Yesterday, Greece voted overwhelmingly to reject the terms put to it via the latest in a string of proposed bailout deals (it was actually more complicated than even that, but for the purposes of this article, go with it). Tsipras told the Greek public that a “No” vote would strengthen his hand in discussions with the country’s various creditors. The question now is whether he is proven right or wrong. For the future of both the Eurozone and the EU, I think Tsipras should have his bluff called.
I’m going to say something obvious here: Greece shouldn’t have joined the Euro and shouldn’t have been admitted into the single currency. Its economy wasn’t up to it, and its admission risked the entire project as has been proven many times since the 2008 crash. It was a mixture of political idealism and the economic hubris that was a hallmark of the very early 21st century that made the other Eurozone countries put to one side any thoughts of it being a potential problem.
In Britain at present, we have an unholy alliance of left and right urging Greece to leave the Euro. The left because they think some sort of socialist paradise will be able to flourish if the drachma returns and the international banking conspiracy leaves the Greeks be. The right thinks if Greece leaves the Euro, the European project will collapse. Should Greece actually leave the Euro, neither of these things will happen.
What would occur would be sad to watch, but is something that has been specifically mandated for by the Greek people when they elected Syriza, and then ratified yesterday with the No vote. Greece will spiral downwards into oblivion. An economy already saddled with no growth will get worse as a depression settles in. Tourism will be looked to as the saving grace, but will falter as the country descends into unrest as youth unemployment skyrockets and the streets of most towns become unsafe. More people staying away as a result will make the economy worse, which will mean more social unrest, which will mean less and less tourists until there is no tourism industry at all, in a terrible negative feedback loop.
However, perhaps I’m completely wrong and Greece will flourish outside of the Eurozone. But I think it’s time to find out one way or another. Our Aegean counsins have become like the alcoholic who keeps saying they’ll get straight this time, they just need a few quid to do it, before hitting the bottle again big time. At some point you just need to wash your hands of the situation and let them either destroy themselves or happen upon a moment of clarity. It’s horrible, but it’s reality. I, like all of the European institutions, want Greece to stay in the Euro and work everything out. But there’s only so many times the voters of Greece can say No before Europe has to listen. It’s actually what the left, right and centre all agree on, albeit for completely different reasons: if the Greeks don’t want to play by our rules, we shouldn’t force them to.
But I expect that Tsipras will be proven right in the end and some new deal will be discussed between Greece and the ECB. The core of the EU is too scared of what a country exiting from the Euro might mean, not just to the markets in an immediate sense but to the entire future of the European project. This is sad, because I think Grexit would actually strengthen the project in the long run. It would send a clear warning signal to anyone thinking of playing loose with the rules – want to end up like Greece? Also, Greece leaving the Euro would strengthen Cameron’s hand in negotiations (Greece leaving the single currency followed by Britain leaving the EU really would endanger the project), helping the UK stay in. Furthermore, Greece leaving the Euro and then falling to bits would act as a clear warning sign to the British public about how dangerous it is out there, by one’s lonesome.
Its very simple – the EU will cut Greece adrift with all the horrible consequences for the rest pour encourager les autres of the consequence of exiting
Also, Greece leaving the Euro would strengthen Cameron’s hand in negotiations […], helping the UK stay in. Furthermore, Greece leaving the Euro and then falling to bits would act as a clear warning sign to the British public about how dangerous it is out there, by one’s lonesome
Surely these are directly contradictory? If the example of Greece sends a warning sign to the British public and makes them less likely to vote to leave, then that weakens Cameron’s hand in negotiations, not strengthens it; his only real bargaining chip is the threat to leave, so if it looks like that isn’t going to happen because opinion polls show people switching to the ‘Stay In’ side because they’re scared of ending up like Greece, then none of the other EU countries have any reasons to make any concessions to him.
EU wanted Greece in helped by Goldman Sachs,when maybe EU shouldn’t have accepted them,seems to me Germans and French so want a Euro to succeed,they’ll hang in there and do some sort of deal. They probably owe it.
