Thursday 27 October 2016

Whether Greece stays or goes, the Eurozone must change to survive

Published 20/06/2015 | 02:30

'There are those who say that a default would see Greece (or even Ireland) better off'
'There are those who say that a default would see Greece (or even Ireland) better off'

The show may not be over until the fat lady sings, but some very high notes are being sounded in the operatic farce/tragedy that is the Greek crisis.

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Greek Prime Minister Alexis Tsipras accuses the IMF of "criminal irresponsibility". Unnamed German sources - the Ministry of Finance being the chief suspects - call the Greeks "clowns." Meanwhile, the countdown to June 30, when Greece must repay €1.5bn it does not possess to the IMF draws ever nearer.

The show is not over yet but many have noted that it would not be the first time Europe stumbled into a disaster that no one except those on the extremes actually wanted.

Much of the commentary on the present situation seems at least two years out of date. It still centres around the argument of austerity versus soft money. That at least was a simple question, however important. But things have moved on from there. We are now looking at more fundamental issues about what is wrong with Greece - and what is wrong with the Eurozone.

The austerity bit has been done - admittedly at terrible cost to the Greeks. National income, as measured by GDP, has fallen by more than a quarter. Almost a third of public sector workers have lost their jobs and unemployment is close to 30pc - double that for young people.

Whatever the criticisms of such a horrendous adjustment in just five years, austerity did what it said on the tin. Greek public spending is now covered by tax revenues and a deficit in dealings with the rest of the world amounting to two months' national output has been eliminated.

On the creditor side, debt write-offs and cuts in interest rates have reduced the actual annual cost of Greece's huge debt to quite affordable levels. The question is what to do next. Even though Greece is not being asked to endure any major austerity cutbacks, it is, in many ways, a far more difficult question. Hence the stand-off.

What Greece is being asked for is a programme which would convincingly allow it to continue matching tax revenues and spending. But - and this is what is wrong with Greece - no such credible programme has been forthcoming.

Pension cuts are a touchstone. The system is unaffordable in the long run and must be changed, but the Greeks have a point when they say now is not the time for big cuts. However, if that is the case, they must then find savings elsewhere, while slow reform of the system takes place. The creditors say they have not done so.

Even at this later stage, everybody is still wondering whether the Syriza-led government believes it could not survive agreeing to any such programme, or whether it is playing the most gigantic game of bluff. One US financial manager was quoted as saying that keeping Greece in the Euro mattered more to Germany than it did to Greece.

One unexpected result of the crisis has been a clear view of the thinking of the enigmatic German Chancellor, Angela Merkel. In an extraordinary move, she held a secret meeting with the heads of the EU commission, the IMF and the ECB - along with, of course, the president of France - to draw up a new offer to the Greeks.

The hardline German finance minister Wolfgang Schaueble was not invited. He did not even know about the meeting. The Greeks ignored the offer anyway. Perhaps they concluded that the geo-political importance of keeping Greece in the Euro and EU, and keeping it away from Vladimir Putin, may matter more to Ms Merkel than money in the end.

They may still hope to get a better deal by hanging tough. There was a curious event this week when the Greek Minister for Finance, Yanis Varoufakis, met the Secretary-General of the OECD, Angel Gurria, to discuss a request to the OECD for support in the design and implementation of a major programme of reform.

Mr Gurria's welcome to Mr Varoufakis could not have been warmer. The Euro crisis has sidelined both the IMF and the OECD, and neither likes it. Nothing can be ready by June 30 but Greece might well be able to finesse its creditors by playing the OECD card.

Or perhaps it's not a ploy. A large part of Mr Tsipras's party now thinks that the costs of default would be less than the costs of any possible deal. Many Greeks - although not, it would seem, a majority - feel the same. It is the kind of calculation that caused so much trouble in 1914.

As to what is wrong with the Eurozone - a key principle was that states in financial trouble would not have their debts paid by the others. This has been the position in the USA since the 19th century. But Greece was partially bailed out, although a partial write-off was particularly pointless. The creditors' last line of defence, that assistance should be with cheap loans, not grants, may be all that is politically possible, but it is not good enough.

The no-bailout rule has been re-introduced. Yet creditor governments are not prepared to cut their losses in Greece with large write-offs and make a credible commitment to the new rules, thereby leaving Greece, and everyone else, in the hands of the financial markets in future.

We are left with a monetary union in which states might be bailed out with loans, but in which there will be no transfers from richer to poorer, and where Greece has already shown that membership of the monetary union is not sacrosanct. That is a system which cannot work in the long run, whether Greece stays or goes.

In the short run, nobody knows what will happen if Greece does go. There have always been those who say that a big debt default and a new competitive, devalued national currency would see Greece (or even Ireland) better off.

That would also be in the long run. In the short run, Greeks' already feeble purchasing power would be devastated by a new currency worth much less than the old. Without the paradox of Troika help, the banking system might well collapse. Given Greece's history, democracy itself could fail.

Either way, another phrase from 100 years ago comes to mind; it will not be over by Christmas.

Irish Independent

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