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Friday, September 20, 2013

A "Merkel-Plan" (Instead of a Marshall Plan) for Greece. Really?

Prof. Robert Kuttner of American Prospect argues forcefully that Greece needs not a Marshall Plan but a 'Merkel Plan' instead. Off the bat, I would suggest that whatever it is that one has in mind for Greece's future, I would not put the name 'Merkel' in its title if it is meant to serve a positive purpose...

Actually, I should feel vindicated by this article because, since 3 years ago, I have argued that Greece needs a long-term economic development plan aiming at establishing solid domestic economic value creation and, thus, creating sufficient employment opportunities. I have often referred to the Greece Ten Years Ahead report by McKinsey in that connection.

So why is it that I hesitate about what Prof. Kuttner has in mind?

The following statement by Prof. Kuttner I found very worrisome: "It is also worth remembering that the German Federal Republic itself, after 1989, did not condemn the former East Germany to austerity as a remedy for its fictitious economy. Instead, Chancellor Helmut Kohl allowed the “Ossies” to exchange their nearly worthless ostmarks for deutschmarks at the inflated rate of one to one. He also poured the equivalent of more than a trillion euros into the reconstruction of the Eastern economy".

My view is that what West Germany did with the former DDR beginning in 1990, however noble the intentions may have been, serves as an excellent example of how NOT to build up a value-generating economy. The first mistake was to give the East an overvalued currency (just like Greece was given the Euro) which made it impossible for the East to compete. And the real mistake was to think that the challenge would best be met by simply throwing money at it. Today, over 20 years later, the monies thrown at the East exceed 2 trillion Euros; the East is, for the most part, still an economically underdeveloped region; and millions of talented former East Germans are now in the West strengthening the economy there.

Prof. Kuttner asks: "Why not couple Greek budget and tax reform with a large infusion of funds for public works and economic modernization in the spirit of the Marshall Plan?" True! That should be the overall concept. But how should it work in practice? Who will provide that large infusion of funds? Who will determine what the funds will be used for? Perhaps a High Commissioner from the EU who will set up shop in Athens and direct the Greek economy from his office?

The issue is not that the Greek economy needs a long-term reconstruction (or rather: construction) plan aiming at generating sufficient domestic economic value creation. That's obvious! The issue, instead, is how that could best be accomplished. If the challenge is reduced to simply throwing money at the problem, the results won't be better than they were in the former DDR.

PS: for lack of better alternatives, I think the Greece Ten Years Ahead plan by McKinsey would be a good starting point.

6 comments:

  1. Injection of money in "public works"? Infrastructure projects? If that was the solution Portugal and Spain would be prosperous and have thriving economies. Portugal has 60% more motorway kilometers (in immaculate condition)per capita than Germany.I cannot remember how many airports Spain has, where no plane has ever landed.
    Yes Klaus, the "Greece Ten Years Ahead" would be a good start, if it had any other nation in its title. Greece do not want a long term economic plan, they do not want investment as such. They want to go "back to growth", that is, the consumption driven growth that they can not borrow money for anymore, and therefore expect EU to supply as grants. If "Mutti" is not very careful we shall soon se more roads, more bridges, more train tracks, more harbour renovations here in Greece. In short, lot of infrastructure and no goods to transport. But then again, there will be lots of happy contractors and politicians.
    Lennard Schorlemmer

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  2. "The issue is not that the Greek economy needs a long-term reconstruction plan. The issue, instead, is how that could best be accomplished."

    The issue is that time is ticking away, and the more it ticks away, the more unlikely it is that anything good is gonna come out of this (as recent events have shown).

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  3. We do need a development plan not funds. Our debt is 321 b € or 180%.
    20 b € are available from the banks recap. Those money are scheduled to reduce debt or a better for me idea is to compensate 600.000 Greeks in office expenditures and insurance without employment in professions with demand the next 20 years or very small but export oriented companies.
    This only under european control-supervision.
    Yesterday mr Tsipras visit mr Asmussen and probably asked him for a debt relief around 40-50% just as happened in Germany in 1953.
    I think this is not acceptable from Germans or even other europeans, but it's smarter a transfer of the recap funds for banks to ESM to "hide them" and a debt rescheduling in which you are in favor, would make Greek debt viable.
    Europeans should take into consideration only this:
    european funds should handled only by europeans in Greece until 1) educational practices from the first grades of school change plus close scattered universities with poor quality studies 2)easying of doing business improved significantly, public administration change from zero, land legistry finish 3)Orientation of economy and mentality change.
    We need practical ideas.

    MS

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    Replies
    1. Quite some time ago, I wrote this piece titled "Send machinery & equipment --- not money!"

      http://klauskastner.blogspot.gr/2011/10/send-machinery-equipment-not-money.html

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  4. I remember that i think.
    About the idea to compensate 400-600.000 with money left from bank recapitalization some well educated people without employment, or very small but a bit promising companies with strict supervision from eu, what do you think?

    MS

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  5. Klaus, articles like this are interesting but at the same time do an excellent job of highlighting the absurdity of the situation in Greece.

    Everyone has their own opinion on what needs to be done and yet these same people ignore their own analysis of the problem.

    Greece is backwards and every Greek knows why.

    Employment regulations are draconian. Taxes are extortionate. Government related paperwork is a joke.

    It is extremely simple to fix Greece. To talk about plans or programs is frankly ridiculous when the real issues are staring everyone in the face.
    Richard

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