The Greek saga: The Euro is in deep (French) trouble.

“Can the Greek government be trusted to do what they are promising, to actually implement in the coming weeks, months and years?” asked Jeroen Dijsselbloem, the Dutch finance minister who is president of the 19-member Eurogroup.

If this statement is taken as meaning that the Greek government has done nothing or very little since 2010, it is just plain false.

 Some facts about Greece.

Of all the countries which now belong to Euroland, Greece is the country which has implemented the deepest adjustments in terms of budget cuts. Between 2009, and the onset of Euroland’s crisis, and end 2014, the Greek government deficit has fallen from -15.2% gdp to -2.7% Minus, interest payments, Greece is running a structural surplus.

That represents a cut of 12.5 points in the gdp, a colossal adjustment. By comparison, Spain’s government spend fell 5.1 points, Lithuania by 8.6 points, or Estonia by 2.3 points. Overall, Greece has slashed government spend by E 47 billion.

Looking at the Greek statistics a bit closer, Athens is in the top league of Europe’s cutters. Ireland is No 1, reducing government spend from 47.6% gdp to 36%, a reduction of 11.5 gdp points; Greece by 9.7 points from 53.9% gdp to 44.2%; and Lithuania from 43.7% to 34.1%, or 9.6 gdp points.

These figures would suggest that the EU institutions will only be satisfied if Athens reduces expenditures to say the level of Ireland. In fact, the Greek economy has shrunk 27 gdp points, an unprecedented contraction since the depression of the 1930s.

Furthermore, Greece is the only Euroland member state to have lowered the minimum wage from 689 to 586 Euros a month; has done the most in Euroland to make its labour market flexible; and has seen wage levels fall by a quarter.

Greece compared.

Other member states who were forced through the austerity policy imposed by Germany have experienced a turnaround, albeit often with very high levels of unemployment as in Spain, Portugal and Italy.

The small Baltic states, after a deep recession, rebounded in 2011 with growth rates of 6 to 8% gdp, with Estonia growing at 4.5% in 2014.

Ireland and Spain resumed growth in 2014. Both counties have a significant industrial sector, are host to a wide spectrum of multinational corporations, have moved into current account surplus, and have a strong export sector. Ireland’s per capita exports are 16 times greater than those of Greece.

In mid-2014, there were some indications of a turnaround in Greece, but by the end of the year, these disappeared. Germany’s Finance Minister Schäuble has argued that the Greek economy was turning the corner when the Greeks voted in a Syriza government, turning a promising situation for Greece into a disaster.

This is disingeneous. The first bailout in 2010 was aimed at topping up German and French banks, not the Greek economy. Greece though was saddled with the bank’s debts.

Greek imports have shrunk by 45%, and 44% of the population is below the poverty level. As the economy has shrunk, the Greek debt has soared. From the very start of the crisis, it was an open secret that Greece could never repay the debts loaded on to it. The allegation that Athens has implemented little to nothing is plain wrong.

Prime Minister Tspiras is not alone when he told the European Parliament that “my country has become a laboratory for austerity and the experiment has failed”. Two Nobel Prize Winners, Paul Krugman and Joseph Stiglitz, as well as the IMF, are of the same opinion.  

Revenge is sweet.

So what is happening? One explanation is that the German and Dutch Finance Ministers, joined in this by the Commission and the ECB, are happy to eke revenge on a small member state that has made so much trouble for five months, and worse, has made them to look fools.

Germany has been throughout the five year crisis at the centre of an austerity coalition, including Finland, The Netherlands, and countries like Slovakia and the Baltics which resent what they consider to be Greek begging bowl tactics.

Last week, the ECB, now highly politicized, forced Greece to impose capital controls, a measure reported at the time as a first step to having Greece ejected from the Euro.

Berlin’s Finance Ministry has produced a plan, which clearly enjoys the support of Chancellor Merkel as well as of the social democrats in the coalition. None of the major political parties in Germany wish to be seen to be weak in the face of Greek pleas for clemency.

The plan outlines two options: either the government submits to drastic measures such as placing €50bn of its assets in a trust fund to pay off its debts, and have Brussels take over its public administration, or Athens agrees to a “time-out” solution where it would be ejected from the Eurozone for a five year period.

Last Sunday, the Syriza government won a referendum handsomely rejecting the bailout conditions which it is now prepared to sign up to. This involves a raft of spending cuts and tax rises to secure a new three year rescue plan worth around E75-100 billion. Tspiras has not followed advice that he should be prepared to exit the Euro.

