Cairo and Athens: A Long Hot Summer

Convinced that Hosni Mubarak would inevitably resort to overt military force against protesters, my wife and I landed in Athens on February 4.  Days of protesting, nights spent guarding the streets, and concerns for the sanity of our geographically distant family had taken its toll.  Ironically, after less than 24 hours in Athens, I said to my wife, “You know, we left Egypt because it was on fire, but here in Greece they are very clearly stacking the dry wood.”  Most shops were closed and cleaned out with large “For Rent” signs plastered across the doors.  The downtown restaurants were empty, and taxi drivers in their glimmering yellow Mercedes were challenging the bargaining skills of their Cairo counterparts to cheat the sparse tourist population out of their very last cent.

More recently, there have been rumors that Greece is planning a departure from the Euro.  Of course, such a discussion represents a very frank admission of the revolution coming soon to Southern Europe.  In spite of what a recent New York Times op-ed says, Greece cannot avoid this social instability by becoming Argentina.  What its author fails to realize is that the interest Greece may have in dropping the Euro and defaulting on its debt is completely immaterial to the broader economic discussion.  Due to the threat of a complete eurozone break-up, citizens of Greece will absolutely be made to suffer and will justifiably come to more closely resemble Egyptians in their actions.

Naturally, no one in Europe wants to see Egyptian-, Tunisian-, and Libyan-style revolts reach the continent, but it seems as if we are heading in that direction one way or another.  The Arab Spring, regardless of ECB policy, may well become a long hot Southern European Summer if recent news reports out of Athens are accurate.

Given austerity, there are only four ways to proceed for Greece and they all lead to the same uprising.   Since Greek debt is denominated in Euros, one way for Greece to actually pay at a cost lower than that it does presently would be to peg the New Drachma at a value higher than the Euro.  This would of course be catastrophic from a macroeconomic perspective, resulting in a debt-deflation depression at a time when Greece desperately needs a currency valued lower than that of its neighbors.  Imagine the revolutionary movement that would result from the further destruction of Greek export industries, the further erosion of tourism, and the massive selloff of real estate as Northern European retirees face spiraling costs on their island retreats.

Greece could also of course drop the Euro and pay off the accumulated debt and current deficit with a massive printing of depreciating New Drachmes.  This sounds like a decent idea except the results would be incredible inflation at a time when Greek incomes are not at all going to be responsive in an upward direction.  A mere 25 or 30 percent inflation would likely turn Athens’ Syntagma Square into Tahrir Square in a matter of weeks.

Of course, Greece could also abandon the Euro and subsequently default on its debt, but this would likely create a situation even more dangerous than those discussed previously.   The great sucking sound of capital flight will be deafening as Greek banks begin freezing accounts until the government decides how many New Drachmes are to be replaced for every Euro.  People would run to the gold sales counters in numbers making last year’s stampede appear to be a quiet stroll in the countryside.  Again, the potential for Europe-wide financial instability would be huge as Spanish, Irish, Portuguese, Italian, and even British banks faced doubts about their solvency and whether or not the Euro and Pound could hold it all together.  Of course, as a currency refuge, the dollar would benefit immensely in such a circumstance, but this too would act counter to Western interests and the hope for some sort of export-driven economic recovery.  In short, no one in Northern Europe or North America really wants Greece out of the EU.  In the capitalist mind, it is much better to let the Greeks suffer with the vain hope that the global economy might recover quickly enough to save everyone from a descent into some North African-style revolutionary frenzy.

Naturally, Greece could also stick with the Euro and continue the game of subterranean currency manipulation, receiving bailouts, and maybe even engage in a bit of tactical “restructuring.”  Amazingly, the last time this was a realistic prospect, the Euro maintained value quite well and eventually gained value when the expansionary monetary policy was announced by the ECB/IMF.  Whether this is a commentary on the faith that people have in the Euro or the distrust that people have in the dollar is a matter of debate.  Last year it was only the enduring uncertainty of the perilous Greek situation (and the strategic foot-dragging on the part of Germany) that caused the currency to drop to $1.20, and when the final deal was struck we moved right back up to $1.49 in pretty short order.  This is, however, very counterproductive for countries like Greece which desperately need a cheaper currency.  Not surprisingly, the US has very effectively been exporting its recession to Europe with a very short-run aim to prop up her exports.

However, the West should take note of the saying in Europe: “When the wind blows in Egypt, the sand lands in Greece.”  Failing the magical materialization of a devalued Euro in the face of a simultaneously declining dollar, Greece faces two prospects within the four broader economic scenarios discussed above.  She will either experience a debt-deflation depression or rampant inflation . . . but nothing in between.   Either case will have average Athenians assembling Molotov cocktails inside of 18 months.

