Why Greece Must Ditch the Euro: An Interview With Economist Dimitris Karousos

One year after Syriza was elected promising change and an end to harsh austerity, the Greek ruling party faces tremendous pushback from a populace that is resisting efforts to impose additional cuts and austerity measures. Throughout Greece, farmers have set up roadblocks, lawyers and doctors are striking, and ordinary citizens are mobilizing to protest a new onslaught of taxes and pension reductions.

Economist Dimitris Karousos has worked as a foreign exchange and investment expert in Greek and international finance. Karousos ran for Greek Parliament in the September 2015 election with the United Popular Front, a political movement formed in 2011, which has consistently called for Greece to depart from the European Union (EU) and the eurozone, and which has vehemently opposed Syriza’s capitulation to the demands of the EU and Greece’s lenders. Karousos analyzes Greek economic developments, the harsh realities of the austerity and privatizations being enforced, and the necessity for Greece to leave the euro and return to its own currency. This interview has been edited for clarity.

Michael Nevradakis: Let’s discuss the recent recapitalization of the four major Greek banks. What will be the consequences of this latest recapitalization?

Dimitris Karousos: The consequences of the recapitalization are nightmarish. The government amended the law, which regulated bank recapitalizations, which stated that the cutoff price of a bank’s stocks was set as the price that would be determined from the bids that each financial institution would receive. The option was given to accept [these bids], and the Hellenic Financial Stability Fund had the right to reject those bids. The current [Syriza] government came in, however, and introduced a new law, which required the Hellenic Financial Stability Fund to accept any bid from the book building process. Indeed, when the book building process was completed, the bids that emerged were, for the National Bank of Greece, 0.02 cents; for Piraeus Bank, 0.03 cents; for Eurobank, 0.01 cent; and for Alpha Bank, 0.04 cents. The prices were as close as possible to zero.

Distress funds have valued the Greek banks at 747 million euros. Looking at the most recent balance sheets of the banks, we will see that while the banks did indeed require recapitalization in order to continue operating normally, the capital that the Greek banks possessed during the first three-quarters of 2015 totaled 24.6 billion euros, in addition to the 6 billion euros they received from the previous recapitalization. This excludes 40 billion euros given to the banks in the first two recapitalizations.

In all, the distress funds paid around 5 billion euros, with which they bought out the four Greek banks that control 95 percent of assets in the Greek banking system, and 350 billion euros worth of assets, including all of our consumer and business loans and mortgages. This has never before happened elsewhere in the world.

There is no question that these “toxic assets” will be foreclosed upon. The troika and distress funds are calling for 60,000 to 70,000 foreclosures annually. I should add that I do not believe this is the last recapitalization. I believe we will see a new recapitalization very soon.

The Greek government recently proceeded with the privatization of 14 profitable Greek airports and the major port of Piraeus. Will these privatizations benefit Greece?

These privatizations will be catastrophic for Greece. None of the income that is earned from the privatizations enters the economy. It is instead earmarked for the repayment of interest and the debt, required by law to be transferred within 10 days to a special account used exclusively for the repayment of the national debt.

We can look at the Greek government’s agreement with [German-owned] Fraport for the privatization of the airports, which contains numerous absurdities. It states that Fraport is excluded from the requirement to pay the unified property tax and municipal taxes. Furthermore, Fraport will be reimbursed by Greece for any strikes by airport employees. If in the next 40 years, any equipment requires upgrades or to be replaced, it will not be Fraport paying for this, but the public sector. In addition, if new environmental studies or permits are required at any of the airports that have been privatized, the costs will be borne by the Greek state. This is absurd.

The port of Piraeus was sold recently for 360 million euros. This amount equals two weeks’ worth of debt interest repayments for Greece. The government claims that the company that purchased the port, Cosco, will proceed with 350 million euros worth of mandatory upgrades within the next decade. The government referenced the expansion of the cruise dock, which is supposedly a binding part of the agreement. However, for this investment, valued at 120 million euros, 95 percent will come from EU sources, from grants that Greece is already entitled to. Out of the purchase price of 360 million euros, only 160 million euros will be paid by Cosco, while the remainder will come from various EU programs. Conversely, in September, 65 percent of Turkey’s Kumport Terminal, which is three times smaller than the port of Piraeus, was sold to Cosco for 813 million euros.

It should be noted that the annual income that was up until now earned by the Greek state from these airports and harbors will no longer be there. This will create yet another major gap in Greece’s public finances. How will this gap be closed? With more cuts in salaries and pensions and increases in taxation.

What does Greece’s public debt include, what percentage of the debt is comprised of interest payments and what does international law say about this debt?

We have to make it clear that we are talking about an unsustainable debt. We are not merely talking about a debt that is difficult to repay but which eventually could be serviced. An unsustainable debt is a debt, which, no matter what actions are taken, cannot be repaid. Instead, this debt will continuously grow.

When Greece was thrust into the first memorandum or so-called “bailout,” its public debt as a percentage of GDP was around 125 to 129 percent. After enforcing these harsh measures, the following year, the percentage increased to 148 percent of GDP. Further harsh austerity measures were implemented, which the IMF [International Monetary Fund] and the troika told Greece to enforce, and yet the next year, our debt increased again, reaching 178 percent of GDP and now totaling 188 percent of GDP. Greece’s debt is the epitome of an unsustainable debt.

Greece is forced to sell off everything and to provide the income from these privatizations for the repayment of a debt that is mathematically impossible to repay. While this is happening, we are not being informed about the fact that Greece, as a sovereign nation, has the right to refuse the repayment of its debt according to international law. Greece could declare a “state of necessity,” which has already been recognized by the committee on international law at the United Nations and by the international court in The Hague. [Greece could] declare the public debt as odious debt. Odious debt consists of loans that violate the basic principles foreseen by international law. When it has been proven that a debt is a result of loan-sharking, fraud, usurious interest rates or under duress, then we are talking about an odious debt.

