Why Detroit could be a good example for Greece (or not)

July 09, 2015
Just two years ago, the city of Detroit filed for bankruptcy, the largest municipality in the United States to ever do so. Today, Detroit has turned into a catalyst for change. We look at the city’s meltdown, its parallels to Greece and possible lessons. 
Once one of the world’s leading industrial cities, Detroit’s economic crisis began in the 1970s, with Japanese car makers taking over the US market and local manufacturers leaving for southern states and cheap labor overseas to survive. Struggling with a shrinking tax base and population decline, the city was already a sick patient when the US financial crisis hit hard in 2008. Operating expenses, past bills as well as pension and health care obligations began to outpace annual revenues. Much of the money Detroit had in any given year already had been earmarked for those and other bills, leaving little to pay for even adequate city services. In 2013, Detroit’s debt had amounted to an estimated $18 billion. 
In February 2013, the state of Michigan decided to take over Detroit’s finances. In March 2013, Michigan governor Rick Snyder appointed bankruptcy lawyer Kevyn Orr as an “emergency manager” for the city. After months of negotiations, Orr was unable to come to a deal with Detroit’s creditors, unions, and pension boards and filed for Chapter 9 bankruptcy protection in the Eastern District of Michigan U.S. Bankruptcy Court on July 18, 2013. Orr’s own handling of money in the bankruptcy filing stirred controversy, with $177 million paid to lawyers - among them his own law firm partners -, bankers, mediators and consultants. 
As much as Detroit was a victim of market forces, bad governance killed it. In October 2013, shortly after bankruptcy was filed, Detroit’s former mayor Kwame Kilpatrick was sentenced to 28 years in prison for a long list of felonies that included taking bribes, steering contracts to complices while extorting businessmen, deceiving donors to his nonprofit, living lavishly on the public’s dime and loading the city’s payroll with friends and family. The city’s government, paralyzed by poor record keeping and antiquated computer systems, also left hundreds of millions of taxes uncollected. Many business owners openly admitted not paying taxes, blaming the city for not providing adequate services. 
Detroit formally emerged from bankruptcy in December of 2014, shedding almost $7 billion of its roughly $18 billion debt. City workers made concessions and the healthcare coverage of pensioners was reduced, while the pensions themselves remain largely intact to this day. The Detroit Institute of Arts had already had put price tags on some of its Bruegels, van Goghs and Rembrandts – but in the end, its famous collection survived, thanks to donations. A city of 1.8 million in 1950, Detroit is now home to nearly 690,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets. But the city teems with optimism. Business leaders, corporations and foundations have committed funds to help revitalization, while the city's finances will be overseen for some years by a commission that includes a majority of state-appointed representatives. 
Both Greece and Detroit share a history of financial mismanagement and corruption. Both are a historically important sub-unit of a larger entity - without control of their monetary policy. Both produce a similar economic output: Detroit ~$224bn, Greece ~$242bn. According to some experts, the EU is likely to force Greece to stay in the Euro and put it through an American-style municipal bankruptcy, like that of Detroit. 
The US has seen municipal bankruptcies before, while the European Union so far rescued every country in danger of default, like Ireland or Portugal. When a US municipality files for bankruptcy, the state government takes over its finances; the unlikely equivalent for Greece would be non-Greeks taking over Greece's finance ministry. Detroit's case is an example of a fiscal and political union under which erring local governments lose sovereignty when higher levels of government need to clean up their fiscal messes. No such mechanism exists in the Eurozone, with its proud nation states and skepticism towards pan-European regulators in Brussels. 

Even if the consequences of Greece’s crisis are still uncertain: The Detroit bankruptcy was handled quickly and efficiently. Within 18 months, the city changed from being looked at as a post-apocalyptic scenery into a place for opportunity and growth. A new convention center, a new sports arena, a 21st century style streetcar line and a massive bridge connecting Detroit with Canada are only some of the many massive projects underway. Meanwhile, more than 100 tech startups have settled in the inner borders of the city, targeting disruptive business sectors such as agriculture, renewable energy and drone navigation. 

“Detroit: Now Hiring” reads a sign recently put up in New York City. Athens and the rest of Greece have a chance to go the same way – if Europe stops the financial bleeding and helps it resurrect.

Felix Zeltner

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