Greece can learn from Israel

In classic Greek tragedies, written 2,500 years ago and enjoyed in theaters to this day, the hero is often insecure, troubled by internal conflict and haunted by past mistakes. Sadly, modern Greece is suffering through a prolonged real-life tragedy, partly of its own making, partly the fault of Europe, which is tearing the country apart internally. In this modern tragedy, however, it is not actors, but millions of people who suffer daily. With only 745 miles separating Athens and Tel Aviv, Israel can learn a lot from its Mediterranean neighbor's ongoing crisis. How did Greece get into such deep hot water? A country is a business. But unlike businesses, countries are run by elected politicians who have little or no knowledge about management. In the 1990s, Greece ran large budget deficits and printed excessive amounts of its currency, the drachma. In 2001, Greece joined the eurozone, embracing Europe's currency in place of its own, in 2002. The ensuing Greek economic boom, 2001-07, was artificial, fueled by massive irresponsible borrowing of euros at low interest rates. Greek leaders bear much blame for reckless borrowing. European banks and governments bear equal blame for irresponsible lending to Greece. The boom ended with the global financial crash of 2008. Unemployment in Greece soared to 28 percent. In October 2009, Greece revealed that it had joined the eurozone on the basis of a lie – its budget deficit in 2000-2001 was far bigger than the three percent of GDP permitted by European Union rules. Europe winked at Greece's duplicity at the time and is now paying the price. Greece's Gross Domestic Product is lower by one-fifth than at its peak in 2008; for Greeks, this is a depression, not a recession. Why haven't the emergency bailout loans to Greece helped? In 2010, a trio of institutions known as the Troika (the European Commission, the European Central Bank and the International Monetary Fund, or IMF) gave Greece the first of a series of bailout loans. The loans did not help, for two reasons. First, Greece used the new loans to pay off old debts rather than building its economy, much like drug addicts who need bigger and bigger doses to feed their addiction. Second, in return for the emergency cash, Greece was compelled to implement austerity – budget cuts, lower pensions and layoffs of civil servants. The austerity imposed on Greece caused a doom loop – a shrinking economy, causing lower tax revenues, bringing higher deficits, making it even harder to pay off old debts, shrinking the economy even further. That doom loop remains at the heart of Greece's current dilemma because the Troika is demanding more austerity in return for another bailout. Europe is validating Einstein's dictum – doing the same thing again and again and expecting different results is insanity. On June 30, Greece missed a debt payment of 1.6 billion euros to the International Monetary Fund, sliding closer to bankruptcy and joining an elite group of deadbeat nations such as Afghanistan, Iraq and Bosnia. Why would the European “doctors” continue to prescribe austerity medicine that is making the Greek patient even sicker? Many of my fellow economists will have to stand trial for that one in the court of history. Nobel Laureate Joseph Stiglitz has accused the Troika of criminal behavior by essentially declaring war on Greek democracy. Why has the Greek crisis gone on for so long? Today, Greece's public debt totals 324 billion euros, or 177 percent of its Gross Domestic Product. In contrast, the corresponding figure for Israel is 69 percent of GDP, only half of which is owed abroad. A fifth of Greece's public debt is owed to Germany and German banks. In recent years, much of the Greek debt has been shift - ed from private banks to governments and official lenders. There is no doubt that much of this massive debt cannot and will not be repaid. Why can Germany, which sets the tone in Europe, not accept this? A key principle in business is: Good news a little at a time, bad news all at once. Businesses that get into hot water need to clean up the mess quickly, drastically ‒ take the pain, swallow the medicine – and move on. After the 2008 financial crash, for instance, the United States cleaned up the mess fairly quickly. But European policy toward Greece has been the opposite. The Greek people, especially its pensioners, have been administered slow, painful torture by austerity, drop by drop, year after year, with no hope in sight. Why? The answer is democracy. Athens invented democracy 2,500 years ago. On January 26, that same Athenian democracy elected 41-year-old Alexis Tsipras, whose Syriza party promised to end the austerity and reject European demands for more of it. But European leaders also are elected, and their voters are fed up with Greece's constant demands for more handouts. As the President of Bulgaria said recently, “We