Time to Admit Defeat Greece Can No Longer Delay Euro Zone Exit

There are many things Alexis Tsipras likes about Germany. The leader of Greece's Coalition of the Radical Left (Syriza) party drives his BMW motorcycle to work at the Greek parliament in the morning, Germany's über-leftist Oskar Lafontaine is one of his political allies, and when it comes to his daily work, his colleagues have noticed a certain tendency toward Prussian-style perfection.

Tsipras is the new political star in Athens. While the country's washed-up mainstream parties struggled for days to form a new government, the clever young politician has been dominating the headlines with his coalition movement of Trotskyites, anarchists and leftist socialists.

In the recent elections, Tsipras' Syriza party advanced to become the second-largest political force in the country, and Tsipras is making sure his gray-faced opponents from the Greek political establishment know it. Surrounded by cameras and microphones, he stood in the Athens government district last Tuesday, put on his winner's smile and called upon the two traditional parties, the center-left Socialists (PASOK) and the conservative New Democracy, to send a letter "to the EU leadership" and cancel the bailout deal that Athens made with the EU and the International Monetary Fund (IMF).

Turning Point

Two years after the government in Athens requested the first emergency loans in Brussels, the European debt crisis is reaching a turning point. Europe and the international community pumped about €240 billion ($312 billion) into the Balkan nation, government employees were let go, pensions were slashed and a series of restructuring programs were approved.

But even though the country is virtually being governed by the European Commission and the IMF, Greece's debts are higher than ever and the recession is worsening. As the political situation becomes increasingly chaotic, new elections seem all the more likely.

At the Chancellery in Berlin, the television images from Athens now remind Merkel's advisers of conditions in the ill-fated Weimar Republic of 1919-1933. Back then, the Germans perceived the Treaty of Versailles as a supposed "disgrace." Now, the Greeks feel the same way about the austerity measures imposed by Brussels. And, as in the 1920s in Germany, the situation in Greece today benefits fringe parties on both the left and the right. The country's political system is unraveling, and some advisers even fear that the tense situation could lead to a military coup.

Greece has been in intensive care for years, but the patient, instead of recovering, is just getting sicker and sicker. In a confidential report, which SPIEGEL has seen, experts from the IMF arrive at a devastating verdict. The country, they write, has only "a small industrial base" and is characterized by "structural incrustations" and an "excessively large role of the public sector."

In Greece's Best Interest

It's time to rethink the treatment. The Greeks were never ready for the monetary union, and they still aren't ready today. The attempt to retroactively bring the country up to speed through reforms has failed.

No one can force the Greeks to give up the euro. And yet it is now clear that withdrawal would also be in the country's best interest.

It isn't a matter of abandoning the Greeks. Greece is and remains an important part of Europe. A Greek withdrawal from the euro will have serious social, political and economic consequences -- mostly for the Greeks, but also for the rest of Europe. The continent's solidarity is not tied to the euro, which is why other European countries will still have to support Greece with massive amounts of money.

But only a Greek withdrawal from the euro zone will give the country a chance to get back on its feet in the long term. The Greeks would have their own currency once again, which they could then devalue, making imports more expensive and exports cheaper. As a result, say American economist Kenneth Rogoff and others, the Greek economy could become competitive again.

At the same time, a Greek exit from the euro would send a strong message to other financially ailing countries, namely that Europe cannot be blackmailed. Populist politician Tsipras is merely expressing views that are already widespread within large segments of the Athens establishment, namely that the Europeans will ultimately give in and pay up, because they fear a Greek bankruptcy as much as people in the Middle Ages feared the Black Death.

Regaining Dignity

There are no provisions in the regulations of the monetary union for the withdrawal of a member state, and the euro partners cannot force a member to withdraw. But what else can the Greeks do if the Europeans remain truly adamant and insist that Greece satisfy all conditions attached to further aid?

