Zorba the Gr€€k is still skint after five years

As the euro continues to fall amid disappointment that the EU has not come up with a solid rescue plan for Greece, Zorba makes an appearance

Patrick Blower, Feb 2010

It was five years ago to the day that I saw this livedraw on what was then the Guardian’s Comment is Free[ref]Sadly along with it’s other faults the Internet is not forever – because meaning is held on the transitory relations of bits of spinning discs and network switchery that somebody has to pay for the rust that is linkrot  never sleeps. Analogue media coded information in what they were and didn’t need a constant supply of power and rent, though they had their own decay mechanisms. I was surprised to find this was hard to get hold of again after only five years. For me at least the Guardian’s link doesn’t play, but the artists own livedraw site still has it. I used a youtube link[/ref]. Only one of the leaders in the cartoon is still standing after the five years, – five years is a really long time in politics.

In those heady days, a nervous Ermine was still at work, but had roughed out a flight plan for the exit. All this turbulence in the market seemed hazard and opportunity, and I was convinced the Euro was going to blow, the internal contradictions of a finance union without a transfer union, the lack of common cause.

None of these things have changed, but I underestimated the doggedness with which people cling to old forms, and of course perhaps the preparations the rest of the eurozone felt they needed to do to bolster the creaking edifice against Grexit. Even now it’s hard to say – will I look back at this in five years time and wonder how nothing has changed? Exactly how long can the markets stay irrational while the entirety of the Eurozone grinds its way into insolvency.

Just like then, it feels that the forces are gathering for a showdown. It is in points of change that opportunity arises and destruction threatens. The five year anniversary seems to be a good one to invoke the spirit of Zorba the the Gr€€k once again. The world has still not recovered from the 2008 financial crisis, there is still too much capital chasing not enough productive assets. Greece is a symptom as well as a cause – the Eurozone serves two masters. As Lincoln observed the problem in a different field

A house divided against itself cannot stand. I believe this government cannot endure, permanently, half slave and half free. I do not expect the Union to be dissolved — I do not expect the house to fall — but I do expect it will cease to be divided. It will become all one thing or all the other.

Abraham Lincoln, 1858

So too with the Eurozone, it lumbers endlessly from crisis to crisis, and it is time for it to become one thing or another. It has crushed too many dreams already, and it needs to shape up or to start to cut away the dead wood, and become small enough to for a political and transfer union to hold. Or the United States of Europe needs to be constructed.

To call in another American view on the fiasco, I was glad to hear Greenspan finally call it out in public

“I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognises that parting is the best strategy.

The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

Until that comes to pass or the whole misbegotten enterprise disintegrates from its internal inconsistencies the rotting corpse that was wounded by the original financial crisis will endlessly stink up the place and ruin Europeans’ lives – particularly young folk by the looks of it.

As a young man I was unlucky enough to graduate into Thatcher’s first recession in 1982, but although deep it recovered relatively quickly compared to the 2008 recession that seems to be combining with other strategic shifts in the workplace. In Britain although these problems may be affecting the quality of jobs, in the Eurozone and southern Europe there seems to be grinding youth unemployment as well as a general protracted recession – five years of that is a serious hit on one’s working life. No wonder there is a Greek youth brain drain.

Can’t pay, won’t pay

The Greeks are never going to repay the debt in Euros. Writing the debt off which is what Syriza seem to want isn’t going to help them in the long run either. They are yoked by the Euro to people that like to live in a different way. Let’s see what happened in the past. I hit up these guys for some historical USD to GDR, GBP and DEM from 1990 to 2001. I then normalised everything to a value of 1 on Jan 1990. Basically you needed 2½ times as many Drachma to buy a US dollar in 2000 than you’d needed 10 years before. Germans, who didn’t exactly have a great 1990s needed roughly the same and even in Blighty we only needed about 20% more GBP to buy that dollar. You can quibble as to what sort of store of value a US dollar represents but the difference cancels that out. There’s something different about the way Greece likes to do things and its currency reflected that.

As time went by you needed more and more drachma to buy that US dollar

When Zorba the Gr€€k was drawn, roughly the same distance as is covered by this chart had elapsed after the drachma was crash-locked to the Deutschemark’s proxy the Euro. Now it’s 1.5 times the space covered by this chart. There’s no point in resetting this to zero now, it’s a structural difference. In a true currency union like the United States, rich parts continuously transfer money to poor parts, else a New York City dollar would appreciate against a Detroit, MI dollar – in the chart above you’d need a lot more Detroit dollars to buy a beer in NYC at the end than at the start.

