Home   Editorial   About   
Greece & the Eurozone - Part 1

Hector McNeill1

The recent "counter-proposal" to the Greek government's proposal to resolve the debt crisis by the European Union, European Central Bank and the International Monetary Fund contains no credible provision of incentives for growth to secure payments on a sustainable basis and therefore shows no consideration of the fact that this proposal will exacerbate the state of the Greek economy and significantly prejudice Greek society.

This article summaries some of the main issues.

IMF adds some common sense - sort of

The IMF has recently stated in its "Preliminary Draft Debt Sustainability Analysis" on Greece of 26th June 2015, that Greece should have a 20-year grace period before making any debt repayments and final payments should not take place until 2055. It would need €10bn to get through the next few months and a further €50bn after that. Considering "possible" growth scenarios there might be a need for debt write-offs; as requested by the Greek government. However, this admission was not shared with the Greek government during negotiations. Privatization proceeds are minimal, as explained in this essay.

The IMF, however, provides no justifications policy-wise for the range of growth assumptions; it cant do this because of the lack of policy instruments available within the conventional policy tool kit.

The analysis and proposition made in this essay remain valid.

See IMF report here
With such widespread discussions concerning the policies post-2007, everyone knows that in order to pay back debt there is a need for an increase in disposable funds. This increase is also commonly recognized to be based on economic growth. However, the growth required is that of real incomes arising from moderated prices and higher levels of production and consumption that will occur if the currency maintains its value or purchasing power.

I have reviewed a copy of the most recent counter-proposal from the "troika" to that presented by the Greek government. Without looking at the Greek proposal it needs to be stated that the troika's proposal is unacceptable because there is absolutely no provision for incentives for growth upon which to based cash flows to pay back debt. There is also no consideration being taken of the constitutional circumstances. This counter-proposal amounts simply to an imposed stripping of Greek assets and the imposition of claw backs on a shrinking economy. Any proposed surpluses arise not from increased growth but from the imposition of higher taxes and budge reductions. As we know such policy and regulatory impositions can only further impoverish Greece and impose more suffering on the people of Greece.

A paper produced by Yanis Varoufakis, Stuart Holland and James K. Galbraith entitled “A Modest Proposal for Resolving the Eurozone Crisis” (Version 4.0, 2013), provided a sound basis upon which to initiate a negotiated settlement, not only for assisting Greece in overcoming its current economic circumstances but also identifying a way for a reconsideration as to how the Eurozone and European Union can avoid and resolve the type of general crisis that we are experiencing now. However, as things have evolved little reference has been made to this proposal because the negotiations got off to a bad start. The resistance of the so-called “troika” to a rational Greek position has been excessive and the difficulty of coming to a settlement has a lot to do with national politics within creditor nations but more importantly both sides have deployed economic models tied into our common legacy of conventional macroeconomics and microeconomic theory and a range of fairly useless policy instruments. One does not have to be an economist to realize that the troika’s “solution” cannot work since it imposes more unacceptable prejudice on the people of Greece. In a constitutional sense the Greek position has evolved from being one emphasizing four crises: banking, debt, investment and social to a final reversal of order with the social crisis becoming dominant.
A myth concerning the cause of Eurozone ills

There is a perception that the Eurozone currency union has issues because it includes countries with different sizes and types of economies. This is self-evident when one considers that monetary policy the dominant governor of the currency union is managed through centralized monopolistic market interventions by a central bank. Clearly whatever monetary decisions are taken in terms of interest rates cannot be ideal for each economic constituent and therefore the impact will be a divergence of outcomes. This is most clearly manifested in the creation of winners, losers and those unaffected by policy. It is true that because members of the Eurozone are some of the EU member states with very different per capita incomes, economic structures and needs that result in an exacerbation of divergence of outcomes. As we know the largest divergence is between the European periphery and Northern “centre”.

However, this is not an argument against the Eurozone since countries with currency unions, including the USA and UK, have similar problems in their North-South divides, run down cities, decaying regions and vibrant commercial centres. So these currency unions also have serious policy-imposed issues. In the case of single states it is easier to obscure this by compensating for differentials through social programmes, subsidy and targeted development programmes.