In the end, a Greek withdrawal could only be the result of negotiations, prompted by the realization that it would enable the country to regain its national dignity. If Athens clung to the euro at all costs, it would remain dependent on the international community for decades to come. In contrast, regaining its own currency would enable the country to decide on its own fate.

Part 2: Reforms Have Ground to a Halt

An exit from the euro zone would be the prerequisite for the political new beginning that the country's reformers believe is inevitable. One of those reformers is Gikas Hardouvelis, 56, the chief adviser to transitional Prime Minister Lucas Papademos.

His job description was easy to write but difficult to fulfill: He was supposed to ensure that Greece remains in the euro zone. Since the end of November, Hardouvelis has had possibly the most beautiful office in the country. The Maximos Mansion, next to the National Garden in downtown Athens, is the prime minister's grand official seat.

But since taking office, the economist has also had a mission which could well be described as impossible: to revamp a country that has been completely mismanaged.

Until last summer, the total number of government employees wasn't even known, nor was the number of government agencies, which were often established for the sole purpose of concealing the enormous expenditures of certain ministries.

Devastating Conclusion

When Hardouvelis began working as chief adviser to the prime minister, the reform process was supposed to be in full swing already. His first step was to count the laws that had not only been passed but had actually been put into effect. "It was a very small number," Hardouvelis recalls.

After two years, Hardouvelis came to a devastating conclusion about Greece's economic, political and social situation: Almost none of the government's reform efforts have been a success.

The privatization of state-owned companies, which was intended to help fill up empty government coffers, has hardly even begun. Of the €50 billion in anticipated revenues by 2015, the program has only generated €1.6 billion to date.

The sale of real estate holdings, in particular, is more difficult than expected. Until recently, the Greeks were almost wholly unfamiliar with the concept of the land registry. After over 10 years of efforts to develop such a registry, only 6 percent of all real estate has been entered into the system.

The liberalization of restricted sectors of the economy has also ground to a halt. Symptomatic of this failure is the plan to open up the services of architects, lawyers and shipping agents to competition. There are roughly 140 so-called closed professions; no one knows the exact number. The members of these professions received the licenses for their profitable activities under the former military junta, and they are passed on from generation to generation or sold for a lot of money. Sums of €100,000 to €150,000 are not uncommon for the purchase of a taxi license in Athens.

Furious Reaction

The system seemed to have come to an end in the early summer of 2010. After only a few months in office, the Socialist government enacted a law to liberalize the closed professions, which were expected to become open to competition in the free market in the future.

Professional groups like pharmacists and taxi drivers reacted furiously by going on strike. In the early summer, freight forwarders used their trucks to block major roads, bringing the entire country to a standstill -- at the height of the tourist season.

The efforts to protect the vested rights of many professions were successful, and the protesters secured transition periods, special rules and exceptions. As a result, the professions are still virtually closed to outsiders today.

In addition, large parts of the government administration are still in agony. One of the new miracle weapons that the European Commission is keeping ready for the European economy was also supposed to be used in Greece: so-called project bonds. They would have enabled private investors to hedge against the risks of investing in major trans-European infrastructure projects.

But there is not a single Greek project among the construction projects that the European Commission has proposed for the pilot phase this year and next year. It isn't as if the officials in Brussels did not have every intention of finding a project in Greece that could be implemented quickly. The new stimulus program was intended to drum up €4.5 billion in investments in Europe in the short term. But the Greeks also had to fit the requirements for the scheme. Now the subsidies will go to the Baltic countries.

Tricking the Troika

The only progress, albeit modest, that the Greeks have to show for themselves is in the fight against the budget deficit. To this end, the value-added tax was raised from 19 to 23 percent, several new taxes on luxury goods and special duties were introduced, pensions were cut by 15 percent and the salaries of government employees slashed by 30 percent or even more.

