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Greece Confronts Modern-Day Epic of Economic Survival
The Washington Diplomat / June 2010

By Larry Luxner

In August 2004, the last time a Greek ambassador graced the cover of The Washington Diplomat,Athens was euphoric over its imminent hosting of the XXVIII Summer Olympics in the ancient land of their birth.

"The Games will be an excellent opportunity for Greece to project an image of a modern country. Greece is determined and capable of doing the job," George Savvaides had declared proudly, as he rattled off $7 billion worth of mammoth infrastructure projects associated with the long-sought Olympiad everything from a sparkling new international airport for Athens to a 50-kilometer-long ring road around the capital city.

Today, sadly, Greece seems incapable of doing anything right.

Bloody street protests have marred its once-glowing image as the world's cradle of democracy. Unemployment soars while tourism falls in the wake of unrest. And the Greeks certainly won't be winning a gold medal in fiscal responsibility, given the country's bloated public sector and the fact that Greece's deficit stands at 12.7 percent of its GDP more than four times higher than euro zone rules allow.

Greece currently owes 162 billion euro to foreign banks and private industry worldwide. It didn't help when, on Apr. 27, Standard & Poor's downgraded Greece's debt rating to junk status amidst fears of a default by the Greek government.

None of this has been a picnic for 61-year-old Vassilis Kaskarelis, the current Greek ambassador to the United States.

"I've been with the Ministry of Foreign Affairs for 36 years, and I've gone through many difficult periods," Kaskarelis told us last month. "But now, for the first time in my career, I feel strange because Greece is on the front page of the news every single day. Consequently, wherever I go, there are questions about the Greek economy and a possible default. It's not the best situation an ambassador can face."

Kaskarelis spoke to The Washington Diplomat in an exclusive one-hour interview on May 3 the morning after euro zone members and the International Monetary Fund approved a $146 billion, three-year bailout package aimed at keeping the Greek government from defaulting on its debts.

But that bailout comes at a stiff price for Greece. The center-left coalition led by Prime Minister George Papandreou has had little choice but to pass a deeply unpopular package of austerity measures that, among other things, raises the average retirement age from 58 to 63 by 2015, slashes government wages by 20 percent and cuts pensions by 10 percent. It also hikes the Greek value-added tax already one of the highest in Europe from 19 to 23 percent, while pushing up the excise tax on gasoline, alcohol and tobacco by 30 percent.

Longer term, the number of municipalities will shrink from 1,000 to 400 and publicly owned companies from 6,000 to 2,000 to save money. Yet tens of thousands of people are likely to lose their jobs in the short term and that doesn't sit well with a society raised on state handouts, corruption and tax evasion.

Two days after our interview, anti-government street protests turned violent. Three bank employees, including a pregnant woman, were killed when demonstrators threw a Molotov cocktail through the window of the downtown Athens building where they worked. That day's rioting left 59 people injured, with dozens of stores, banks and offices damaged.

And the scenario is likely to get much worse before it improves, predicts the amassador. This year, he warned, the Greek economy will shrink by 4 percent; that compares to an 0.9 percent contraction in 2009. More than 100,000 people might find themselves out of work over the next 12 months.

"It will be devastating," Kaskarelis told The Diplomat, when asked about the likely impact of the austerity measures. "I don't know what the people's reaction in the streets will be, or how strong. On the other hand, everybody in Greece understands that something was very wrong, and that we must change the situation."

Kaskarelis blasted extreme leftists who demand that Greece default on its loans to avoid such painful cuts. "We don't have that option," he warned. "We have arrived at a point where we don't have any options except one: to receive a loan from our partners."

On the day Greek legislators voted 172-121 to approve the austerity measures, Papandreou told parliament what had to be done: "Today, things are simple. Either we vote and implement the deal, or we condemn Greece to bankruptcy. Some people are speculating and hope that it will happen. We, I, will not allow that. We will not allow speculation against our country, and bankruptcy to happen."

Even so, the euro seems to be shrinking in value every day, fed by fears of a financial contagion spreading to Spain, Portugal and possibly Italy. At press time, one euro was worth only $1.23 its lowest level in two years.

Yet as for abandoning the euro altogether, Kasakerelis says that course of action would only lead to disaster. "There are people in Greece suggesting we go back to drachmas. You'd have to default, change currencies out of the blue and block bank accounts. This would be instant death for Greece."

Besides, the euro is hardly to blame for Greece's current problems. Before it joined the euro zone, the Washington Post pointed out in a May 5 opinion piece on the European debt crisis, Greece's household debt was only 6 percent of the nation's GDP. By 2009, it was nearly 50 percent of GDP. And by the end of 2998, government debt had ballooned to about 115 percent of GDP.

