A Greek settlement?

Although no one emerges from the Greek debt crisis smelling of roses, Alexi Tsipras has perhaps lost more than most; the new deal for Greece he promised the Greek electorate in the run up to his election six months ago is gone; and the one that today he has been forced to accept is worse than the that on which he staked his future when he called a referendum eight days ago.

Several things are clear. First Germany's desire to stick to the rules has trumped France and Italy's desire for the appearance of European Unity. Second, the crisis has exposed flaws in the structure of the common European currency, which looks like it has fallen between the two stools of monetary and fiscal independence and full integration, a position that it turns out is unworkable. Third, it has shown how important are integrity and honesty in negotiations; and that when they are gone things get very difficult very quickly.  And finally, any deal which might have made economic sense has been distorted by the whipping up of public opinion and the resulting transition from the realm of finance to that of politics.    

It would appear that the economic can has again been kicked down the road in that Greece may have been forced to make promises in return for a lifeline that it simply hasn't the capacity to deliver. And even supposing that the numbers did add up, something Paul Krugman disputes, Greece's history of lax implementation of revenue raising policies and its attachment to spending may scupper implementation of key parts of the deal; and that's even assuming that the deal is approved by an parliament that must feel angry at Europe and betrayed by its prime minister. 

One commentator asked a Greek MP this morning whether this was 'Europe trampling on the democratic will of the people'. I understand journalists like to ask provocative questions but this was at the sillier end of the spectrum. Europe has 503 million people, 482 million (97%) of whom were excluded from that referendum; and ultimately they are footing the bill.

If European monetary union is to succeed, the notion that economic under-performance in one region can be solved by labour migration, which replaced currency fluctuation as the purported adjustment mechanism, must be largely discarded. Instead the richer Europe countries will have to come to terms with the fact that direct transfers of wealth may be required semi-permanently to support the less productive parts of the European economy, while the latter must accept that those transfers will come with strings attached: and that effectively means a loss of sovereignty—something the Greeks are just finding out.


  




  

Greece

First a caveat; I don't claim to understand the Greek situation, but for some reason it's bugging me. There is little likelihood that Grexit will have a big impact on the US and we have other things to worry about in California: fire (too frequent) and water (not enough), not to mention gun violence, racism, decaying infrastructure, expensive health care, declining educational standards. But although it's a small country, about the population of Ohio, with a GDP equivalent to 1.7% of the US (roughly equivalent to Louisiana), I am transfixed.

Here's my take. When Greece joined the Euro, its government was able borrow money from private lenders at very low interest rates. They were prepared to lend at rates that didn't reflect the risk of Greek sovereign default in part because the government cooked the books on its tax receipts, and in part, I'm assuming, because they calculated that the EU would not let the Greek government default; that would put lots of European 'too big to fail' institutions in peril.
When Greece's finances began to look shaky, interest rates on Greek debt soared, and default looked likely, the IMF, the ECB and the EU then stepped in, bailed out the private lenders to reduce the risk of contagion (exactly as those lenders predicted) and, in return for lending European tax payers money to the Greek government, asked for a repayment plan, one based on 'austerity' (meaning a drastic cut in government spending and the privatization of state owned enterprises).

It seems that some of this plan was never implemented: the retirement age was not raised, pension reform was neglected, privatization proceeded at a snail's pace, and tax collection wasn't improved. But government downsizing did lead to a severe contraction in economic activity, lowering tax receipts still further and prompting another bailout. With it came more pressure for reforms and government spending cuts, leading ultimately to a soft 'revolt' by the people who, in 2015, elected an anti-austerity government led by Alexi Trsipras. Trsipras' Syriza party came to power promising to undo austerity, something it really had no way of knowing it could deliver.

Over the six months of rancorous negotiation and increasingly hostile rhetoric, Trsipras and Yanis Varoufakis, Greece's finance minister, failed to get the concessions they had promised their voters and in a desperate move, called referendum on the austerity deal which, perhaps not surprisingly, the Greeks rejected, in effect tying Trsipras to the mast of his electoral ship.

By now, private lenders were largely off the hook so 'contagion' in the banking system was mitigated. But that meant that instead, European tax payers in effect were backing Greece through the IMF, the ECB and directly through (I'm assuming) Greek debt purchases made by European governments.

In June an IMF repayment deadline came and went with out visible consequences; in early July and ECB deadline (it had promised not to renew it's prpovision of funds to the Greek banks were a deal not reached) passed and funds continued to be provided. So a big bang (much like the passing of the US debt ceiling) went off with hardly a sound, making all the dire warnings look like posturing and negotiating. What people say they will do and whey they actually do when push comes to shove often seem to differ.

So where now? For one thing, despite the artificially whipped up emotional indignation of "being cast out of Europe" there may be benefits to letting the Greek currency float again. Import substitution should create jobs and the economy, after some period of inevitable chaos, should recover. That may give Greece some breathing space to decide for itself which path it wants to take - reform or economic stagnation and collapse. But at least that won't be a solution imposed on them by outsiders.