Through these efforts, the budget deficit was reduced by an impressive 7 percentage points. A historically unparalleled debt haircut, in which 95 percent of creditors relinquished 75 percent of their claims, also brought some relief. Nevertheless, the successes of the debt reduction effort remained modest. Despite creditor participation, the country still suffers from a debt burden of 160 percent of gross domestic product, which threatens to suffocate the country in the long term.

This is aggravated by the fact that the established ruling class has no interest in the reforms being a success. To accommodate the programs called for by the so-called troika of the European Commission, the European Central Bank (ECB) and the IMF, laws were established that could not work, "because the relevant cabinet ministers didn't want them to work," says Hardouvelis.

According to Hardouvelis, it is very clear that members of the former administration tricked the troika, and valuable time was lost as a result. "They thought the party would somehow go on," he says. And they behaved accordingly.

Little Interest in Reform

One of the peculiarities of the Greek state is that, although there are 32 laws on deregulation, there is in fact no deregulation in reality. Greece routinely ranks poorly on the World Bank's Doing Business index. Neither the troika nor the local EU Task Force for Greece, whose goal is to actually implement reforms, have been able to change this.

Officials from the Greek Interior Ministry complain that the ministers are usually the ones getting in the way of progress. "We have to fight with our own bosses when it comes to administrative reform," they say. There is a rumor that the minister of public administration advised the environment minister to agree to the troika's proposals, but not to implement them.

The international envoys and the EU Task Force staff members are familiar with many such examples, as are those ministerial officials who truly want to change things and have given up on the old system.

Most politicians have very little interest in reform, says Hardouvelis, whereas the general population is more willing to change. "The Greeks want their government to work, and they want it to be more equitable," he says. Like Italy, Greece currently has a technocrat, Papademos, as (interim) prime minister. But unlike in Italy, the ministers in Greece unfortunately stayed the same -- in other words, the same old politicians are still in charge.

High Price

It's no surprise that the EU and IMF reform plans have failed so far, given that the people who were responsible for the country's problems were expected to solve the crisis.

It is difficult to explain to a deeply frustrated population that while ordinary people are supposed to change, and have to pay more taxes and receive less income, the political class continues to occupy key positions and can keep doing as it likes.

The policy of austerity and drastic cuts has a high price. Domestic demand plummets, the economy shrinks, new holes open up in the budget and further cuts become necessary. The result is a downward spiral from which the country cannot extricate itself without outside help.

Part 3: The Only Way Is Down

Greece is now in the fifth year of recession. Economic output has shrunk by a fifth, unemployment is at almost 22 percent and youth unemployment is at more than 53 percent. The ranks of the unemployed grew by 95 percent between March 2008 and March 2011.

For the first time in postwar history, there are more people out of work than employed in Greece. The minimum monthly wage was reduced to €585, and was even brought down to €490 for younger workers. The monthly unemployment benefit was reduced from €461 to €385, and benefits are discontinued after a year. At the same time, more and more new taxes are being levied. One, for example, is the charatzi, a special tax on real estate collected through electricity bills.

All the same, according to reports by the IMF, wages in Greece are still significantly higher than in Portugal or in neighboring Balkan countries like Bulgaria and Romania.

A Vote Against the Political Class

There is little movement -- and when there is, it is downward. This explains why the election success of the smaller, more radical parties is not just a vote against the hated austerity policy and the so-called memorandums, as the loan agreements with Greece's creditors are dubbed. Most of all, it is a vote against the ruling class, which shamelessly took advantage of its power for so long.

Radical parties garnered more than 42 percent of votes. This shows how much trust the established parties have lost with the Greek public. For years, Greeks voted for either PASOK or New Democracy, but now they no longer believe their promises. Alexis Tsipras did particularly well in major cities.

The Greeks are fed up with their political establishment, which appears to firmly believe that the state's raison d'être is to allow them to line their pockets and enlarge their own sphere of influence.

The two candidates of the major parties, Conservative Antonis Samaras, 60, and Socialist Evangelos Venizelos, 55, are part of this establishment.

