Wednesday 22 June 2011

The Gloom of having no Good Options

The Greek government has survived the vote of confidence, and now its next test is passing more austerity measures. Austerity has little - if any - support among the Greek electorate simply because it hasn't delivered the goods yet. It seems obvious that Greece will default at some point, but would it be better to do it sooner rather than later?

There doesn't seem to be any good solution here.

Greece cannot pay its debts, but the default and decouple option, as advocated by Daniel Hannan, among others, would be disasterous for Greece and for the EU. Defaulting would unleash a tidalwave of debt back into the European banking system and European taxpayers in the Eurozone would take a big hit at the same time that their governments (particularly in Germany, France and the UK) would be forced to decide whether or not to bail out their bad-Greek-debt-holding banks. For Greece, it would be locked out of the international financal markets (as it is now), and without an alternate line of credit. Since it takes in less in taxes than it needs to finance its expenditure, the resulting austerity could be much, much worse. Leaving the Euro at such a time could lead to extremely high inflation.

Just leaving the Eurozone (and not defaulting) is unlikely to help either, as the devalued New Drachma would make it harder for Greece to pay off its debts, most of which are in Euros.

Continuing austerity doesn't seem to be working either. Greece needs time to restructure and reform its economy, but the time-frame is extremely short for the task that faces the country, and the refrain of "tough love" from Northern Europe is not endearing for the Greek public, to say the least.

Further integration is the call of others, and interestingly also of the IMF, urging the Eurozone to integrate economically and politically. However, these calls still seem vague to me on detail, and I'm not sure how much they are aimed at solving the current crisis rather than on preventing it from happening again (or both). The blue-and-red bonds (where there are some Eurobonds and some national bonds) or the Eurobonds idea is attractive, and could ease some of Greece's problems, but it could also raise some others. Regardless, there is little political will for more integration, and as no attempt by any Eurozone government to really make the case for further integration, it doesn't look like that will change soon.

At the moment the best option seems to be to accept the bad austerity and bail-out deal and forge ahead with reforms in Greece with at least the thin cushion of EU/IMF loans rather than no loans at all and hope that either (a) the EU gets its act together; or (b) the painful austerity will help Greece just enough so that it can partially default in a more managed way in a year or two when the prospects are better for it and the EU. Neither option is an inspiring or very sellable one.

The protests in Greece will continue, but I wonder what the historical legacy would be if they won and Greece defaulted unilaterally - both for internally and in Europe?

1 comment:

  1. Having handed them Versailles-treaty-like terms, they will likely default unilaterally anyway, and if not, exhibit what I like to call "powerful weakness", wherin every time they suggest default, the public and private financial instiutions of the EU get a chill in their neck. Politcally, they could behave like Hamas.

    Look at this shambles for what it is: a river in Egypt. The EU is effectively one sovereign state when it comes to finance, markets, and economy. Member states can point to one another and tell them to "take one for the team", but what they need to do is print some Euros in a classic devaluation move, and use them to dissolve government debts that are at a risk of default internal and international.

    Greece then goes into financial recievership. Italy, Spain, and Portugal might have to join them there, but if you're a bum and owe people money, then too bad. The intervening years will turn these places into a great investment once prices align with value.

    Remember that Greece has in it's high-borrowing years used it to show a per-capita GDP figure as high as Germany, but with an economy akin to Bulgaria whose GDP/capita is a third of Germany. The borrowing and sprinkling of this moolayh on the 'starving proletariat' is what did this. They need to own up to that by not doing it again, but "demanding reparations" will not work for them.

    COncider for a moment the postwar German "Wirtschaftswunder". It is a direct result of the US dissolving their past debts, and was willfully done to restore their economy and feed people.