"In that sense, the euro did pave the way to this crisis," said the article's authors, Carmen and Vincent Reinhart. "However, Greece was not the only country on a borrowing bender. Iceland and the United Kingdom, not to mention the United States, dramatically increased domestic and international borrowing, even as they retained their national currencies. The question is now why politicians were willing to spend freely and tax insufficiently that may be part of their DNA. Rather, why did lenders facilitate such overborrowing? Across continents, good economic times bred complacency among investors, who believed that past performance promised a bright future."

Taking the long-term view, Kaskarelis in his impeccable English blamed three factors for the current collapse: the lingering impact of the global financial crisis, the impact of "bad management of the situation by the previous government," and the general mismanagement of state finances for the past 30 years.

"You can mismanage for decades," he said, "but at a certain point, when the other factors are also negative, the bubble bursts. We are facing too many problems at the same time: structural problems, economic problems due to the financial crisis, and other systemic problems like tax evasion and corruption. All this together has created what meteorologists call the perfect storm. It happens once every hundred years, and the dynamics of this storm are so powerful that they change the entire picture."

Those dark clouds on the horizon are so frightening, in fact, that in early May, the 27-member EU voted to back 440 billion euro ($560 million) in new loans to bail out countries like Spain or Portugal, which are also on shaky ground. The IMF has pledged another 250 billion euro ($320 billion) to support the effort, while 60 billion euro ($76 billion) under an existing lending program pushes the total to nearly $1 trillion.

On the surface, claims Kaskarelis, Greece's situation is no worse than that of other countries in the 27-member European Union, or even that of some U.S. states.

"We're actually in a better position than California. The problem is that we are members of the euro zone, and the markets are using the Greek case in order to test the stability of that zone and of course in the long run to make profits, and if possible, huge profits," he said. "It's nothing new. The only new parameter in this equation is the fact that the markets sense a weakness in the euro, and they're using Greece as a kind of a guinea pig to test the limits."

Even more frustrating, he said, is that Greece no longer has its own currency, the drachma. "Since we are part of the euro zone, we have to play by the rules. We're limited by the regulations of the euro system. We don't control our currency and we don't control all the weapons that we could have at our disposal."

Kaskarelis lamented the fact that Greece adopted the euro on Jan. 1, 2001, but that nine years later, "you still have 16 ministers of finance taking decisions on their nations' economies. It doesn't make sense, but the same goes for other issues. We've already adopted the Lisbon Treaty, which discusses, among other things, the formation of the Foreign Service. Five months later, we're still discussing how this Foreign Service will be structured."

Before his appointment to Washington in June 2009, Kaskarelis spent five years as Greek permanent representative to the EU in Brussels, a post he had for five years. Prior to that, he was Athens' permanent representative to NATO (2000-04), while also serving as negotiator for the confidence-building measures between Greece and Turkey (2000-03), as well as deputy permanent representative of Greece to the United Nations in New York (1995-2000).

Between 1976 and 1995, Kaskarelis served in various capacities at Greek missions in Turkey, Cyprus, Italy and Germany. In 1989, as head of the Greek military mission in Berlin, he witnessed the collapse of the Berlin Wall. Now, as Greek ambassador in Washington, he's watching the possible collapse of the Greek economy from afar.

"Everyday life in Greece showed we had a system that was not viable in the long run. Look, you have tax evasion. You have corruption. The civil-service sector does not work properly. It's a vicious circle, not only because new technologies are not adopted by the government. It's that we have a huge civil service."

Bloated is more like it. Kaskarellis said 1.3 million Greeks are employed by the state, even though their work can be done by only 600,000.

"The reason is that, in order for governments to secure votes before every election, they were offering jobs in the civil sector. This has been the case for the last 30 years, regardless of who was in charge."

In fact, Greece has more than five times as many civil servants per capita than the United Kingdom. European media are filled with horror stories about government agencies that do absolutely nothing, yet eat up millions of dollars in revenues.

For example, the German newspaper Der Spiegel reports that a state entity created to manage a bid to make the city of Thessaloniki a European cultural capital in 1997 is "still humming away." Another government office called Kopais named after a lake near Thebes was set up in 1957 to prepare for the draining of the lake so that roads could be built in the lakebed. But more than half a century after the lake disappeared, the agency still employs 30 workers who receive monthly salaries of up to 2,500 euro ($3,175).

"It's not normal to have 12 percent of the population working for the civil sector," said Kaskarelis. "And it doesn't make sense that last year 25 billion euro in taxes went unpaid. This is almost equal to the loan we're going to get this year from the EU and IMF."

He added: "We have a weak tax system. You have people making huge amounts of money, and governments were never willing to adopt tough measures because they didn't want to create problems with the vast majority of the population. The status quo was fine for most people regardless of their income level and fine with the government. They exploited the system for electoral purposes, and that was OK with the people, because our people were wealthy but not the state. The problem was and still is the black market, tax evasion and corruption."