Photo by John Pastrikos

That said, just across the Mediterranean, Egypt is trying desperately to stave off Revolution 2.0 as sectarian violence flares up between Christian and Muslim populations.  Of course, remembering their own history, many here don’t actually believe that appearances reflect reality.  A great many people suspect that the recent violence is part of a counterrevolutionary movement.  Since Mubarak opened the prisons to generate chaos in late January and the police were seen looting during the revolution, many assert that thugs are being paid to burn churches and attack Christians in order to “divide and conquer” the Egyptian people.  The theory of course is that, if people are governed by fear or convinced that Islamists will reign absent a strong central government, they might turn to the tired NDP promise of “stability” and “secularism.”  The irony of all of this is that none of the political wrangling may matter a bit if the economic realities facing Egypt are not addressed.  Whoever gains or maintains power in Egypt will definitely be facing the same revolutionary forces now operating in Greece and still wildly swirling in the Mediterranean wind.

Domestically, the revolutionary fervor in Cairo has heightened the population’s expectations of their government much more than any events prior to Jan 25 could have.  Therefore, given that all revolutions are implicitly “revolutions of rising expectations,” the potential for future unrest is great if the interim or elected government fails the Herculean test that is before it.

Now, to highlight some of her current economic difficulties: Egypt experienced 5.6% growth in the first half of this fiscal year ending in December.  More recently, the Ministry of Finance predicted 2-3% annual growth, which is effectively a prediction of 0% growth for the remainder of the year.  However, even Ministry of Finance sources will tell you, informally, that this is a highly optimistic prediction.   Why are these figures optimistic?   Well, tourism constituted about 11% of Egyptian GDP in the pre-financial crisis era, and recent official sources show a 46% reduction in “tourism nights” while “tourism arrivals” declined by 80% from January to February.  Now, it is important to realize that a good many of these “arrivals and nights” represent Libyans who fled their own conflict beginning in the middle of February and people with connections to Egypt returning to their homes in the wake of the January 25 revolution.  In either case, these are not people staying at The Four Seasons and spending thousands of dollars over a couple of weeks.  The broader point, of course, is that the government tourism numbers are inflated.  In actuality, we have very likely seen a 70-plus percent reduction of tourism in Egypt (particularly in Cairo) and it is unclear how long the situation will persist.  Even casual observation on the streets, in the narrow passages of local bazaars, makes it very obvious that the consequences are real.

Further, double-digit growth in Egypt’s construction sector over the first half of the fiscal year effectively stopped and has remained entirely stagnant in the second half.  Cairo is dotted with vacant construction sites, towering piles of leftover rebars, and bags of unused cement piled haphazardly underneath freeway overpasses.  More specifically, the consumption of cement and iron has fallen 20% and 60% respectively in the last two months.  Needless to say, the production of these commodities has similarly plummeted, thus putting even more strain on the Egyptian working class.

Simultaneous to the above, Egypt is trying desperately to control prices in the face of surging international commodity markets which have been partially responsible for Egyptian annual inflation rising from 10.7% to 12% over the two months.  The Egyptian government is therefore acting to maintain the value of the Pound, which in effect necessitates contractionary monetary policy in the face of economic stagnation.  Obviously, this is a very counterintuitive action.  This policy and the resulting artificially inflated Pound clearly yields a diminished incentive for potential visitors to come to Egypt and a diminished desire for consumers of Egyptian exports to change their money into Pounds and spend it.  The result is a deeper economic depression in the face of simultaneously rising prices.  Add to this the political instability that is undoubtedly fostering a “wait and see” attitude until at least September, and the prospect for economic recovery in Egypt appears grim.

The above economic realities, the threat of a double-dip global depression, and substantially heightened domestic political optimism all mean that Egyptian policy makers are in an incredibly tight spot.  They know that, at any moment, increasing calls for domestic wage increases could be thwarted by global economic realities and result in greater social instability.  Greater social instability in Egypt, in turn, will only exacerbate her economic issues as tourism, foreign investment, and trade suffer.  Further, policy makers must also know that wage increases alone won’t solve Egypt’s problems.  In fact, implementing simple wage increases would be a typically short-sighted Mubarakian solution.  As in Greece, Egypt’s problems are more structural in nature and can only really be addressed at this point with expansionary policy that has a real and not merely nominal impact.  In short, jobs must be created that also yield an output of value.  Roads can be built, bridges repaired, buildings refurbished.

In 1936, John Maynard Keynes ironically observed that ancient Egypt enjoyed a good fortune that tends to elude the moderns: there was never a shortage of fiscal policy opportunities in ancient Egypt.  “Two pyramids, two masses for the dead, are twice as good as one,” he joked.  Frankly, both Egypt and Greece need a modern equivalent of pyramid building to generate income, keep workers occupied, and improve the general standard of living.  If not a new Acropolis or Great Pyramid, then a simple end to austerity and an embrace of public works to fill the economic void and alter the public’s expectations of the future.

A further embrace of fiscal responsibility and economic rationality in either Greece or Egypt will absolutely cause the sands of revolution to circulate North and South haphazardly over the Mediterranean.  For now, that stacking of dry revolutionary wood continues in Athens and has also started afresh in Egypt.  Austerity is the matchstick.

John Pastrikos is a writer in Cairo, Egypt.

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