terrorists. They asked for a new agreement with the EU, while telling them they’d still tell their countrymen to vote no. Their countrymen have now voted no.

Even if the EU negotiators had been amongst the most astute and level-headed bunch, they would have been nonplussed. Instead, being ordinary humans with their own electorates to answer to, they’re hopping furious.

As Syriza celebrate their victory after a rather poisonous week of hurling abuse at their EU partners, and Varoufakis retreats to his university to continue teaching Marxism (where, hopefully, he’ll be paid in Drachma), Greece and Europe are exactly where Tsipras and Varoufakis wanted things.

The question is: where exactly is that?

Greece right now

Let’s get the good news out the way immediately. The cherry tree in our garden has just produced its first batch of cherries since we moved in four years ago and – boy – was it worth the wait. Its branches are bent low in an abundance of cherries which are not only enormous (like small plums), but stuffed so full with flavour it’s like a mini-taste sensation.

Right, with that bit of excitement out the way, let’s get on to Greece.

It is now, as a write, almost 24 hours after the polls closed and the “No” vote released.

Yanis Varoufakis and Alex Tsipras had promised that within 24 hours after getting their decisive “No”, they’d have a new deal, and the banks would all open as normal on Tuesday.

A few hours ago, the Eurozone finance ministers said, “Nuh, so where’s your new proposal?” Since, obviously, the pre-existing proposal had been rejected, and Greece has yet to present a new one.

Varoufakis’ only comment on this has been, “I said it was possible that it could be resolved in 24 hours, not that it would be.” But he said it after the polls closed, so not sure how that helps the Greeks who voted in the expectations of resolution.

The sticking point for Syriza was – in one word – pensions. 50% of Greece’s pension system is funded directly from the state, equivalent to 7% of GDP (or, since Greece’s GDP is sinking, €14 billion annually).

Contrary to what Tsipras and Varoufakis have said, the creditors haven’t asked for reductions in individual payments. They have asked for major changes to the retirement age. Up till the start of the crisis in 2010, Greeks could retire on 80% of their final salary from age 55, after as little as 35 years of work.

You know that fantastic Mediterranean diet that’s supposed to guarantee longevity and health? That one? Yip, Greeks have it, and they have an average life-expectancy of 80. So retiring at 55 means about 25 years of pensions for a person who worked 35 years.

And the Greek system is “final salary”, not “defined contribution”. It’s not the individual’s payments that fund their retirement, it is the taxes from everyone currently working who has a job.

Which is where the Eurozone leaders demanded that the retirement age rise to 67. Greece agreed. But not right away. The Europeans demanded that, “Yes, right away.” And Syriza walked out of the negotiations.

Here are two charts from The Washington Post that reveal the hassle of generous pensions, funded by taxpayers:

Uncollected Tax Receipts - The Washington Post

Uncollected Tax Receipts – The Washington Post


Youth and Unemployment - The Washington Post

Youth and Unemployment – The Washington Post

I’ll put this gently: Greeks haven’t been paying their taxes. Hardly anyone in Greece pays the taxes they’re supposed to pay, and their tax collection system isn’t working. And do please read Michael Lewis’ magnificent article from 2010 in Vanity Fair on just how ludicrous this all is.

Unemployment for the youth (the people supposedly contributing to pay those pensions) is all but non-existent. If you’re under 25, there’s a 50% chance you’re not working.

This is where things get interesting. Most people over the age of 60 voted “Yes” for austerity in the referendum. Most people under the age of 35 voted “No”, rejecting austerity in the referendum.

This does not appear to make much sense.

It was the pensioners’ swing behind Syriza that put them in power in the first place. And Syriza is returning the favour by holding firm on any changes to pensionable age for the existing crop of pensioners (and those set to retire soon).

But it appears the pensioners and soon-to-be-retired have changed their minds. Their “Yes” vote is in the realisation that they’ll get less and work longer.

But now the “No” voters appear to have supported the pensioners (after all, there isn’t much in the negotiations – on either side – that will benefit an unemployed 25-year-old anytime soon).

So Tsipras and co will soon be negotiating with the EU about means to cut the deficit to protect pensioners.

Greece real soon

Ideally – as recommended by the IMF – the Greeks would get some debt relief to make their remaining payments somewhat more palatable. And the Greeks would offer to retire later, and pay their taxes.

The problem is that Syriza has now made helping Greece unpalatable for political leaders all across the Eurozone.

