If Grexit comes, Greece will have wasted five years in depression


Photo credit to Orestis Panagiotou / EPA.

If you think the past nine days have been tense, just wait.Greece Flag Icon

For all the uncertainty and mistrust that have characterized Greek-EU relations since Greek prime minister Alexis Tsipras suddenly announced a snap referendum last Friday, the week ahead promises to reach ever dizzying heights of suspense after Greek voters delivered a strong endorsement to Tsipras by rejecting the terms of the most recent deal on offer from the Eurogroup — over 61% of the electorate voted no (or ‘oxi’). The result, whether Tsipras admits it or not, essentially begins the process by which Greece will eventually leave the eurozone.

There are no winners here.

Tsipras and the far-left SYRIZA (Συνασπισμός Ριζοσπαστικής Αριστεράς, the Coalition of the Radical Left) took power after January’s parliamentary elections on the mutually incompatible pledge of keeping Greece in the eurozone while demanding more lenient conditions from the country’s creditors. In so doing, Tspiras miscalculated European goodwill. It wasn’t unreasonable for Tsipras and finance minister Yanis Varoufakis to argue that Greece’s debt load is unsustainable. Moreover, even plenty of orthodox economists, including many at the International Monetary Fund, one of Greece’s creditors, admit that years of austerity have exacerbated economic conditions — GDP contraction of nearly 30% since 2008, a 26% unemployment rate and a nearly 50% youth unemployment rate. But the erratic and amateurish approach of the Greek government, capped by Tsipras’s 11th-hour decision to call the July 5th referendum, destroyed what little goodwill remained for his government.

There’s still time — even now — for Greece and the rest of Europe to reach a deal. But the complete lack of trust between Tsipras’s government and the entirety of the rest of the eurozone’s leadership makes it much less likely to happen. The complete breakdown in trust between Tsipras and even sympathetic European leaders must certainly rank among the most troubling casualties of the past nine days.

Post-‘oxi,’ if the EU leaders back down now and provide a third bailout with some sort of debt restructuring, they will have rewarded someone they believe to be a cynical demagogue. What’s more, they will have incentivized other European states to make future demands. Tsipras, having just won a mandate for his confrontational approach to negotiations, certainly cannot turn around and accept the same deal that the Eurogroup has been offering for weeks.

The contours of a smart deal have always been clear — some form of debt relief that stops short of a full haircut. A third bailout that extends the repayment period for Greek debt to 40 or 50 years or somehow links debt service to economic growth, in exchange for reforms that will bring Greece’s regulatory environment more in line with mainstream Europe’s. Pension reform, perhaps, but the kind of sweeping changes to eliminate waste, corruption and inefficiency that you might have expected SYRIZA, a party of outsiders in a country governed for decades by an incestuous elite, would embrace. Sneering condescension from German finance minister Wolfgang Schäuble (pictured above in an anti-austerity poster) and smug lectures from Eurogroup president and Dutch finance minister Jeroen Dijsselbloem haven’t helped bring the two sides to agreement.

Barring a miracle, Greece is now headed for ‘Grexit,’ at long last, and it will be a messy Grexit at that. Shortly after voting ended, Varoufakis was already calling for the issuance of ‘parallel liquidity and California-style IOUs,’ which you can think of as the prototype for what could become the new drachma.

The real tragedy in today’s vote is that if Greece had left the eurozone back in 2010, it might well have been on the road to recovery today. The best-case scenario for Grexit goes something like this:

  • The eurozone’s monetary policy was never a good fit for Greece and it’s even worse now that Greece is in the midst of an economic depression. Greece needs a much more activist policy to reduce unemployment.
  • Eurozone policies have required what economists call an ‘internal devalution’ — a grinding process of lowering labor and other costs, and that is in addition to the other painful economic reforms that Greece’s lenders have demanded over the past half-decade.
  • A return to a devalued drachma would almost instantly make Greece’s exports more competitive (and draw more tourists to a country now 40% less expensive) and give it at least a chance to jump-start its economy.

That assumes a lot of optimistic variables — that Greece’s exports are strong enough for a depreciated currency to reverse downward growth, that the Greek treasury would have significant foreign reserves, that the ensuing belt-tightening wouldn’t harm the economy even more, that the precedent of a ‘Grexit’ wouldn’t cause significant contagion that it casts doubt on the rest of the eurozone. You also have to believe that Tsipras and SYRIZA are equipped with the political and economic toolkit to carry Greece from catastrophe to growth. Their first six months in government don’t inspire confidence.

Just last month, Iceland started lifting currency controls imposed during the most difficult days of its own 2008 financial crisis. There’s no doubt that Iceland endured its own form of austerity in the ensuing seven years without ready access to international bond markets. While unemployment in Iceland never reached Greek joblessness levels, it’s now down to 4.3%, and the Icelandic economy is growing at a pace of around 4% annually.

Had Greece left the eurozone in 2010, it might be similarly on the upswing today. At the time, and in 2012, private-sector exposure to Greece was much higher, and the risks of contagion (i.e., the risks that a Grexit would cause bank runs or other trouble in other weak southern European countries) were also much higher. No one believes that Grexit, today, would amount to the same kind of existential crisis as it might have in 2010 or 2012. After five years of economic depression and ‘kick the can’ measures from European leaders, Greece is now expendable. But if Greece were destined all along for Grexit, the past five years of misery were needless — and Greeks will have paid the price for European stability.

The deeper problem for European leaders, no matter what the outcome for Greece today, is that it continues to make decisions about economics with politics. From the initial decision to pursue the single currency through the 1992 Maastricht treaty, Europeans have prioritized political goals over economic ones. The economic solution to Greece’s woes isn’t difficult to see — either (i) Greece should leave the eurozone and devaluate its currency or (ii) the rest of the eurozone should step up to provide debt relief and, simultaneously, create the kind of fiscal, banking and economic union that could facilitate a smooth currency zone. Both options are untenable, however, for political reasons.

While Greece is far from blameless for its current condition, European political paralysis has worsened Greece’s plight. Portugal, Spain, Italy and other peripheral economies trapped in the straitjacket of a German-centric monetary policy continue to suffer. In the years ahead, as more talent from places like Romania and Bulgaria leave for jobs in Frankfurt or London, national governments will be left responsible to pay for the social welfare of an aging, less productive population with a shrinking revenue base.

None of this bodes well for European ‘unity.’ 

One thought on “If Grexit comes, Greece will have wasted five years in depression”

  1. > “..over 61% of the electorate voted no…”:
    This is not accurate.The official voting participation has been of about 62%, therefore about 38% of the “electorate” voted for ‘no’.

    > “..While Greece is far from blameless for its current condition..”:
    Greece has had two structural issues for decades:

    a) an inability to manage seriously its fiscal affairs, and more broadly to effectively enforce laws and regulations, and
    b) a weak economy with tourism being the only sector which is performing strongly (with, amongst others, many German visitors), therefore making it difficult to develop exports of products and services which could contribute to generate a positive balance of trade and cash flow.

    These issues should have prevented Greece from being admitted into the Euro until such time Greek governments would have satisfactorily fixed them…but this is history.

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