Painful lessons from Greece and the euro

He admitted that the euro’s future is bleak and, sooner or later, Greece will be the first member country to leave the single currency. For some time, chaos will remain and any country depending on exports to Europe should seek diversification, he said.

His speech was worthy of attention. Notably, Davies was the former executive chairman of the Financial Services Authority – the single regulator for the UK’s financial sector – from 1997-2003, at a time when European nations were discussing whether to join the single currency. Prior to that, he was deputy governor of the Bank of England, from 1995 to 1997.

Davies’ views on the single currency were reflected in his speech at the gala dinner. It should also come as no surprise why the UK opted out of the euro. Sside from the competitiveness gap of the 17 countries that use the euro, he also questioned practices in the government sector. In several references to Greece, Davies devoted one to a tale of malpractice. 

In Spain, when a loan was granted for a bridge’s construction, the actual width of the bridge was narrowed so the town could save some money for construction of a town hall. But if a Spaniard visits Greece, which was granted a similar loan, he would see no bridge at all, as all the money was channelled for construction of a big town hall. 

Supporting this is the Transparency International Index 2011, which showed that Greece had the second worst Corruption Perceptions Index after Bulgaria, ranking 80th in the world. Yes, in this ranking, Greece was tied with Thailand. Yet, while a majority of Thais remain poor, Greek people enjoyed a high standard of living and “very high” Human Development Index, ranking 29th in the world in 2011 and 22nd on The Economist’s 2005 worldwide quality-of-life index. According to Eurostat data, in 2008, GDP per inhabitant in purchasing power standards stood at 94 per cent of the EU average. 

Only now, with the full-blown financial crisis – driven by high public debt, borrowed to finance unnecessary programmes – purchasing power has dropped sharply, with over 20 per cent of the working-age population unemployed. And now Greek people do complain about corruption and austerity measures.  

It was also right for Dhanin Chearavanont, chairman of Charoen Pokphand Group, to voice concern over the Thai government’s massive spending on populist policies. He doesn’t mind if some programmes are designed to help the poor, but these need to be well-designed and implemented. Still, he opposes the concept of a welfare state, like the one in Greece, which would incur huge public expenditure and discourage people from working.

It is sad that the government has ignored the warnings from many quarters about its populist policies, particularly the rice price guarantee scheme. True, Dhanin supports the rice pledging programme, but he insists that the implementation must be improved: farmers should be able to sell rice any time they want, not only for a specified selling period and to a particular miller or middle man. While insisting that the government will continue with the programme, Commerce Permanent Secretary Yanyong Phuangrach did not mention any possible change in the process. Critics say the programme still benefits middle men rather than farmers, who still have to sell rice below the Bt15,000 guaranteed price.

Yes, under the programme, farmers’ income is at least guaranteed to some extent. But, as exporters can no longer compete, demand for local rice will drop – resulting in government stockpiles. If these are released at the wrong time, which is always the case – as the government assumes the trader role despite its lack of experience – the price will fall and farmers will suffer in the end. 

Among other populist policies, the minimum wage hike has won support from some, given the problem of widening income inequality. Still, a 40 per cent hike in a year is too generous, given that the average pay rise of a private-sector employee in the past year is well below 10 per cent. 

Against the huge spending programmes, the government has done little to ensure some cuts. Take energy prices, for example. It complimented itself on the securing of LPG and NGV prices, but they are much lower than the lost excise tax revenue to be reaped from diesel. Praipol Khoomsap, a Thammasat University’s economics lecturer, said that it is just a psychological tactic, adopted by the Abhisit government, that diesel should not retail above Bt30 per litre. Now, the diesel excise tax has been waived until the end of August, and in light of persistently high oil prices, termination of the subsidy seems to be impossible.

Populist policies and corruption ruined the Greek economy. Will that be the case here too?