Greek Tragedy Continued

Under its agreement with the EU, ECB and IMF (the Troika), Greece was supposed last week to pay back the first instalment of its €350 billion external debt (around three times its national income).  As was always likely, the Greek government has not been able to pay and a four-week postponement has been agreed, not for actual repayment, but to allow the Greeks to come up with another plan for eventual repayment via a new dose of “austerity” measures.  Chief among these, which the German government is particularly keen on, is reform of their absurdly generous pension schemes for state employees (see below for comments on the British state pension schemes).

Chief among the criteria for the success of the austerity measures is that the Greek government should run a surplus of 5% of its expenditure (the UK’s deficit is about 13% of its expenditure).  Depending on how much the long-term debt (greater than 10 years) is discounted, Greek government debt is somewhere in the region of $330 billion or 150-160% of GDP.

Devaluation of the Greek currency is the only way

Being under the cosh of international creditors, principally the International Monetary Fund and the European Central Bank, is not a pleasant experience for Greek pride and living standards.  The one thing which would make a real difference to Greek fortunes is if they devalued their currency by dropping the euro in favour of a New Drachma.  This would allow the Greeks to markedly increase external earnings (especially tourism) as well as enforcing a general drop in their ability to import foreign goods.  Import substitution would thereby be encouraged, which would, in turn, start to reduce the horrendous, soul-destroying unemployment, currently around 50% among those under 34.

Meantime, the obligation on Greece to repay the IMF the relatively small sum of €1.5 billion during March is unaffected by the above postponement agreement covering the ECB loans[1].

Lessons for Britain

Our most recent post on this subject “Greek Tragedy: Lessons for Britain” drew attention to important similarities between Greece’s recent position and Britain’s direction of fiscal travel – a government debt heading towards 120% of GDP.  One reader, Mr Jon Livesey (see his comment on “Greek Tragedy” took great exception to this observation and also adopted a degree of insouciance about Britain’s debt interest payments – now over £50 billion – on the grounds that these were basically payments to UK pension funds as principal holders of UK government debt, and thence to UK pensioners, i.e. stayed within UK control.  Mr Livesey also seems to say that repayment of government borrowing was not in some way very important.  It all depends on the magnitudes of course.  Certainly maturing debt can be “rolled over”, but at gradually increasing cost relative to other loans.

Size of UK Public Sector Debt

The currently quoted UK national debt of £1.4 trillion is about 80% of GDP (£1,740 trillion[2]) but this excludes the public sector occupational pension liabilities.  Of the seven main public sector schemes: Teachers, NHS, Civil Service, Armed Forces, Police, Firefighters, Local Government, only local government employees have a fund which in theory pays pensions independently of central government (see PPI[3].  With approximately 5 million employees, and 2.5 million pensioners, a realistic estimate is an addition to the government’s acknowledged debt of £600-1,000 billion, increasing.  This will take the true national debt on which payments of interest and pensions will have to be paid out of tax revenue towards 120% of GDP by 2020.

While the vast bulk of pension payments will be made to UK residents, the same is not true of debt interest payments.  The biggest single class of holders of UK (gilt edged) debt are overseas residents – about 30% or £420 billion.  There is no indication that the Debt Management Office have found any UK buyers to reduce this proportion (which has been steady for the last 5 years).  In fact pension funds are casting around for alternatives to the 1.8% return that long-term treasuries will pay – not enough to pay their pensioners.

In any event, while on a simplistic macro-economic argument, most interest and pension payments circulate back into the UK economy, they represent a massive and increasing pre-emption of money raised in taxes which would at the micro-economic level be better spent on infrastructure investment and improved services, or simply reducing taxes on the productive sector to encourage it to reduce its own investment weaknesses.

Why does Britain have such huge debts?

Basically for the same reason that in 1976 the then Chancellor of the Exchequer, Denis Healey[4] applied to the IMF for a loan of $3.9 billion, about £1.6 billion at the then exchange rate.  The proximate reason for this was to shore up the pound sterling at the Bretton Woods rate of $2.40 against foreign speculators, which were causing an outflow of £100 million per month in foreign currency.  The pound sterling had been seen as vulnerable because of rapidly increasing public expenditure (49% of GDP in 1975/6) with no offsetting rise in tax receipts, coupled with a massive rise in the balance of trade deficit after the removal of tariffs on goods, following the UK’s  joining the European Common Market (now the EU).

These two deficits were closely linked.  Unpicking the composition of the imports bill in 1974-76, it is found that most of the increase in the trade deficit was in consumer goods, imports unmatched by exports, the increase closely matching the extra cash the government handed its employees – then nearly half the economy (49%).

Rewarding its own employees with massive unearned wage rises, exacerbated by low productivity in many private sectors, is at the heart of the huge size of the present debt built up in the Blair-Brown years, 2000-2010, and the severity of the subsequent 2008-2012 recession, much as the crisis in 1974-77 derived from the same policy in the Wilson-Healey years (1974-76).  Both crises were made much worse by precursor private credit booms going into housing and imports.

One measure of average British industrial competence may be taken from the decline in the 1970s of the value of the pound sterling against the Deutsche Mark, the currency of our principal industrial competitor, from around £1 : 8 DM in 1970  to 3.78 DM by 1979[5].

As has been written before on this website, British industry is now (2015) fully competitive with other countries’ industries[6].  There is just too little of it to satisfy the goods appetite of its people.  Until this is rectified by systematic expansion into markets from which Britain has in effect been expelled from or retired from, Britain will never be free of recurrent economic crises.

End Notes

[1]  Interestingly, there are reports that the Greek government is considering raiding its own pension funds in order to repay this modest sum by Friday, March 6th.  One estimate is that the pension funds are already down to €1.8 billion.  With possibly 500,000-1 million pensions in payment, this looks like about three months’ worth.

[2]  World Bank 2014 estimate.

[3]  Pensions Policy Institute, Occupational Pension Provision in the Public Sector.

[4]  Harold Wilson resigned on April 5th 1976, but Healey continued as Chancellor under Jim Callaghan until April 1979.

[5]  This manager has direct experience in the 1970s of the almost complete irrelevance of the devaluation of Sterling for export competitiveness.  Quality and delivery were what counted, and still do.

[6]  In the period from the 1880s to the 1970s, British industry on average became less and less efficient compared with its competitors.  In the 1980s many of the inefficient parts went out of business, not to be replaced.

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