The Greeks may be the canary in the coal-mine

Those Gr€€k €uro debts ain’t gonna get paid. There’s a history lesson in this for the rest of us too. In the good times it’s easy to believe in financial promises, but in the end a lot of finance is just that, promises. A lot[ref]okay – all of it – a solar flare/EMP would vaporise the lot, but even without that some promises are more hand-waving than others[/ref] of my ISA is also promises, so are all those British mortgages taken out of overinflated house prices at low interest rates by people who will never earn enough in a lifetime to discharge those debts unless something changes. At the moment the lens is focused on Greece, but it can move, and maybe zoom out. Odd things are happening in the economy – we have created a lot of money to buy off the day of reckoning in 20o8 and after seven years it’s still not finding things of value to stand proxy for, companies are hoarding cash because they can’t invest it to make things people can/will buy more of. It’s not necessarily all bad. Maybe it is the final denouement of consumerism -the Post Carbon Institute’s Richard Heinberg in a curiously upbeat mode

The practical result of declining overall societal EROEI[ref]energy return on energy invested – how much energy you have to invest in getting energy[/ref]will be the need to devote proportionally more capital and labor to energy production processes. This is likely to translate, for example, to the requirement for more farm labor, and to fewer opportunities in professions not centered on directly productive activities: we’ll need more people making or growing things, and fewer people marketing, advertising, financing, regulating, and litigating them. For folks who think we have way too much marketing, advertising, financialization, regulation, and litigation in our current society, this may not seem like such a bad thing; prospects are likewise favorable for those who desire more control over their time, labor, and sources of sustenance (food and energy).


The energy glut of the 20th century enabled us to embody energy in a mind-numbing array of buildings, infrastructure, machines, gadgets, and packaging. Middle-class families got used to buying and discarding enormous quantities of manufactured goods representing generous portions of previously expended energy. If we have less energy available to us in our renewable future, this will impact more than the operation of our machines and the lighting and heating of our buildings. It will also translate to a shrinking flow of manufactured goods that embody past energy expenditure, and a reduced ability to construct high energy-input structures. We might find we need to purchase fewer items of clothing and furniture, and fewer electronic devices, and inhabit smaller spaces. We might also use old goods longer, and re-use and re-purpose whatever can be repaired. We might need to get used to buying more basic foods again, rather than highly processed and excessively packaged food products. Exactly how far these trends might proceed is impossible to say: we are almost surely headed toward a simpler society, but no one knows ultimately how simple. Nevertheless, it’s fair to assume that this overall shift would constitute the end of consumerism (i.e., our current economic model that depends on ever-increasing consumption of consumer goods and services). Here again, there are more than a few people who believe that advanced industrial nations consume excessively, and that some simplification of rich- and middle-class lifestyles would be a good thing.

I grew up in a simpler London, and when I look around me at the shocking waste and inefficiency of consumerism compared to only 40 years ago I do wish we could distil the many great and genuine innovations and improvements from all the destructive busywork and tat that takes away.

Why? For crying out load, why?
Consumerism. Why did this misallocation of resources happen?

Perhaps Greece rubbing up against the evil heart of darkness in the common cause assumptions of the Euro is reminding us that in the battle of illusion against reality the latter tends to win out over time. We tell ourselves many stories round the virtual campfires weaving meaning into the flickering shadows on the wall. Although these myths are symbolic, not all of them are true. It is going to be an increasingly difficult task to find a way of turning cash into usefully productive long-term assets against a background of secular stagnation, and making easy assumptions is probably not the way to do it. Much of the appreciation is asset prices like shares and houses doesn’t reflect an increase in underlying value or future income stream in the case of shares. It merely reflects the increased amount of QE money chasing those assets. Anybody could be a great investor over the last few years with that sort of tailwind, though the day of reckoning seems to be getting closer with the help of our Greek friends shining a light on what unrealistic claims upon the future look like.

The Greeks want to live with a currency that depreciates faster than the Germans. It is called the drachma. Possibly if Northern Europe wants its money back from the repudiated € loans, sue Goldman Sachs who aided the Greeks get into the Euro under false pretences, and good luck with that. It’s always good when seeking repayment to pressure people who actually have some money, and the Vampire Squid would seem to be where a lot of the money ended up 😉

Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.

The drachma is dead. Long live the drachma.

10 thoughts on “Zorba the Gr€€k is still skint after five years”

  1. I expect a compromise actually

    True left wing revolutionaries don’t hire investment banks like Lazard to advise them on restructuring talks with their lenders

    The Greek government did

    Argentina, who actually defaulted, didn’t hire any bankers to tell them what to think

    The Greek people really really want to stay in the euro


  2. greece would have a whole extra set of problems if they left the euro now: bank runs, and so on. see this blog last year from yanis varoufakis (who is now the new greek finance minister): http://yanisvaroufakis.eu/2014/03/10/if-scotland-why-not-greece/ … (he also argued that an independent scotland *should* have left sterling – interesting, though no longer of immediate relevance).

    syriza is offering to pay part of their debt, just not all of it. there certainly ought to be a compromise: partial debt recovery is better than a total loss. the suggestion of linking how much greece pays to greek GDP is also sensible for all parties. (GDP is a decent measure of a government’s ability to pay, since it’s what they can tax.)


