Courtesy of Doug Short.
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The throngs demonstrating on Athens’ streets will recognize these words. They were uttered by Pyrrhus, King of Epirus, after Greek forces under his command defeated a Roman (a proto-European Union of its day) Legion at Asculum in 279 BC. The Greeks, though victorious, had lost their best officers and men in the battle. From this event comes the phrase Pyrrhic victory.
Today’s demonstrators are advised to give pause to reflect on the Greece they will gain if they force the “Troika” (the term given to negotiators from the European Union, the European Central Bank and the International Monetary Fund) to relent and to cease calling for further austerity measures by the Greek government. The economic freedom to chart their own course is worth little if their intransigence towards the austerity measures demanded (as the price of aid), compels the “Troika” to retreat. A default, or a return to the drachma (tantamount to a default), will be catastrophic for Greece, its economy, and its people — one that will take decades, if not generations to undo.
Greece has always had a problem with government debt, one that predates the euro’s introduction in 1999. Greece has always relied heavily on external sources to finance its government. In 2001 — just two years after the euro replaced the drachma — Greece’s financial liabilities to the rest of the world exceeded foreign assets owned by Greeks by a wide margin — a situation due almost entirely to the need to finance the government’s debt abroad. Externally held government debt was 48 percent of gross domestic product (GDP) in 2001. Overall, Greece’s net international investment position (IIP) in 2001 stood at -47 percent of GDP. Ten years later this situation is largely unchanged. Government debt financed abroad has almost doubled to 88 percent of GDP. Overall, Greece’s net IIP at the end of the 1st Quarter 2011 was a negative 101 percent of GDP.
Some might argue this is all the more reason for Greece to exit the euro and return to the drachma. The difficulty with this tactic is it does nothing to change the fundamental imbalance between the government’s ability to raise revenue and its expenditures. If this equation is not dramatically altered, Greece must find foreign lenders willing to buy its debt at less than exorbitant interest rates. Given the government’s current reputation, this is asking for too much credulity by potential lenders.
Nor can Greece expect to revive its economy from the repatriation of foreign financial assets. Should Greece leave the euro, the funds moved abroad by its citizens are unlikely to return. The recent improvement in the net IIP for the economy’s non-governmental sectors is the direct result of money moved overseas out of Greek banks and Greek securities. The best chance of the government coaxing these funds back home is to commit itself to the euro. And, the only way it can do so, is to accept the austerity plan offered under the “Troika’s” auspices. Any other outcome may seem like a victory to the man on the street, but it will be a Pyrrhic one at best.
Notes:
A country’s net international investment position (IIP) is a measure of difference between its aggregate stock of foreign direct investment and financial assets held outside of the country and foreigners’ aggregate ownership of farms, factories and other businesses within its borders as well as their holdings of stocks, bonds and other securities issued by the country, its corporations or its citizens. A positive net IIP means the nation owns more in foreign assets than foreigners own of its assets. A negative value has the opposite interpretation.
GDP (Gross Domestic Product) is one measure of the aggregate quantity of economic activity within a country or region. As a barometer of the flow of goods and services over a period, GDP includes only final consumption (excluding the value of intermediate products), investment spending, changes in inventory levels and the difference between imported and exported goods and services. It may be expressed in nominal, or, current prices, or in real terms, adjusted for inflation. The chart is based on GDP computed using current prices.
The “Private Sector” net IIP statistics reflects the aggregate of net direct investment in Greece plus the financial and non-financial sectors.
(Source: Bank of Greece; Hellenic Statistical Authority.)
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