At the end of 2000, Greece’s public debt totaled 143 billion euros. From 2000 to 2011, Greece paid 119 billion euros in interest. Yet Greece’s debt reached 356 billion euros. This was not the result of the mismanagement of funds or the payment of high salaries or pensions; this occurred because the loans were usurious, imposed on Greece as the result of swaps and complex financial instruments such as futures options and other derivatives. The primary deficit during this period, including payments for salaries and pensions, totaled 35 billion euros.

Prior to last July’s referendum in Greece, capital controls [preventing the withdrawal of more than 420 euros per week from Greek bank accounts] were imposed, which remain in effect today. What has been the impact of these capital controls on Greek businesses and citizens?

The capital controls have left a huge scar upon our economy. According to an analysis by the Panhellenic Federation of Exporters, based upon figures available from the Bank of Greece, they showed that the damage to the Greek economy from the capital controls totals approximately 4.5 billion euros. This is not the only damage. We have to take into account how many businesses shut down or suspended their operations temporarily.

Prior to the capital controls, there were about 3,500 containers [imported] through customs daily. After the capital controls were imposed, this dropped to 1,700, a 50 percent decline. The entire supply chain stopped operating effectively. Accordingly, numerous light industries shut down or temporarily suspended their operations. This means that these businesses were forced to place their employees on leave, albeit temporarily. This means a reduction in wages, which adversely impacts our economy and consumption. And this does not take into account the businesses that closed permanently.

There is major opposition to the new pension bill that has been proposed by the Syriza government. What does this bill contain and what would the consequences of this proposed law be?

What this new law may or may not contain is hard to say, because even the members of the government do not quite know yet. They are attempting to present this bill as a “reform” of Greece’s pension system, but this is not the case. The government is looking at its financial shortfall for this year and next and simply covering the amount through reduction of pensions and increases in pension contributions.

The draft law is socially unjust. It shifts the burden onto newer pensioners while also harshly impacting those who currently receive the lowest pensions. It does nothing to improve the performance of the pension system. In fact, there are provisions that essentially promote uninsured and black market employment. This law does nothing to make our pension system more sustainable. We cannot talk about a sustainable pension system when [there are no provisions] to combat black market and uninsured labor; when unemployment surpasses 25 percent; when the tax system is structured in such a way that it forces businesses to leave the country.

Additionally, the government is not willing to allow those who have not completed 15 years of pension withholding to receive a minimum pension. They will instead receive a “social support” stipend, which will begin at 20 euros monthly. This is absurd.

Discuss the difficulties that small businesses and the self-employed encounter in Greece as a result of the heavy taxation that they face.

I don’t know where to begin. Should I mention the bureaucracy? The regressive and chaotic tax system with over 1,300 different ordinances, which are constantly changing? The income tax? The “solidarity tax” that has been imposed? The tax on businesses or the trade tax? The pre-payment of the next years’ taxes? How can a small business or the self-employed survive this onslaught?

An analysis by the Economic Chamber of Greece estimated that every self-employed individual is forced to pay 7 euros out of every 10 euros earned. According to the Greek Federation of Commerce, 60,000 businesses have applied to move to Bulgaria, while the Bulgarian Chamber of Commerce estimates that the number of Greek employees active in Bulgaria is expected to increase from 70,000 to 90,000. How can we have a sustainable pension system when we will not have any employers or employees to contribute to it?

You are a member of the United Popular Front and were a candidate of theirs in September’s parliamentary elections. The United Popular Front has presented a plan for how Greece could exit the eurozone. What is the United Popular Front proposing?

The United Popular Front [EPAM] is the only political movement in Greece that has remained true to its beliefs and has not changed its rhetoric in the slightest. In terms of how Greece could emerge from the crisis, the first step would be a unilateral stoppage of payments and write-off of the public debt. Second, we will proceed with a return to a domestic currency, because a domestic currency is the only tool that a country can use in order to improve its economy and generate growth. You cannot have economic growth if you are utilizing a foreign currency [the euro], and one that, it should be noted, is not a wealth instrument but instead is a debt instrument.

I’ve heard that if we return to the drachma, Greece will be destroyed and millions of people will be unemployed. Yet now, within the euro, we already have millions of people unemployed and thousands of businesses that have shuttered or which have moved out of the country. They say that the banks will shut down if Greece returns to the drachma. Yet now, within the euro, capital controls are being enforced and there is no chance that they will be lifted. They are saying that there will be continuous devaluations of the new currency. Yet the price of basic food items increased by 18 percent in one year. Meanwhile, we have over 1 million people unemployed and a 23 percent average decrease in wages and pensions. Add to that the increase in taxes and the sharp decline in property values. People are unable to sell their properties and if they do, it is for ridiculously low prices. Is this not an internal devaluation?

Is there any chance that the current austerity regime could be overthrown from within the eurozone and the EU, as Yanis Varoufakis has suggested?

No, there is no chance of this happening, no chance of growth if Greece remains within the EU. Growth means an increase in GDP. GDP has four components. They include net exports. For Greece, this number is negative, so we can’t count on growth from this. The next component is government spending. Greece’s memorandum agreements, however, aim to cut government spending, and when the government proceeds with spending cuts, how can there be growth? The next component is investments. But Greece is in the very last places worldwide in investment. Which investor will want to come to Greece under current conditions? It is clear that there is no ability for Greece to ever attain growth within the EU mechanism. Yet, each year we are told that growth is coming. How can GDP increase when 1 million people are unemployed? According to a study by the Athens Polytechnic University, each unemployed person reduces the GDP by 11,000 euros, and this is evident by the dramatic decline in GDP.