ESSA

ESSA

A bitter summer: Greece on the precipice


Leon Obrenov

By

July 1st, 2015


A referendum has been called, global markets are frightened. Leon Obrenov outlines the latest developments in the Greek debt crisis, and discusses whether Greece has anything left to lose.


Well then. Here we are once more. The next Greek debt payment to the IMF is due. Except this time, Alexis Tsipras and Yanis Varoufakis, Greece’s prime minister and finance minister respectively, seem to have decided that enough is enough. That there will be no more lurching from interest payment to interest payment, all the while bearing the pointless burden of unnecessarily punitive and economically damaging austerity measures.

Tsipras and his Syriza party were elected with the mandate to reject austerity. If he’d simply acted on that mandate, he would’ve outright rejected the latest offer from Greece’s three creditors, the IMF, ECB and the European Commission, disparagingly called the “troika”. However, recognising the critical nature of this decision and being a public advocate of the power of democracy, Tsipras instead decided to let the people choose. A referendum on whether to accept the latest creditor proposal has been called for July 5.

Immediate reactions on global stock markets were strong, with most major indices dropping somewhere between one and three points. The FTSE lost just over 2%, French and German markets fell by 4%, and European banking shares experienced dramatic losses of “up to 10%.” The falls weren’t limited to Europe either, with the Nikkei and Hang Seng also dropping. The problem, however, isn’t the reactions of global stock markets to the threat of Grexit. Stock markets will eventually rebound, and with forewarning, do as much as possible to limit contagion risk. The problem lies in the political and subsequently economic reactions from the Eurozone.

Let’s be clear: current polls coming out of Greece suggest the outcome will likely be yes, that the Greek population will accept the creditors’ most recent offer, regardless of what Tsipras and Syriza want. Unfortunately, European leaders have seemingly completely overlooked that tidbit of information. Larry Elliot, economic editor for The Guardian Australia, has drawn the striking analogy of “the Sarajevo moment”, precisely because of these reactions.

Euro heavyweights including Jean-Claude Juncker, president of the European Commission, have since come out arguing for a yes vote, and implying that a no vote would mean that a Grexit, a Greek exit from the Eurozone, would become inevitable. The ECB has decided that it has no choice but to freeze emergency liquidity assistance to Greek banks at last Friday’s level. Given that an uncontrolled run on Greek banks now could destroy any liquidity they still have, Tsipras and Varoufakis had no choice but to declare capital controls beginning Monday June 29 until the referendum. Withdrawals at ATMs have been capped, banks have been shut, and the stock market didn’t operate on Monday.

So far, Greece’s rescue by the troika has indisputably done more damage than good. Harsh austerity has left Greece in a situation with 25% unemployment, nearly half their youth unemployed, and a 25% economic contraction over five years. The notion that raising taxes and minimising government expenditure, on the phenomenally punitive scale demanded of Greece, could ever lead to economic growth is just shy of laughably absurd. Sucking the demand out of the economy, crashing government stimulus; this is the opposite of sensible policy in a contractionary cycle.

Yet nonetheless, the creditors have continued their moral crusade against Greece, underpinned by the premise that Greece’s financial difficulty is its own fault. Undoubtedly, some of it is. Greece’s government for the early 21st century is responsible for Greece’s massive debt problem, ceaselessly borrowing from banks including German and French banks, when instead they probably should have been exercising greater prudence. That said, those banks could’ve stopped lending but chose to continue knowing that Greece’s debt situation was slowly worsening. But the solution was never going to be bailing out German and French banks by proxy (after all, most of the emergency funding is going from the IMF to Greece, then on to Greece’s creditors of the past), and trapping Greece in an economic quicksand from which it will be very hard pressed to escape.

The quasi monetary union of the Eurozone has left Greece in an untenable position. Greece cannot devalue its currency, as it ordinarily would have in this situation. Unlike a true monetary union, there is no real means to transfer resources equitably across members. The stability and growth pact was always a patchy solution at best. According to Nobel economic laureate Joseph Stiglitz, the Greek concern “for popular legitimacy is incompatible with the politics of the Eurozone, which was never a very democratic project.” However you regard the Eurozone, it is fairly clear that this debt crisis has become political. It’s patently obvious that the creditors aren’t acting in the best interests of Greece’s economy or long term prosperity. Economic stability and a return to growth is really the only way Greece can ever repay its debts, short of defaulting, which is now looking increasingly likely.

If the Greeks vote yes and accept the latest troika proposal, there will likely need to be a new government. Greece won’t get a favourable deal, and even the vaguest mention of debt write-offs finally now flying around will be forgotten. If they vote no, it will be hard to see how they can stay in the Eurozone. But then, it might very well be better for everyone but German and French banks if a Grexit actually happened. Greece would be able to devalue its currency and restore its economy, and the Eurozone would probably need to spend less capital ‘rescuing’ Greece. Overnight, Greece defaulted on the €1.6 billion interest payment they owe the IMF (making them the first developed country to ever default on a debt to the IMF). A return to the negotiating table is looking increasingly unlikely.

A crisis in a relatively small European country, followed by unconscionable and unproductive demands by larger European powers. The last time this happened was in late June, 1914. The rest, as they say, is history.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

Founding sponsors

 

 

Partner

Gold sponsors

 

Silver sponsors

 

 

 

 


Affiliates