in Bulgaria are much poorer than the Greeks, but we have performed reforms. When you have a problem, you have to address it and not shift it to Brussels [the European Union capital] or onto somebody else.” A leading German newspaper editorialized, “The Greeks go onto the streets to protest against the increase of the pension age from 61 to 63. Does that mean that the Germans should in the future extend the working age from 67 to 69, so that the Greeks can enjoy their retirement?” Pensions and protesting old-age pensioners have been at the center of the Greek crisis. Why? According to the British financial weekly The Economist, “Civil servants in Greece employed before 1992 can retire after 35 years service if they have reached the age of 58 and retire on 80 percent of their final basic salary... As in many Mediterranean countries, all social spending [in Greece] was skewed toward pensions, essentially for vote-winning purposes. Things like unemployment benefits are pretty miserly; the real money has always gone to pensions, which have been used as a substitute for other welfare policies.” So here is the crux of the Greek tragedy. Voters in Europe refuse to pay for pensions on which Greek voters have become crucially dependent, based on fiduciary promises made by irresponsible Greek politicians elected by Greek voters. This was not what Athens had in mind in 500 BCE when its leaders invented democracy. Beneath this Greece-Europe conflict is a layer of historical bitterness. During World War II, Nazi Germany caused immense damage and loss of life to Greece, which suffered between 500,000 and 800,000 deaths, both military and civilian, during the war ‒ that for a population of only 7 million. Now, Greeks say, the Germans are destroying their country again. Germany, in response, says the Greeks have done this to themselves. Greeks respond that Germany twice erased its own huge external debts, once after World War I by printing worthless marks, and once, in 1953, when Western countries forgave what Germany owed. Why is Ger - many denying Greece what Germany itself did twice? Is there a deeper underlying problem haunting Europe? There is indeed. Of the 28 European Union nations, 19 countries have adopted the single euro currency; Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom retained their own money. The euro is managed by the European Central Bank, located in Frankfurt. In order to manage the euro properly, the euro nations need a single unified banking system. But so far, each of the 19 euro nations has largely retained its own banking laws. The result has been chaos. Greece is just a symptom. Is the European Union itself threatened by the Greek crisis? No. The truth is the European Single Market is an outstanding achievement. France, Germany, Italy and Britain spilled each other's blood for centuries. Then after World War II, a French visionary named Jean Monnet had a simple idea. If European countries do business together, trade together, and grow wealthy together, perhaps they will be less eager to slaughter each other. He was right. Today, a European war is unthinkable. Had the Ukraine been integrated into Europe sooner, Russia's bloody land grab of Crimea and Donetsk might have been prevented. Even if Greece eventually leaves the euro and restores its drachma, the euro will survive. But the European Union must deal with the underlying conflict ‒ you cannot have a single currency for 19 nations without a clear unified set of rules to manage it. Greece cannot play poker while France is trying to play bridge. Will Greece abandon the euro and return to the drachma? I doubt it. Greeks do understand that they cannot trust their elected leaders to keep their local currency sound and stable; history proves that. A return to the drachma would virtually end Greece's ability to borrow in international capital markets, and no country or business can run smoothly without credit. Besides, Germany would lose heavily. German Chancellor Angela Merkel said recently, “If the euro fails, Europe fails.” And, she was probably thinking, Germany fails. Greece's crisis has dragged down the external value of the euro and the resulting cheap euro makes German exports more competitive. If Germany, under Merkel, would give Greece three percent of all it has gained from the Greece-driven euro decline, the crisis would be over. In 2014 , some 37 percent of Germany's GDP was comprised exports, or nearly $1.5 trillion ‒ just slightly behind the total exports of the US, whose population is three times bigger. Even China exports only 23 percent of its GDP. How strong would German exports be if Greece leaves the euro, restores the drachma, bankrupts its citizens and its banks, crashes world financial markets, bashes the world economy and the Greek- less euro soars, throwing Germany's export- driven economy into recession? How is the Greek crisis affecting