You can't always get what you want

“Change the way you look at things and the things you look at change.”

― Wayne W. Dyer

As many fellow Eurozone residents, I am eager to see a resolution of the Greek conundrum. In part because the Greek people are fellow Europeans, and in part because of the tangible impact resulting on each of us from positive or negative changes in the value of the Euro and the cost of credit.

When news reports bring us notices of the positions of the creditor group on one side and the Greek government on the other, I become curious and frustrated: why is this situation, now in its 7th year, still unresolved? What are the real issues? Can I contribute on perspective?

I have been in company venture development for over twenty years, and my scars resulted from not doing my own analysis of facts. I have dealt with creditors and seen restructuring and bankruptcy as a part of the young ventures environment, and when you scale that up to sovereign level, and to federations, we get to see the drama played out in our media.

It is easy for us all to go with the critics of a corrupt system of an overspending nation that cannot meet debt obligations. It is easy for us all to look at the large creditors of Greece and find reasons for criticism. It is easy for us all to judge based on likes and dislikes, on emotion, on political prejudice or any other non-rational basis.

I decided to look at the facts, understand the relative importance of issues, and apply my own mind to the challenges represented by the Greek situation, knowing that once you complete analysis of the surface layer, the analysis will be incomplete, and the drilldown to detail is a longer journey.

I love the Wayne Dyer quote above, as it confirms what I have seen in practice through thirty-five years in business. It is an opportunity gateway to a solution space in negotiations, in deal making, and it is never a given that the other party is the one who must revise his initial position for negotiations to succeed, and a transaction to complete.

Basic Premises

Admittedly, I have biases, opinions and beliefs that not all may share. Some of the most important ones guiding my analysis are these:

1. Economic stability requires in part a single, large currency zone, such as the Eurozone, and is a good thing for all citizens. The period since 2008 has amply demonstrated the incomplete nature of the Eurozone economy and its institutions, allowing member states to ignore its obligations and jeopardize the common monetary policy. This has caused unnecessary pain for a large number of individuals, and the ensuing chaos demonstrates that the capacity of the elected and the bureaucracy to design an economy is lacking.
2. Mutual benefits of a solution for Greece is an absolute requirement for success and acceptance by citizens in other member states. In practice, citizens should carry the same burdens and have the same benefits and opportunities across the Eurozone.
3. Fiscal Union would complete the Eurozone Monetary Union, and allow fiscal and monetary stimulus to be coordinated, as in any economy around the world. We are in a mess because member states can spend, tax, and borrow – but not debase the currency unit as emperors have since the invention of money.
4. Governance of the Eurozone is the broader issue, of which the fiscal and monetary unions are parts. We now have member states in the European Union with their own, non-Euro currency, Central Bank and hence, printing presses. The European Union, not the Eurozone is the federation, and Governance is structured around the larger entity. At some point this system must break down, simply because the inequities arising from pursuit of policies favoring a group of citizens, at the cost of those not participating – aka beggar-thy-neighbor policies. The non-Eurozone members should enter the European Economic Agreement (EEA), while the governance bodies of the federation remain open only to the Eurozone member states. Inefficiencies in governance arise from eternal discussions raised by the Free Trade participants who want governance rights, without taking the wins and losses arising from the same.
5. Polarization in the Eurozone is on the rise, and it is important to keep aligning citizens within countries and across member states – first and foremost in economic and governance terms. This is not about socialism or capitalism, left wing or right wing – it is plain common sense, pulling in the same direction gets the job done.
6. The single market must apply to all areas of economic activity. The largest single market is the labor market. The tax wedge varies from country to country, and so creating massive distortions among member states and its citizens. Labor taxes (employers and employees) account for 51% of EU tax revenue and so the imperative is to get this tax area aligned soonest. The buyers of labor demand workers according to the after tax costs. The suppliers of labor likewise look at the resulting net reward. Markets clearing at different price levels in the same economic union is folly. The largest component of GDP is consumer expenditure. A functioning labor market is essential for a growing economy. Still, Merkel, Hollande, and Renzi have not done anything to address this issue. The imperative for Eurozone citizens is to understand why.
7. Transition from crisis and non-alignment to an integrated economy with solid institutions takes time, but short-term measures must precede perfection. The imperative for aligning both monetary and treasury policies in economic stimulus is evident when one considers the massive task of re-building the Eurozone economy, and in particular getting back to something close to full employment.
8. Changing the way we look at things is an opportunity for dealing with challenges of the Eurozone. From immigration to innovation, and to the Greek crisis – we need new, fresh approaches to solving issues, to accelerating time schedules, to giving both creditors and debtors sustainable solutions. The value of a perpetuity – reserved for perpetual institutions (like nations, central banks, or the IMF) to issue and accept - is based on paying just interest payments, and never principal – and employing this as part of the restructuring toolbox can eliminate the massive burdens of debt repayment, while maintaining the value of debt to creditors. In some way, that is what governments do – they roll over debt, and sometimes having a problem finding ways to reducing the debt. However, unless you restructure with a plan, this could work contrary to purpose, if the parties earnestly want resolution. Since the Greek debt now is largely institutional and not part of the private sector any longer, there are no banks or individuals falling over as cash flow reduces. Declaring default or changing approach are both willful acts on either side of the table. We managed our economies based on a model of “full employment”, and all system dynamics break down when we remove that assumption. Twenty-six point six percent unemployment is a Black Swan event concerning the sustainability of an economy and its institutions that started the crisis in 2008 at 7,5% unemployment. Forcing austerity measures upon an economy leads to massive unemployment, as corporations – the labor market buyers - adjust to domestic demand. When the issue is sovereign credit collections, the cash flow coverage for such collections is diving. As the nation adjusts its spending, in conformance with creditor demands, nothing improves in terms of debt service capacity – to the contrary: it gets worse. The theatre becomes tragicomic as creditors then show up at the low point of this cycle, suggesting “something must be done, or else…”. We need to rethink credit default resolutions mechanisms for sovereign states, corporations and individuals – binary outcomes hurt both creditor and debtor. Negotiated outcomes imply massive transaction costs, also external to the negotiating parties. My suggestions in this point are perhaps modest compared to yours, to those of experts in the creditor group, in the central banks, EuroGruppe, and debtor governments.

The Eurozone member states need to re-consider these eight points soonest and work to remove the brakes on the economy resulting from political drag introduced by non-Eurozone member and non-member states.

Eurozone vs. Competition

It would seem to be an easy fix if the Eurozone had a Government, but unfortunately it is an 19-member subset of a 28-member federation, each with a national government. There are 10 currencies circulating as legal tender in the federation, but there is no federal body governing any of these. The Eurozone has to become a federation.

The Big Lie

"The Single Market refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. A functioning Single Market stimulates competition and trade, improves efficiency, raises quality, and helps cut prices. The European Single Market is one of the EU’s greatest achievements. It has fuelled economic growth and made the everyday life of European businesses and consumers easier. "

How can it be that the European Commission is up in arms over geo-blocking of websites, but not marginally concerned about price formation in the "Single Market" for labor, the major source of EU tax revenue?

My question is easily regarded as impertinent, as the European Commission is a governing body of the European Union, and as such is focusing on the Free Trade aspects. It nevertheless has an established Competition Authority that regularly looks into abuses of dominant position by corporations, worried about the consequences for prices in the federation. Yet, the Commission accepts that member states apply tax policies to favor the attraction of capital, the establishment or transfer of businesses, or any other fiscal arrangement that pits one member nation and its labor force against the other. This is not much of a problem when there are 11 currency zones to confuse the picture, and so we can sweep it under the exchange rates fluctuations carpet in Brussels. In the Eurozone, this is starting to become embarassing, as we still hear people talking about the "Single Market" that does not exist - the largest, and most important of them all.