Ludicrous Farce

The two men have been professional politicians -- a term that is now perceived as an insult in Greece -- for decades. Samaras has been a cabinet minister three times and a member of the Greek parliament since 1977. Venizelos has held eight cabinet posts since 1990.

Samaras' campaign was a ludicrous farce, difficult to surpass in its political miscalculation and overconfidence. In defiance of all polls, he campaigned on the expectation that New Democracy would govern alone, and he made election promises that could easily compete with those made by Tsipras. "His rhetoric is straight out of a 1985 campaign manual," the newspaper Kathimerini scoffed.

Just how cluelessly Samaras has acted in the public sphere as head of New Democracy in the last two years is also reflected in the fact that he was the one who pushed for the new elections that have now dealt him this humiliating defeat -- and will likely put an early end to his political career.

Venizelos, on the other hand, a former finance minister and a sort of emblem of the crisis, who was responsible for finally curbing the tax flight of the rich and the super-rich, is also responsible for a highly controversial law that codifies the immunity of ordinary members of parliament. In supporting the legislation, he essentially endorsed corruption at the highest political levels.

A Nightmare for Business

Greece is caught in a uniquely Greek vicious circle. Hardly anyone wants to invest in a country that is not only bankrupt, but is also seen as highly corrupt.

Aris Syngros, who has been trying to market his country for the last year, is also aware of this problem. The gray-haired Syngros, 52, who is wearing a gray suit with a purple pocket square with yellow polka dots, runs an economic development agency connected to the Economy Ministry. The agency is called "Invest in Greece," and its logo looks like a stylized tree with a large amount of fruit.

Seen in this light, Syngros is at the forefront of the campaign to overcome Greece's poor image as a place for investment. The country is viewed as a nightmare for entrepreneurs, a place where it can take years to obtain something as simple as a license.

If Syngros has his way, all of that will now change. There has even been an expedited approval process for large projects for the last year. Nevertheless, Greek government agencies, with their Kafkaesque structures, sometimes even drive Syngros to desperation. It recently took two months until all required signatures had been appended to the minutes of a meeting of the relevant committee of ministers.

But the main problem is that investors are hard to come by. "They shy away from the sovereign risk," says Syngros. As an example, there has been only one taker so far for an extremely attractive loan set up for that purpose by Germany's KfW development bank.

New Beginning

For Syngros, a withdrawal from the euro would be a nightmare. But things cannot continue in the current vein. Experts are increasingly realizing that it will be difficult to attract foreign capital to the country under the current conditions. But an economic new beginning, including a renaissance of the drachma, could change that.

If the currency is devalued, it will become cheaper to buy Greek companies and operate them profitably. This could stimulate investment, say proponents of a Greek withdrawal from the euro in Brussels and Berlin.

Europe's governments have expanded their bailout funds to protect other southern European countries like Spain, Portugal and Italy, and private creditors have largely withdrawn from Greece. Under pressure from Berlin, Paris and Brussels, and after months of negotiations, banks, insurance companies and other investors waived almost 75 percent of their total claims of €206 billion against the Greek government in early March.

Billions of losses in Greece have spoiled the bottom lines of many financial companies. But because the debt haircut was so long in the making, the banks were able to digest their bad Greek bonds in small bites without getting into trouble themselves.

The banks complained that they were forced to agree to the supposedly "voluntary" haircut. But if Greece now withdraws from the euro and Athens can no longer service its debt, private-sector creditors will benefit from the fact that they have already survived the worst.

"The direct costs of a Greek government bankruptcy are manageable for private creditors," says Jürgen Michels, chief economist for Europe at Citigroup. Furthermore, only a portion of the remaining debt lies with banks and insurance companies in the euro zone, while the rest has been taken on by speculators outside Europe. This is why a bankruptcy would probably not severely affect the European banking system.

Part 4: Scenarios for a Greek Exit

Translated from the German by Christopher Sultan