Whatever happens one way or another, the people of Greece will suffer enormously for many years to come and the blame will be on the EU powerhouses of Germany and France for making this happen in the first place by getting carried away with the ideology and encourage more and more countries with poor financial standing to join the Eurozone from the start.
The alcoholic comparison makes sense to a point – but I would argue the barkeeps need upbraiding too.
We talk about moral hazard – the idea that Greece getting a further debt haircut and investment funds (albeit as loans) would embolden the country, and others, to also “not play ball” in the hope of getting (more of) the same.
But the real moral hazard here was banks that lent to Greece getting bailed out via the sovereign. They lent to the dodgiest member of the EZ and when the tide came in…got pretty much everything back. The much-vaunted “PSI” that saw haircuts on privately-held Greek sovereign notes came once the vast majority of such paper had been safely offloaded to the Troika.
What should have happened is Greek default, sovereigns bailing out those banks, and a move towards full banking union (the latter the EZ is slowly groping towards with the Single Supervisory Mechanism under the ECB).
There is a sort of chicken and egg scenario here. I agree with Varoufakis that no deal worthy of the name can occur without debt relief. It is not sustainable – and was not before Syriza took office. Had the Troika been serious about keeping New Democracy in power, they should have offered Samaras the debt relief suggested as a carrot for good behaviour in 2012. They didn’t and got Syriza.
But I also agree that Greece’s clientelist economy and whip-round tax collection system requires URGENT and serious reform. Varoufakis is an eminent macroeconomist and I agree with his take on fiscal sustainability. He is, though, a lousy negotiator and seems not to have a comparable grasp of these types of reforms.
The Troika insist on reforms first. Varoufakis insisted on debt relief first. I tend to agree with Luxembourg finance minister Pierre Gramegna, who today said there should be no “taboo” on debt relief, so long as it is accompanied by reforms.
Eurozone weakness is down as much to, probably more to, the failed architecture (no fiscal transfers within the currency union, unwillingness of Germany to address its distorting surpluses, no mechanism to put surpluses to use in productive investments in southern Europe, banks having lent to southern EZ sovereigns at the same coupon as the likes of Germany, etc.) than “southern laziness”, or whatever. Spain and Ireland were also torpedoed – both went into the crisis with fiscal surpluses.
Finally, there is the simple fact that Germany and Finland don’t want to pay more – they want to get their money back. Grexit and further default will see far less of this money repaid by Greece than a sensible debt restructuring (as suggested, btw, by those crazy Marxists at the IMF). Such a restructuring could even maintain the nominal value of the debt, but push out maturities and link repayments to GDP growth.
Great analysis. I am sure that you are right. It should be obvious, by now that the economic model used by bankers and politicians has been wrong for years. Many in the agricultural industry would certainly agree, the model forces habitat destruction, even though farmers are (or were when I trained in the early’70s) trained to think of themselves as managers of ecosystems.
If the model worked, and the Greek economy was as bad as people now say, they should never have been lent money in the first place. (At least not without strings attached at the earliest possible point). But the lenders simply assumed that penalties would return big profits – I guess. The crash changed that, even if it might have worked before. But the grand “Economists” failed to foresee the crash – even though one bank was trying very hard to sell my handicapped son a credit card even though they knew – because we repeatedly told them – that he had a mental age of three, and could neither read, write count nor speak! At every scale the economic model we are sadlled with fails.
The problem is that we have no reliable model to use as the basis of dealing with the Greek situation. The solution cannot be entirely economic. The lenders must admit that they were foolish, and accept some of their loss.
We must try to repair the Greek economy, but in doing so we must acknowledge that there is a bad and worsenig humitarian situation. If it gets worse as many have suggested there is a risk of unrest, perhaps even a “failed state”. Right wing politicians need to wake up to this, because if we let conditions inside Greece slide we might find many Greeks queing for places in the “Jungle” at Calais as well.
But seriously we must take action now to deal with the greatest hardship that the Greek people are suffering. More prolonged international financial negotiations will not feed people who are hungry now.
But whatever mess the financiers and politicians have made, we should not right off the Greek people yet. Dont forget that a few years ago they controlled a pretty good slice of global shipping (and perhaps got too comfortable on the back of it), but I am sure that Greece will find a new niche, given half a chance.