Defective theory and policy

No currency union managed on the basis of monetary policy alone can avoid divergence in outcomes between economic constituents and therefore social constituents. Missing links include ways and means whereby the different needs of economic constituents can be accommodated under policy so as to prevent policy acting as a constraint on growth based on enhanced productivity. Of course monetary policy cannot contribute to a process whereby each economic unit can pursue its own ends so as to maximize their productivity and provision of goods and services to their customers at accessible prices. For this to happen there need to be adequate well-designed incentives that genuinely assist the full range of existing economic units. This means that policy instruments need to be based on practical mechanisms that managers can deploy as business rules, thereby gaining a coherence between macroeconomic and microeconomic objectives.

Critical macroeconomic actions geared towards growth include the provision of incentives for raising productivity and aiming to increase real incomes based on measuring productivity on the basis of declining operational prices and the rising purchasing power of the currency.
This is of course where, in political terms, they should have started.

No evidence of due diligence

It would appear that the original entry of Greece into the Eurozone was based on false data prepared in part, it is alleged, by Goldman Sachs. This major failure in due diligence was common knowledge to Greek politicians and the European Commission but unknown by the people of Greece; this was a political decision. Now we see the result.

However, what is revealing, although today not surprising, is that key social and constitutional issues are being ignored. In terms of ethical decision-making we see that the normal considerations of balancing what is legal with what is ethical and with what is prudent has ended up as only a consideration of what is prudent and prudence is dominated by the immediate interests of the creditors. In constitutional economic terms it is important not to allocate responsibility to the people of Greece on the basis that they elected the past governments who created the current crisis as a result of bad decisions, poor policies and corruption. If the democratic systems were perfect and able to transparently explain to the people what political parties intend to do in government and if government decisions were transparent permitting second opinions by electorates through some form of specific referendum2 when major commitments to loans are taken, then, in this case, the electorate would bare some responsibility. However, in most European countries, the electorate is not consulted on international loans and the lobbies and pressures to undertake them seldom arise from the population at large because they are not provided with the full facts. Therefore the fact that "Greece" owes a lot of money is not the responsibility of the people of Greece but rather the combined responsibility of specific politicians and those who lent money without due diligence with respect to the ability of repayment as well as those responsible for managing accounts justifying decisions. Therefore to rely on repayment through imposed austerity on the people of Greece without this population being aware that this was the likely outcome is a failure in democracy and in the professional ethics of those dealing with loans. Some in Greece are characterizing the current state of affairs as a choice between democracy and austerity and this is not irrational. There are, unfortunately, good reasons why there are no projects identified and there are no policies proposed to generate growth in the Greek economy.

Project track records

Besides my work on the Real Incomes Approach, which now approaches 40 years, I have spent over 45 years working in national and international investment and development programmes and projects supported by governments, private investors, international development bank loans such as the World Bank usually operating under an IMF agreed monetary frameworks, international aid organizations such as the European Commission and others. These projects were mainly in the EU, Central & South East Europe and Brazil as well as Peru, Mozambique, Tanzania, Uganda and Kenya. As a result I have become aware of three fundamental facts.

  • The very financing organizations have become extremely cynical about the true worth of investment and development programmes both in terms of effectiveness and efficiency and the overall impacts are invariably far less than hoped for.
  • Such programmes fail for three main reasons:
    • inadequate attention to programme design
    • the mechanisms deployed for investment cycle management are deficient and fail to keep investment initiatives on track thereby lose the sought-for improvements in efficiency and effectiveness.
    • the result is a diversion of funds or their ineffective use in securing their intended purpose
  • Combining the above, the sought-for all-important improvements in social conditions are seldom achieved exacerbating the political circumstances by destabilizing future prospects for stable growth

Clearly by identifying projects the poor oversight and poor management record of major international institutions would become apparent and be an embarrassment.

Policy track records

On the side of policy the work on the Real Incomes Approach has established that Keynesianism, monetarism and supply side economics do not possess any policy instruments nor theoretical support for the provision of a positive incentives to generate growth. 60% of economic growth arises from advanced in technology, technique, learning, the accumulation of explicit and tacit knowledge and innovation resulting from these factors (See: Tacit & explicit knowledge). It is notable that the IMF, in its recent report, "Preliminary Draft Debt Sustainability Analysis" on Greece of 26th June 2015 (see box at top of page), contained growth projection assumptions without any specific justifications of how they could be achieved. This is because conventional policies do not provide convincing growth options based on productivity increases. On the other hand, paradoxically, this report provides convincing support for the Greek government's position. It is disappointing that this analysis was not made available during the negotiations.

