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Ditching Euro No Option for Greeks

Photographer: Kostas Tsironis/Bloomberg

A woman cleans up broken window glass in a coffee shop following austerity protests in Constitution (Syntagma) Square in Athens, Greece. Rioters caused 800,000 euros in damage to state property in Athens during the two days of violence in June as Prime Minister George Papandreou battled for political survival in parliament. Close

A woman cleans up broken window glass in a coffee shop following austerity protests in... Read More

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Photographer: Kostas Tsironis/Bloomberg

A woman cleans up broken window glass in a coffee shop following austerity protests in Constitution (Syntagma) Square in Athens, Greece. Rioters caused 800,000 euros in damage to state property in Athens during the two days of violence in June as Prime Minister George Papandreou battled for political survival in parliament.

Minos Kleidis is the Greek the world’s television cameras don’t see.

When police and protesters clashed in central Athens on June 28, Kleidis and half a dozen of his workers rushed to pack up chairs and tables and lock themselves into the restaurant they manage on Syntagma Square. Kleidis says the 48 hours of rioting caused 20,000 euros ($28,224) of damage, including smashed marble, broken pipes and burnt umbrellas.

“It takes a week to make that sort of money,” Kleidis, 33, said. “The exasperation, disappointment and worry about our country are justified. The violence isn’t.”

Thirty years after Greece became a member of what’s now the European Union and more than a decade after it swapped the drachma, one of the world’s oldest currencies, for the euro, Greeks like Kleidis are on the frontline of the government’s attempts to prevent the region’s first debt default.

As Athenians tally the cost of last month’s riots, most Greeks acknowledge financial stability and the cost of keeping the euro comes with more sacrifice for a country where parents and grandparents endured occupation by the Nazis, famine, hyperinflation, civil war and then a military dictatorship.

“The challenge is to create a healthy and more productive economy,” said Riccardo Barbieri, the London-based chief European economist at Mizuho International Plc, who wrote research reports on Greece in the four years before the nation adopted the euro in 2001. “This is about a country changing its skin. No one can be happy with paying more taxes, having their salary cut, losing their jobs or risking losing their jobs.”

Violent Protests

Rioters caused 800,000 euros in damage to state property in Athens during the two days of violence in June as Prime Minister George Papandreou battled for political survival in parliament.

The 59-year-old premier won a confidence vote and then backing for a new 78 billion-euro, five-year package of budget cuts and state asset sales on those same days to secure further international aid by stemming defections from members of his Pasok party.

One lawmaker, Vasso Papandreou, extended support by saying she was “choosing the knife over the pistol.”

Elsa Papadimitriou, 69, a lawmaker for the opposition New Democracy party for 20 years, defied her party’s line and supported the package, calling her decision “a tragic political dilemma” as the EU and International Monetary Fund held back approval of a 12 billion-euro payment needed to pay bond redemptions in August until passage of the austerity law.

‘Economic Suicide’

“The medium-term plan is a solution, whether good or bad shall be seen, but imperative,” Papadimitriou said on June 29 as hooded youths attacked riot police outside the parliament building and tear gas engulfed the square. “Fiscal suffocation and economic suicide are not an alternative.”

While the majority of Greece’s 11 million people agree something has to be done, Papandreou is paying for that realization with a slump in voter support.

A survey of 1,014 people by Marc SA for Ethnos newspaper showed 70 percent saying the government must implement the cuts. Half of them also wanted the financial package revised; of that number 57 percent said the measures should be applied even if attempts at revising them failed. The margin of error is 2.5 percentage points.

Pasok Behind

At the same time, the poll, conducted June 21-23, showed that the Pasok party was preferred by 20 percent of voters, trailing New Democracy with 21.4 percent. In a survey for television channel Skai and newspaper Kathimerini last week, Pasok stood at 26.5 percent and New Democracy on 32.5 percent.

Papandreou’s approval rating was 28 percent, the lowest, while New Democracy leader Antonis Samaras scored 35 percent. Twenty-nine percent believed Samaras was best suited for premier, compared with 22 percent for Papandreou. Forty-six percent said neither man was right for the job.

When Papandreou was elected in October 2009, his party won 44 percent of the vote.

Papandreou’s challenge is to convince Greeks his measures will work when trust in politicians is at the lowest since democracy was restored after seven years of military rule in 1974. Unemployment in Greece is set to average 14.5 percent this year and the economy is shrinking 3.8 percent, the third year of contraction.

Cost Legacy

Cost controls “should have happened in 1991, instead of us going to a government office and seeing 14 people do a job needed only by three,” said Angeliki Papadopoulos, 48, who sells cigarettes and newspapers at a kiosk near Syntagma Square.

Spending cuts have left hospitals without supplies and higher transit fares sparked a “won’t-pay” initiative that has evolved into a “we don’t pay; we don’t owe; we don’t sell” movement that drew as many as 50,000 Greeks to rally outside parliament on June 5.

Even as protests swelled in central Athens, a Kapa Research poll of 634 people in the square and another 1,208 nationwide underlined the divisions. Eight in 10 of those in the square said Papandreou’s plans should be rejected and elections held. That number fell to 48 percent nationwide.