But he says the government's new tax system part of the reforms now being implemented "will make tax evasion impossible," allowing fiscal authorities to collect billions of euro in new revenues.

"What the opposition is suggesting is to find another way out of this problem," said the ambassador, referring to Antonis Samaras, leader of the center-right New Democracy party, which voted against the IMF-EU package. "It's easy to criticize the government, but they don't put any ideas on the table."

At the moment, Greek unemployment stands at around 10 percent, but the jobless rate is expected to jump to 15 or 16 percent once the government's new austerity package takes effect and maybe 18 or even 19 percent by 2012.

"Most Greeks understand that we have reached a point of no return. This will be extremely painful," he warned. "And even if you do have popular unrest and violence in the streets, there is no option. If we default, it would be even worse."

Kaskarellis said the austerity measures extend to his Washington mission as well. Salaries have been slashed by 20 percent, while taxes have jumped by 40 percent. Some 40 people work at the embassy, and another 40 at the Greek military annex.

Nobody's been laid off yet, but diplomats who leave aren't being replaced. In addition, a planned $12 million renovation of a building adjacent to the Greek Embassy fronting Massachusetts Avenue has been put on the back burner. As the ambassador says, "you cannot spend this amount of money at a time when you're asking so many sacrifices from people back home."

Kaskarelis, who under normal circumstances might spend much of his time promoting the beauty of the Greek isles or encouraging Americans to visit the Parthenon and other world-famous ruins, has harsh words for his own country's tourism sector.

"For many years, because we had very good infrastructure, beautiful places and excellent weather, our prices kept going up. The industry didn't realize that, slowly but surely, other countries around Greece are investing in infrastructure," he said. "We are not so competitive anymore."

It's particularly crucial, he said, because tourism is one of the country's two main sources of income. The other is shipping; Greek shipowners control more than 25 percent of the global shipping trade, and many of them have become quite wealthy.

"Since my arrival here in Washington, I've spent a lot of time establishing contacts with the Obama administration," he said. "Unfortunately, the previous Greek government was totally absorbed with domestic politics specifically whether to call for early elections. We lost precious time positioning ourselves as far as the new administration here was concerned."

Kaskarelis said his long years in Brussels, where he worked with many American diplomats at NATO headquarters, is paying off for him now in Washington.

"The American side was quite nervous about the overall situation in Europe, because the weakness of the euro will have a direct impact probably a negative one on the American economy," he said. "President Obama made clear from Day One that through the IMF, the United States is willing to support these measures."

Despite this being the IMF's bigest crisis since the "Asian contagion" of 1997-98, Kaskarelis said he was pretty sure the aid package would come through despite initially strong opposition from Germany, the wealthiest EU member state.

"Everything in the EU is linked, and German banks own 70 billion euro in Greek bonds, so they cannot allow the Greek economy to default," he pointed out. "By offering this loan to Greece, in a matter of three years, the German economy will profit just from the 600 to 700 million euro in interest."

Greece's old enemy, Turkey, is also helping to bail out the troubled nation. In fact, a few days after our interview, the Turkish prime minister visited Greece, along with a delegation of 10 government ministers and more than 100 businessmen.

Of course, Greek-Americans are a natural source of investment, and the Greek Embassy enjoys excellent relations with this community.

"A businessman always put business before sentiments, so regardless of his Greek origins, Greece must offer a stable environment," said the ambassador. "With the austerity measures Brussels is imposing on the Greek government, foreign investors will face a new environment. Before, you had to wait three or four months to open a business. You had to pay money under the table. It was a mess. But these changes are not because Brussels is imposing new measures on us. It's because our government has decided to adopt and implement them."

It may seem like a bizarre moment in history to push foreign investment in Greece, but now is the time to do exactly that, argues the ambassador.

"The Greek economy has hit rock bottom. When the stock market crashes, you see investors immediately acting to take advantage of the situation because prices are low," he explained. "In Greece regardless of the government's promises you have Brussels and the IMF monitoring the situation on a daily basis and imposing specific actions on the Greek government. In the long run, this package will have a positive effect. Consequently, if you want to profit, I believe now is the time. Things are moving in the right direction."

He added: "It's not that I'm trying to beautify the situation. The situation is terrible. But there are plenty of opportunities to make money out of this. Maybe not today, but it might be different, say, in a matter of three or four months."

Interestingly, the ambassador's father was a professor of gynecology at the University of Athens who for years tried to convince his son to become a doctor too.

"Under this pressure, I studied medicine for two years, just to prove to him that I could do it. But one day I made an announcement that even though I could do it, I don't want to do it, and here I am today," said Kaskarelis, who has chosen to confront the current Greek crisis with resolve and perhaps a touch of humor. "Thinking back, maybe it would have been better to become a doctor."

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