The only economic theory and macroeconomic approach that provides a direct incentive for such organic growth is the Real Incomes Approach and Price Performance Policy (PPP) in particular (see "Barebones PPP"). The likelihood of success is greater because all initiative lies with economic units and their ability, under PPP, to allocated resources according to their specific circumstances. This is something that Keynesianism, monetarism and supply side economics with the central state monopoly impositions in money markets, taxation, public expenditure and debt cannot achieve.
Not by growth alone

When one speaks of growth, conventional economic logic tends communicate and quantify this in terms of nominal GDP. In the case of Greece that has faced a decline in nomnal GDP during the last 7 years in large part because of the extremely poor policy propositions accompanying the provisions of loans. The static "book balancing" proposed by the ECB and IMF reflect a blind, monolithic, out-of-date, inflexible nature of theory and practice and the lack of awareness of options on the part of those concerned with debt repayments. Greece's main challenge is to increase productivity so as to secure growth in real incomes and real GDP. No conventional macroeconomic policy can achieve this without considerable delays, leakage, differential impacts and a general lack of traction. PPP is the only macroeconomic policy that can secure what Greece needs in the short term. This is achieved by basing gains in productivity on actual unit price moderation or reduction. PPP provides the incentives that encourage economic units and public services to moderate or reduce prices. This bolsters real incomes of consumers as well as those in performing economic units and public services through bonuses. PPP also secures real growth based on an effective redistribution of real incomes to lower income groups and generates employment (see The Real Growth Multiplier as well as Growth impetus).

The alternative

The original Greek proposal associated debt, investment and the conditions of the social constituency within its analysis, and anyone with an understanding of the Real Incomes Approach would consider this to be a rational starting point. After all the original impetus of the work leading to the formulation of the Real Incomes Approach was the unacceptable levels of prejudice imposed on the economic and social constituencies by so-called Keynesian and monetarist "solutions" which were more than self-evident in the mid-1970s. But as usual such prejudice and suffering is forgotten about as politicians grab onto statistics on nominal growth but do not refer to the unacceptable levels of suffering endured during "recovery".

Fortunately the Real Incomes Approach has come up with a proposition in the form of PPP that can be applied in any economy to secure non-inflationary growth but policy makers, the ECB, European Commission and IMF appear to be unaware of these facts. The paradox is that although these institutions appear to agree on the logic of conventional policies based on macroeconomic management based on the aggregate demand model (ADM), there has been absolutely no attempt to even apply this logic to any part of their counter-proposal. The state of the Greek economy is such that it cannot endure such lack of attention to essential detail and in a world suffering from a recession the ADM approach cannot operate effectively. What is required is actions that remain under the control of Greek society and economic units, that is, practical supply side actions. PPP operates on the basis of the Production, Accessibility and Consumption Model (See "The PAC Model of the Economy") which represents an alternative and more practical paradigm to the ADM. The so-called "structural reforms" need to be substituted by a transformation in microeconomic incentives so as to bring about a rise in the productivity of the structural production function of the Greek economy.


The only aspect of the counter-proposal which the troika might point to as an attempt to improve productivity and growth is Section 10 of their proposal entitled "Privatization". Under this section the troika are pushing for the privatization or selling off of the port facilities of Pireaus and Thessaloniki as well as the regional airports. However, privatization can be a complex process as I have witnessed closely on several occasions in several countries and these do not have the positive impacts that people imagine. The basic impact is a transfer of assets from national accounting balance sheets to private balance sheets at often favourable terms in tenders whose results are the result of restaurant agreements3 as opposed to a truly competitive tender. This tends to involve a significant degree of asset stripping and concentration on asset values for sales opposed to the identification of stable productive outcomes4.

PPP however provides an alternative where such facilities are brought within the PPP regime under which public assets, utilities and services can be as efficient as privately-owned operations as a result of the strong incentives for productivity.