Israel? The Tel Aviv Stock Exchange's European ETFs (exchange traded funds) fell four per - cent right after Greece missed its IMF pay - ment. In 2014, Israel exported $458 billion to Greece, while importing only $229 billion; the exports were mainly chemicals and pesticides. Those exports will surely decline. The sharp drop in the euro may actually worsen Israel's trade deficit with the European Union, which reached $5.6 b. in 2014, by making European imports cheaper and Israeli exports more costly. What can Greece learn from Israel's 1985 economic crisis? Israel's own existential economic crisis unfolded precisely 30 years before that of Greece, on June 30, 1985. Top-secret minutes of a dramatic 24-hour cabinet meeting have just been released. The background to the meeting, chaired by then-prime minister Shimon Peres, was a stock market crash at the end of 1983, which lead to the government nationalizing the major banks; a huge currency devaluation in 1984 that generated 500 percent inflation; and flight of capital out of Israel. Massive government budget deficits were financed by printing money, á la Greece. As Israel's foreign exchange reserves fell, there was doubt that Israel could pay its external debt ‒ at the time 70 percent of GDP. (Today the figure is half that.) A cabinet meeting was convened at 9:30 a.m. on Sunday June 30, 1985, and adjourned at 9 a.m. on Monday. Before it was a stabilization plan devised by Prof. Michael Bruno together with Prof. Stanley Fischer, at the time an economics professor at MIT, later Bank of Israel governor, and today Vice Chair of the US Federal Reserve. The plan included a massive $750 mil - lion budget cut. According to the business daily TheMarker, Housing Minister Da - vid Levy protested at the time, “How can ministers explain and argue when half of them are asleep?” Peres responded, “This is the best time to make decisions... I've been waiting for this moment for a long time.” A new currency was inaugurated, called the New Israeli Shekel (NIS), in use to this day, and its exchange rate was fixed at NIS 1.5 to the dollar. After the meeting, most of the ministers went home to sleep. Peres, energized, spent the day implementing the cabinet decisions. The plan halted the inflation in its tracks and stopped the capital outflow. The budget deficit dropped from an alarming 12 percent of GDP in the first half of 1985 to only 2 percent in 1986. Growth in the money supply fell from 12 percent a month to less than two. The plan later served as a model for other countries that got into similar hot water. The lessons for Greece are clear. Clean up your mess in one whack, impose the pain in one big dose, and explain what you are doing to the public to gain support. In July 1985, as a result of slashed subsidies and the devalued currency, prices rose 27.5 percent, causing a deep cut in Israelis' standard of living. There were a few strikes, but, in general, the public supported the plan and preferred temporary pain to ongoing chronic inflation (or, in Greece's case, ongoing unemployment and deflation). What can Israel learn from Greece? Three key lessons. First, small countries have no margin for error. In today's global village, if a country overspends, over borrows and runs big deficits, it will get into hot water quickly. Money will flee abroad faster than you can blink. Second, it is all right for a country to borrow moderately, provided the money is used wisely to build productive assets rather than fund wasteful welfare spending. And third, above all – smart leaders avoid crises from which clever leaders can escape. Greece, and perhaps Europe as a whole, appear to have leaders who are neither smart nor clever. Postscript : On July 5, Greek voters went to the polls to vote on the latest bailout offer from Europe. Some 61 percent voted “No.” Stock prices fell throughout Europe and the euro plunged. Greek banks remained closed and the European Central Bank was unwilling to extend more credit to enable them to open. Tourism (a fifth of the Greek economy) declined sharply. Meanwhile, the Greek government lacked funds to pay billions of euros in upcoming debts; bankruptcy loomed. I believe Greek voters were saying, we want to keep the euro but we are fed up with being humiliated by Europe. Give us a break! But Europe lost patience with the recalcitrant Greeks long ago. On July 13, in the wee hours of the morning, European leaders and Greek Prime Minister Tsipras agreed to a third bailout package, giving Greece a new loan of 86 billion euros and easier repayment terms on 300 billion euros of debt, in return for tax hikes, pension cuts and sale of government assets. On July 15, the Greek Parliament approved the latest bailout deal, including painful spending cuts and reforms, by a large majority. The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com

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