About half of the protesters at the square said Greece’s membership in the EU is a negative, a figure that jars with the 80 percent in the national sample that say it’s a positive. Only 16 percent nationwide saw EU membership as negative.

Point to Prove

Papandreou, whose father, Andreas, founded Pasok 37 years ago after the military junta, also needs to show his fellow euro members his austerity plan can move quickly enough.

After 12 months of wage and pension reductions and tax increases that were a condition of the first package of 110 billion euros of rescue loans, Greece’s budget deficit is three times greater than the EU limit of 3 percent of gross domestic product.

Without new measures, the country’s debt will reach 166 percent of GDP next year, the European Commission said on May 13. And in early June, the EU, European Central Bank and the IMF said flagging government resolve to overhaul the Greek economy threatened to leave the fiscal deficit entrenched at the unsustainable level of 10 percent of GDP.

“There is no question that in the first year of the program had Greece made a stronger effort, we wouldn’t be here now,” said Barbieri at Mizuho. “Greece has put at risk itself and the whole of economic and monetary union.”

Credit-rating downgrades and failures to improve tax collection have spurred borrowing costs to records for Greece, forcing the EU and IMF to craft a second aid package to shield the country for another three years.

Bonds Slump

Bonds of debt-strapped euro nations slumped last month and officials in the U.S. and China warned that the euro area’s failure to restore confidence threatened the world economy.

The yield on Greece’s two-year bond topped 30 percent for the first time on June 16 after two members of Papandreou’s parliamentary group resigned, threatening his majority in the house. The cost of insuring Greek debt in the credit-default swap market soared to an all-time high.

Greek bank deposits fell by the most in more than a year in May as speculation reignited that the government would default on its sovereign debt and leave the single currency.

A return to the drachma is advocated by academics, including Harvard University professor Martin Feldstein and Nobel Laureate Paul Krugman, as the best way to restore competitiveness. Such a step has been ruled out by EU and Greek officials.

Not Drachmas

“Going back to the drachma would only make their problems worse,” said Miranda Xafa, senior investment strategist at Geneva-based IJPartners and former IMF board member for Greece. “It would certainly not solve the debt problem because Greece’s debts are denominated in euros, not drachmas. Devaluation would make the country instantly insolvent.”

A “vicious circle” of drachma devaluations and inflation in the 1980s “not only failed to improve competitiveness but also eroded the value of peoples’ savings,” she said. “That’s why Greeks strongly supported euro adoption.”

Invaded first by Mussolini’s Italy and then by Nazi Germany during World War II, Greeks suffered hyperinflation and a famine under German occupation. At the end of 1943, prices for staples were rising at a rate of 234 percent.

More than 500,000 Greeks, or 7 percent of the population, died between October 1940 and October 1944, 260,000 of them from hunger and malnutrition. A Time magazine news report in 1942 labeled Greece “the hungriest country,” with bread costing $15 a loaf. By 1946, the country had plunged into civil war with communists backed by Yugoslavia, Bulgaria and Albania fighting government forces supported by the U.S. and Britain.

Escaping Hardship

Most citizens saw membership of the EU in 1981 and the euro 20 years later as an escape from the political and economic instability that blighted its history. Greeks had a higher-than- average percentage of support for the euro, at 72 percent, before the currency was even introduced, said Yiannis Mavris, a political scientist and head of polling company Public Issue SA.

At first, the country was considered unfit to join, with an inflation rate triple the EU average, a bloated budget deficit, and a currency so unstable that the Bank of Greece had to spend $2.5 billion propping it up.

To bring interest rates in line with those of the euro zone, the central bank reduced the cost of borrowing nine times in 2000 to 4.75 percent, less than half the level at the start of the year. It also changed rules on banks that allowed Greeks to buy homes rather than inherit them for the first time in generations.

First Cash

On Jan. 1, 2002, the country was the first to get newly printed euro cash, an hour ahead of the rest of western Europe when then-Prime Minister Costas Simitis withdrew notes from an automated teller machine in Athens.

“The drachma symbolized a different country, a Balkan country,” Kleidis said in an interview at his restaurant. “The euro defined Greece and the Greeks with other EU countries. The euro made us part of western Europe.”

Even the Communist Party of Greece, whose headquarters is still dominated by portraits of Bolshevik leader Vladimir Lenin, says keeping the euro is a good idea, while it opposes state asset sales and the austerity measures.

“A solution outside the euro and return to the drachma in the current conditions is catastrophic,” said Aleka Papariga, leader of the Greek Communist Party, during an interview in May on Antenna TV.

A May 22 survey by Public Issue showed that two-thirds of Greeks rejected the idea of abandoning the euro and only 16 percent were in favor of returning to the drachma. Overall acceptance of the euro stood at 58 percent, and was significantly higher among pensioners and housewives.

Kleidis says he’s concerned about what the future may bring.

“All I hear is that the measures will just delay bankruptcy, not avoid it,” he said. “We Greeks aren’t very good at managing finances.”

To contact the reporters on this story: Maria Petrakis at mpetrakis@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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