Why, having defied the powers that be in the EU, has Tspiras suddenly got cold feet? His answer is that he won a mandate to negotiate a better deal, and not to exit Greece from the Euro.

Whatever the explanation, Schäuble has instantly seized the opportunity to humiliate Tspiras. There is a savage taste of revenge in Schäuble’s remarks that Athens was now accepting measures that it had dubbed humiliating a week earlier.

“We will certainly not be able to rely on promises,” Wolfgang Shamble is quoted as saying.“In recent months, during the last few hours, the trust has been destroyed in incomprehensible ways.”

There is more at stake than trust.

No doubt the German Finance Minister’s ego has been bruised, but it would be wrong to leave it at that: a matter of clashing egos which caused the disaster.

It is more to the point that German-imposed austerity on Euroland is the prime cause for Syriza’s electoral victory in Febrary 2015.

Syriza, the “Eurocommunist” sister to Greece’s un-reformed, pro-Moscow Communist party,the KKE, won over 36% of the vote; Golden Dawn, an outright fascist party, received over 6% of the vote, and the KKE over 5%.  In other words, 48% of the votes in the February elections went to radical parties of the far left or far right.

The same situation is beckoning in France, where Marine le Pen is making a serious bid for the Presidency. There are other similarities between Greece and France. France has over 5 million civil servants, benefitting by all sorts of special priveleges. Greece has 750,000In 2012, Athens promised their number would be reduced by 2015 through attrition by 150,000.

Little has changed since. Syriza, like President Hollande’s government, has stalled on slicing the bureaucracy. In both countries, the political parties of the left have their alliances with the public sector unions.

Syriza has promised a crackdown on tax avoidance, something the former ruling parties, PASOK and New Democracy, were conspicuously unable to implement. Hollande is making similar noises.

What Tspiras has been asking for has been an EU growth package, involving a 30% haircut for Greek creditors, and accompanied by major EU-promoted investment. Were this to happen, the private labour market, which has borne the brunt of the recession, would pick up, and generate the jobs required to start reforms of the public sector.

In other words, with unemployment at 27%, Tspiras has been hoping for a private sector boom to help him deal with his public sector union allies and competitors.

But Djisselbloem and Schäuble insist on more austerity, supervised directly in imperial fashion by EU institutions. What they seem to forget is that the government sector is in the hands of hardcore trade unionists, ready to knee-cap anyone talking of cuts. If EU austerity in its new form were to be implemented, EU bureaucrats would need 24 hour a day protection for themselves and their families. 

The alternative is to kick Greece out of the Euro for a period of five years. France is opposed, and President Hollande has sent his technocrats to Athens to help draft Greece’s last, last minute proposals. As German commentators have noted, they do not deal with the public sector.

This cannot be a surprise. France has the most bloated public sector in the EU. Hollande was elected to protect it. That is why his one major policy is to raise taxes further. The result is evident in France’s wretched economic performance.

The wider significance of the Greek saga.

So what is the wider significance of the Greek saga. Quite simply, Greece is being used as a surrogate by Germany for what it considers France would have to do to make the Euro a going concern.

The writing is on the wall: Germany is saying that it cannot accept the Euro on any other terms that its own. The implication is that if the rest of the EU cannot accept those terms, then Gerxit beckons. For the moment, France is clinging to the Euro, but like Greece is failing to deliver the reforms which would make the Euro a success.

What would these reforms entail?

  1. sharp reduction in the French government take,(Germany’s government take is circa 42%, France’s is 63%). In other words, a massive reduction in the size of the French government.
  2. Liberalisation of hire and fire rules, thereby freeing up the labour market.

Question: What is the chance of these conditions being met in France?

Answer: Zero.

The Euro is in deep trouble.


The bottom line is that Germany is on top, and Europe is in poor shape. It is a familiar sight.

As Emmanuel Todd, a well known French anthropologist has written in the Belgian Le Soir of July 10, 2015:

“Since 2011, we have been treated to the incredible spectacle of European élites, notably France’s neovichyiste élites: the mix of catholic zombies, bankers and senior civil servants, seeking to preserve this system which does not work. … The tragic reality of the situation is that Europe is a continent which in the XXth century, and in cyclical fashion, has committed suicide at the hand of Germany. First was the 1914-18 war, then the second world war. Now the continent is much richer, more peaceful, demilitarized, ageing, arthritic. In this slow motion picture, we are witnessing Europe’s third self destruction, also under German leadership…”

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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