Greece is now technically in default, having failed to pay its $1.8 bn monthly installment to the IMF which was due June 30. Contrary to the mainstream media treatment of the story, there will be no ripple effect and no major financial crisis.
The Greeks are in dire straits, but their economy (the size of Connecticut’s) and their foreign debt (280 bn euros, including $243 bn to the IMF, the European Commission and European Central Bank) are not significant enough to impact the markets in Frankfurt, London, or New York. In fact it is an even bet that in the end Greece will not leave the Eurozone. My hunch is that some compromise with the IMF-EC-ECB Troika will be found, even though the Greeks are likely to vote “no” in a referendum next Sunday with the following complex question:
“Should the agreement plan submitted by the European Commission, European Central Bank and the International Monetary Fund to the June 25 eurogroup and consisting of two parts, which form their single proposal, be accepted? The first document is titled ‘Reforms for the completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis’.”
In essence the Greeks are asked to provide the leftist government of Alexis Tsipras with a fresh mandate to negotiate a less stringent deal than the one currently on offer. If we look closely at the two documents mentioned in the referendum question and Tsipras’s latest counterproposal, the remaining sticking points are relatively minor: continued 30 percent value added tax (VAT) discount for Greece’s islands which are in danger of depopulation, more gradual phasing out of farmers’ subsidies, and a delay (rather than non-implementation) of a comprehensive pension system reform that will raise the retirement age to 67 by 2022.
This is light years away from Tsipras’s rhetoric during the election campaign which brought him to power last spring. We are witnessing a classic case of the responsibility of power in action. Contrary to appearances the Greeks have blinked, faced with the uncharted waters of leaving the euro and perhaps the EU. An agreement will be worked out, preventing the country’s current IMF “non-compliance” from escalating into comprehensive default.
Were it not for the heavy debt burden for a nation of 11 million, Greece would be considered a reforming success story by the Troika’s own standard. Since the initial 2010 bailout agreement the Greeks have cut public spending, raised taxes, and turned a $28 bn government deficit (before debt interest) into a $3.5 bn surplus. Even the IMF called their austerity measures “exceptional by any standard.” The problem is that austerity has shrunk the economy: Greece’s GDP has dropped by a massive 25 percent since 2008, imports have declined by 40 percent, and unemployment rate is 25 percent (and more than twice that among her under-25s). The structural problem is that a country cannot “generate” money by belt-tightening. To put it simply, raising taxes and cutting spending does not create wealth:
If a country raises taxes or cuts spending, it does not create money overall — it merely transfers it from one set of hands to another… Blame the Davos Darlings who pushed their beloved “euro” project on everybody, including countries such as Greece, for whom it was unsuited. That helped inflate the big debt bubble last decade. Since then, the Davos Darlings have been pushing their patented debt cure of bread, water and gruel — to no effect. You notice the Davos Darlings aren’t foolish enough to try their own medicine. In Brussels, Frankfurt, London and Washington, the diet instead runs to Lobster Thermidor, Oysters Rockefeller and Chateau d’Yquem.
In the long term, Greece’s only hope of growth and prosperity is in her departure from the shackles of the eurozone. As I wrote in these pages almost four years ago, for as long as she stays Greece will continue its long road to nowhere, with zero growth, cuts and austerity. The elephant in the room is the euro itself. In theory it was supposed to remove exchange rate risks, reduce the costs of transactions, stimulate cross-border trade, create an area of monetary stability, and force member countries to practice fiscal responsibility. The unstated intent was to curtail the power of the Deutschmark and to bind reunited Germany more closely to Europe. It was to be Chancellor Helmut Kohl’s burnt offering on the altar of European integration:
In the early years the plan worked to the advantage of the periphery. All of a sudden, it was possible to obtain loans in Athens, Madrid or Dublin at interest rates as low as those in Berlin or Frankfurt. The result was a period of southern rapid growth—largely financed by northern capital in quest of fresh opportunities—and German stagnation. The “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) used the cheap cash not to modernize their economies, however, or to increase their competitiveness, but to finance speculative projects and to indulge in excessive public and private consumption. Tens of billions went into building booms along the Spanish Costas and into Greek government bonds. Ireland’s growth reached 4.5 percent in 2004, fueled by a property boom but not accompanied by an improvement in its international competitiveness.
However seemingly disadvantageous for the Germans, the new situation proved to be a blessing in disguise for them. The periphery was awash in investment funds and it was temporarily oblivious to the fact that it could no longer defend its markets against future German imports through periodic devaluations….
A conspiracy theorist may argue that the Germans had known all along that the euro would create a captive market for their export juggernaut. The southern periphery could no longer protect its domestic markets from the deluge of better made, more efficiently produced German goods by resorting to occasional devaluations vis-à-vis the Deutschmark. The gap was bridged by northern commercial banks supplying loans for southern purchasers of mainly German goods. Greece is now caught in a triple bind: its exports cannot grow because they cannot be boosted by devaluation, its domestic demand cannot be stimulated because she is forced to implement draconian austerity measures, and her economy is additionally burdened by high interest rates on German-led, multi-hundred-billion rescue packages.
Greece needs to get out of this vicious circle. Tsipras is afraid of the plunge, for now, but in the long run he has nothing to fear but fear itself.
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