The implications of PPP

Unlike conventional macroeconomic policy, Price Performance Policy achieves inflation control through the response of economic units to the specific market opportunities they identify. Prices can be set at levels which raise the likelihood of market penetration, that is, growth accompanied by higher net of price performance levy real incomes incurring less risk (See "The price performance levy",). This is because PPP promotes and achieves a state of positive systemic consistency. That is, no matter what the capabilities or conditions of economic units, they can take management decisions to improve their real incomes status. As we know from the track record the outcome of conventional macroeconomic policies is generally a systemic inconsistency made up of winners, losers and others. Under recessionary as well as growth conditions corporate sustainability is maximized when inflation is contained and the real incomes of corporate owners, labour forces and consumers are raised through lower unit prices and increased purchasing power of the Euro within each economy.

The aggregation of such operational microeconomic states into a macroeconomic model at member state, Eurozone or European Union level, represents the achievement of coherence between microeconomic and macroeconomic objectives, satisfying the aim of the Real Incomes Approach to Economics. The common objective that can secure such an outcome is not aggregate demand or national nominal income but by growth in real incomes.

A specific advantage of PPP is that the impact is felt within the sort term because the operation is based a on real time audit of operational prices. As a result there is a strong growth impulse and sustained policy traction.

As can be appreciated, inflation control is no longer solely dependent on the ECB or member state central bank interest rates acting through aggregate demand. PPP supports a business environment where companies can be more proactive in price setting to become more competitive in the national and international markets while reducing the risks associated with such decisions. This is because management can determine the net of price performance levy (PPL) real income levels resulting from transactions by managing the size of their price performance ratios (See "The price performance ratio").

The significance of the Real Incomes Approach, and PPP in particular, is that it provides a model to solve the serious issues facing the Eurozone that suffers from the monolithic orthodoxy of a common monetary policy for regions with very different economic circumstances. The adaptability and flexibility of PPP can offer significant options for the Eurozone to secure growth. Clearly this is in the interests of the people of Greece, all in the European Union and, indeed, the world.

1 Hector McNeill is director of SEEL-Systems Engineering Economics Lab.

2 The latest step by the Greek government is to lay the conditions of the counter-proposal before the people of Greece in a referendum to be held on the 5th July, 2015.

3 I worked on the assessment of some 63 Central European agroindustrial complexes and state farms in preparation for a process of "privatization". What I saw of the follow up process was chaotic, corrupt and brutal. The best combinations of assets often went to consortia associated with political parties supported by private bank finance. This is why so many politicians became millionaires within a very short time in such countries. A lot of bad combinations were given good ratings and sold to unsuspecting and somewhat naive "foreign investors". A memorable aspect was the tragedy of laying off of workers. Quite often the existing managers could not bring themselves to exercise this function because of the emotional stress having worked with the people concerned all their lives. As a result the privatization agency employed specific "managers" who took over from existing managers and were quite brutal in their mass sacking actions. The number of heart attacks and deaths suffering directly associated with this brutal process somehow has been passed over. However, many of those who lost their jobs then have not worked since. In fact labour was not the issue and many of the labour intensive services were viable, the issue was servicing very expensive bank loans many raised for personal gain but left in the name of the state assets. Business school advice promoted this process as essential but they have seldom acknowledged the chaos created and suffering endured to this day.

4 I first came across restaurant agreements in Brazil in the 1970s where companies in specific service sectors would arrange for their CEOs or equivalents to meet, usually in a private room in, let us say, an exclusive restaurant for them to arrive at a decision, before entering a government service tender, on which company would win and who would be subcontracted to the winner and who would have to wait until the next tender; such tenders were never "competitive". In spite of "strict procurement rules" I witnessed the same process involving Brazilian applications under a procurement while at the World Bank. Later such deals could be seen to be more institutionalized and politicized, for example in Central Europe, where the main political parties were closely associated with transport infrastructure consortia agreements between political parties involved was that the consortium of the party in power would get 60% of all contracts and the opposition party consortium 40%. This was applied to EU transport infrastructure projects at the time. In all such cases the involvement or exclusion of politicians, financial intermediaries, civil servants or international institutional staff would depend upon the circumstances and networks involved.

Updated 27th June, 2015: typos & text elaboration for clarity.

Updated 2nd July, 2015: Added box "IMF adds some common sense - sort of".

All content on this site is subject to Copyright
All copyright is held by © Hector Wetherell McNeill (1975-2015) unless otherwise indicated

SMOT.GIF - 2160 Bytes