How does Angela Merkel explain to disciplined German voters that they need to absorb €100 million of Greek debt? How do Portuguese and Spanish leaders explain to their voters that Greece gets a nice reprieve, but they won’t? Or how about the Irish or Eastern Europeans who all went through brutal austerity before recovering, and whose pensioners now earn less than do the Greeks?

The Greeks are very loud about telling everyone that “No” was the democratic choice, but Eurozone leaders are no less democratically elected, and they have mandates too. Mandates that contradict the Greeks.

And now we have Puerto Rico which is in danger of defaulting on its $72 billion debt burden.

As a US territory, there is no danger of the US Reserve refusing to guarantee banks deposits, so there’s no bank run. Neither will the US attempt to prop up the Puerto Rico government by centralising its debts from its state-owned utilities. Those companies, even though government-owned, will be permitted to go bankrupt.

Puerto Rico is not Greece simply because the US is both a financial and political union. Democracy be damned. American’s in the 50 states won’t get to vote on whether they cover the costs, any more than Puerto Ricans get to vote on ignoring them.

This makes the US more stable. Although it doesn’t stop systemic risk (such as when house-prices collapsed everywhere across the US simultaneously back in 2008).

Puerto Rico is in a blind spot anyway. They shouldn’t have been permitted to borrow so much money. I’m sure that will be corrected.

In the Eurozone, individual members can borrow based on the good ratings of the whole group. That permits Greece, Spain, Italy and Portugal to borrow a lot more than they should be able to on the understanding that the others will bail them out.

But if Germany actually does bail Greece out, then what stops Spain, Italy and Portugal (whose debts are a bowel-popping €4 trillion – 10 times the size of Greece’s) asking for the same treatment?

It would be impossible to do and would, instantly, bankrupt Europe.

So Greece isn’t going to get off that easy, even if the European Central Bank is forced to keep Greece’s banks from going bankrupt over the next few months until a deal is eventually agreed.

What about the rest of us?

There’s a more terrifying problem, and Greece is simply a very early example of what that future looks like.

The Millennials voted “No”.

Here’s the question:

“Should the proposed agreement be accepted, which was submitted by the European Commission, the European Central Bank, and the International Monetary Fund in the Eurogroup of 25.06.2015 and consists of two parts, which constitute their unified proposal?”
“The first document is entitled ‘Reforms for the Completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis’.”


Given that no-one understood the question itself, what were they actually doing?

Today’s pensioners feel that the post-war system they designed worked as they intended, delivering a golden age of growth and abundance, and has left them with lavish pensions they feel they deserve.

Each succeeding generation knows they’re getting less and will have to work longer and harder to retire with nothing. And the Millennials have it hardest. They’ve arrived at the party after everything has been eaten, there are no firm jobs for them (but they get to enjoy the “sharing” economy), and they know they’re going to get shafted with both the party- and cleaning bills.

That “No” vote in Greece is as much a vote against the Greek elites who killed the economy as it is against the European system as a whole. It’s a vote against being forced to be responsible without getting any of the benefits of that responsibility.

It’s a pained and anguish scream.

Greece offers the opportunity to learn, with compassion and humility, how we may fix that problem. If we don’t, the aging societies of Europe and the US will have cause to hear that scream for themselves.

3 replies »

  1. So, what do you think about Paul Krugman’s thought that Greece’s best chance to recover is to exit the Euro? His argument for that makes sense to me.

    And is this a result of trying to have a financial union without a real political union?

  2. @angliss The problems are certainly the disconnect between fiscal and political union. A proper union would mean that Greece wouldn’t have as much financial liberty, but they’d get automatic cover.

    Exiting the Euro only works if Greece had the potential to be a new Poland, with lots of low-cost jobs and export capacity. But exports are about 13% of GDP, and most of that is refined petroleum products. A currency devaluation would simply destroy the economy faster since the majority of debts, both national and personal, are denominated in Euros (that’s what’s been happening the last few years as debts have moved to Germany and France).

    They need time, which only being inside the Euro, with a descent fiscal plan, can provide. Otherwise they have to deal with it all at once.

    Their other problem, and I forgot to put this in the article, is they need a bank of last resort to prevent their local banks failing. That would normally be the IMF – but they defaulted. So the only stakeholder in this mess who was prepared to help them, and is empowered to do so, cannot help them because Greece chose to default.