Minimum wages

Nowhere is the absence of a Single Market framework more evident than in the lower end of the labor market.

Once your local economy goes into an unemployment spiral, there are no market dynamics that will help your low or non-existent minimum wage work-force gain terrain in comparison with workers of the same skill level in Germany, the BeNeLux, and Ireland. The only nightmare worse than having 26.6% of the labor force unemployed is to see them go back into lower-paying jobs and so perpetuating the economic distress of the nation and federation.

Once you get oversupply, the risk is that your educational system produces university graduates, while your labor market absorbs these in professions requiring little or no training. Your long cycle, generational growth - the return on investment in human capital, the sacrifices of families - falls apart, and it takes more than a generation to come back.

It is important for the housing market, the birth rate, industrial structure, economic growth and national cohesion that minimum wages are sufficient for living normal, independent lives. It is important for Eurozone cohesion that the conditions for citizens are fair and equitable. Establishing purchasing power parity based standardized minimum wages is an imperative that, with other fiscal policy alignment, could be an important growth driver, and contribute to a more solid fiscal base in countries like Greece and Italy.

The proposal simulations brought us within two euros of the Dutch purchasing power parity adjusted minimum wage. It is hard to propose that countries reduce their established minimum wage, so we let Germany and Luxembourg remain a bit ahead.

As is evident from the figure above, we have cost of living differences of notable dimensions in the Eurozone, and so minimum wages can be lower in some countries and higher in others. Minimum wages will need to be monitored for relative purchasing power parity changes, and to be supported by further fiscal alignment. We propose that a 12% tax rate is established for minimum wages across the Eurozone, with standard deductions. Alignment of Social Security Contributions for employers across the Eurozone becomes of utmost importance in order for the minimum wage to remain the same from a demand side vantage point.

The implied 68% jump in Greek minimum wages would assist a population in a negative Death spiral in establishing a bottom. As a stand-alone measure it is doomed to fail, whereas it will likely be highly effective if a part of the reform package being prepared by the Greek government.

Growth vs Taxation for debt service

In every detailed analysis based on purchasing power parity adjusted amounts relating to incomes and taxation in Greece, the result is that Greeks pay taxes within the norm or in excess of their Eurozone fellow members. The simple analysis of GDP makes a point:

If we assume that the economic impact of each person going back to work is at this level, and we move from 26.6% unemployment to the 7.5% level at the beginning of 2008, GDP would grow by about 74 bn euros - about 40%. Employment growth alone resolves the debt issues.

The problem in Greece is an employment problem, and all efforts should go into kickstarting the labor market. Most employment and economic growth is driven by domestic demand. Raising taxes is  in itself going to choke domestic demand.

Conclusion

As unemployment in Greece has risen from 7.5% to 26.6% since 2008, following severe austerity measures imposed by creditors, elections brought unprecedented support for the Syrizia government’s anti-austerity policy proposals. The collapse of the Greek economy is a vicious cycle in which the burden of carrying the cost of operating the business is spread on a rapidly declining number of general partners, without access to fresh credit lines. 

 As Europeans, we have a prime opportunity for using the Greek experience positively to rebuild the Eurozone, and not pretending this is the problem of Greece only.  The inherent structural shortcomings of the Eurozone, and the grave omissions of the political leadership in seeking Eurozone-level reforms, will lead us to ever-larger crises.  Without belittling the need for reforms in Greece, these should be formulated in part as Eurozone programs applicable to all member states.

The Eurozone needs to find a sustainable governance model and be more aggressive on fiscal alignment, a single credit market, and a single market for labor.

For creditors and debtors alike, this is the the time to take good advice and move on:

You can't always get what you want
But if you try sometimes you just might find
You just might find
You get what you need 

Centenary Sovereign Finance is a PHIMARK Group boutique programs development and consulting arm. We have developed large scale industrial and financial proposals for rebuilding the Eurozone economy. Call for a presentation: