Greece may represent slightly more than 2% of the Eurozone, which in real terms is insignificant, close to the margins of statistical error, but its situation is structured in such a way that if the country goes bankrupt the Eurozone may easily collapse and, furthermore, the American economy may suffer unbearable losses.
Remember that in the round of the next 12 months, there will be elections in Germany, France and the US. The issue is not economic, it is deeply political, and it is quite simple to understand why, a country of ten million people may well act as the catalyst for upsetting the world economic system.
The debt of the central government of Greece is roughly €360 billion and if the government of Greece and consequently the Greek banks go default, to the above figure should be added another €270bn, which represents the private borrowing from European banks. This makes the total in the region of more than €600bn, which will lead European banks to show their hands.
Under the circumstances, given that American banks have an exposure with European banks of some $1.5 trillion, it does not require special knowledge to understand what will happen to Europe and the US if Greece is allowed to go bankrupt.
It is as simple as that.
At the present moment, the Greek government has restricted the salary payments and pensions of the public sector, having stopped all other payments. The policies adopted so far, under the guidance and the supervision, primarily, of the European Commission, proved wrong and counter-productive. Increased taxation combined to recession, resulted in a significant decrease of revenue collection and the insistence of the Commission to begin bulk dismissals in the public sector is an illusion for more than one reason.
The wider public sector in Greece accounts for some 1.2 million employees of all kinds. From permanent employees of ministries, to staff of the state enterprises and temporary staff of municipalities and other local administration entities. Almost all these have been hired during the past 30 years on grounds of political favoritism and, therefore, constitute the backbone of the two parties, Popular and Socialist, which have shared power since 1974.
Secondly, even better – the way the Greek public sector is structured, nearly everyone working in the public sector, with few exceptions, has the right of “signature”. It may be several times per day or once per week or that every single employee of the state has to put his signature under a document and without such a signature nothing can move.
Therefore, as the government proceeds with mass dismissals, the precarious Greek state machine will collapse. It is worth adding that the Greek Constitution does not permit dismissals of civil servants unless their post is abolished, but to abolish positions requires a general restructuring of the system that would take years.
Last, but not least, Greece is a deeply political country and to dismiss someone who rightly or wrongly received a permanent position 20 years ago and, with this job, has based his or her dreams, made a family, invested the future of their children and taken out a mortgage that they are still paying to buy a house, is a practice far removed from the Greek mentality and character.
More feasible instead would be for the government to keep the public sector as it is and reduce salaries and pensions by an additional 40% – adding to the reduction of 20% already made, this will decrease public-sector expenditure by 60%. Certainly, many will leave government jobs voluntarily, therefore the primary deficit (it is only €15.5bn annually) will be covered.
The appointment of Evangelos Venizelos as Greek finance minister has greatly disappointed the European administration, because the man is intelligent, a high-risk player and primarily is what Aristoteles used to call “a political animal”. European technocrats are good in their field and no one can beat them. The European Commission is the most sophisticated economic machine of the world. With more than 98,000 pieces of European legislation (Treaties, Regulations Directives, Decisions, etc.) no one can beat it. No one, that is, unless the game is raised on political grounds.
To sum up, by now, everybody in Europe understands that Evangelos Venizelos will not hesitate to lead Greece into bankruptcy, if he is forced to, but Venizelos also knows that Europe will never let Greece go bankrupt, for the reasons I have already explained.