  3. The trouble is if they are forgiven a portion of their debt what is to stop them continuing to borrow then coming back in a few years and asking for forgiveness again?

    I can’t see any way out other than them leaving the Euro, your graph tells us everything we need to know.


  4. @Neverland I dunno, if Lazard got the 2012 haircut through maybe Tsipras thought they have prior form 😉

    > The Greek people really really want to stay in the euro

    That still staggers me, given the history behind the exchange rate chart. It’s a different way of life with a strong currency as opposed to letting continual devaluation take the strain.

    @GGS Yanis’s blog is interesting, though I find his logic unconvincing

    Greece can reclaim its sovereignty within the Eurozone by finding the courage to challenge the faulty logic of its loan agreement with Brussels, Berlin and Frankfurt.

    Clever, but no. Challenging is not enough. Greece has to actually change the position of their loan counterparty. Yanis seems to think he can do that. Perhaps as game theory architect he has skills, but I would imagine Germany can find similar.

    Grexit isn’t going to be fun, but years and years of hurt doesn’t sound like a great option either – they’ve had five odd years of that and counting 😦

    @Tony Exactly! It’s clear that Greece isn’t going to pay the current debts, and that’s fair enough, it’s hard to see how they could even with a normally working economy.

    Even if the debt is cancelled it isn’t clear to me that the forces that drove the exchange rates apart so much have gone away. If they haven’t, then the cracks will show again 10 years down the line. Nailing the current debt still doesn’t put this on what looks like a sustainable footing.


  5. The Greeks don’t have to pay the debt down, they don’t have to default on it either. They can just service the existing debt forever, provided they can get the German bond rate. As Greek govt bonds mature, they can borrow from the Germans at the German 10-year rate, which is like 0% real, plus say 1%. Since their indebtedness is about 200% of GDP, they’d effectively have to pay Germany 2% of GDP forever. Painful, but probably less painful than leaving the euro. Greece does indeed need a massive devaluation, but the Germans want them to do it the German way–via brutal internal deflation–and many Greeks are in agreement with this. Brutal internal deflation provokes anger and that anger can eventually be channeled against the rentier class. Devaluation/Inflation is less painful in the short run, but for precisely this reason it takes away the anger and so nothing gets done about the rentier class.

    The rentier class largely consists of small retirees, small property owners, petty civil servants, small businesses in protected industries. The shipping billionaires are NOT the problem. Precisely because the rentier class is small people, it is very hard to attack it without a huge build-up of anger. One of the most important reforms will have to be a massive tax on land as a replacement for taxes on productive labor. All of southern Europe needs this reform, as does Britain, though Britain isn’t (yet) in dire straits like southern Europe. The British real-estate bubble is ultimately the result of a bad tax system, one which favors land hoarding over productive labor.


  6. what syriza is asking for is to target a primary surplus of 1-1.5% of GDP, instead of the 4.5% surplus which the previous government had agreed to. so that 1-1.5% would go to their creditors (it’s just that that’s less than the interest alone on the current debt). if they were saying: write off the existing debt, and lend us more, so can run a deficit this year, and repay you some time later – that would indeed lack credibility. they’re actually being very reasonable, by offering to start repaying something right away, but at a more realistic level. which makes their negotiating position stronger.

    the austerity imposed on greece has not even been in their creditors’ interests, because it has made the greek economy shrink, reducing their capacity to pay. similarly, leaving the euro would also reduce their capacity to pay, because they would be dealing with a banking crisis, and their currency would be worth less. some suggest that they must leave the euro if they default, but this doesn’t make sense for anybody.

    in the longer term, of course greece needs proper reforms – better tax collection, less corruption, etc. debt forgiveness doesn’t fix everything. syriza does seem to be committed to reforms, too, though i don’t know how successful they will be. this stuff isn’t easy.

    however, i don’t think the problems will recur in exactly the same way. european banks are not going to be rushing to make lots of big cheap loans to everybody in greece now. (they will probably be making foolish loans in some other country or sector instead …)


  7. Sounds like there is significant negotiating room between 4% GDP and 1.5% GDP.

    Thus I think this will drag on for a long time before a grexit has to occur.


  8. For me this has echoes of a more ancient dispute in Greece itself, the might “democratic” city state of Athens and a tiny island called Melios

    The Athenians demanded that Melios surrendered to it and Melians asked if they couldn’t just be left alone

    In the end the Athenians stormed Melios killed all the men and took the women and children as slaves

    Athens is the oft cited prototype for all Western democracies too

    As justification the Athenian’s just shrugged and came up with the maxim “The strong do what they can and the weak suffer as they must”

    Europe has spent 70 years trying to disprove this maxim while it has just been brutally demonstrated a few hundred miles away from Greece’s frontiers in Yugoslavia in the 90s and in Ukraine just last year

    A compromise is in the EUs best interests really


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