Thursday, 2 July 2015

Should Grexit Happen?

Yesterday was apparently the hottest day since 2006 - I was enjoying the first half of it and then the heat and pollen piled up and triggered off my mostly dormant asthma. The local surgery kindly found me an appointment this morning - and I'm to rest for a few days - while the steroids kick in.

Staying at a family members at a kind of makeshift hospital I seem to be improving which is good news. This, hopefully temporary sickness has forced me to have a little break from my main job in computing - but political junky that I am - the 'what would happen if Greece left the EU/Euro' question is nagging at me, I want to know the answer. So I've been reading round the subject for a while; like other contributors I've read - I don't claim to have exhaustively researched every conceivable variable - but I hope I've got my head around it and here's what I came up with...

The Great Recession of 2008 hit Greece very hard, tax receipts reduced, unemployment increased and GDP lowered. Greece borrowed heavily to keep afloat, payments needed to be made. Greece gained loans from the so-called troika of creditors; The European Commission, The European Central Bank and the International Monetary Fund. Greek debt now stands at 340 Billion Euros.

In return for these bailout loans the creditors attached to Greece certain conditions that are better described as austerity measures, big budget cuts and large tax increases. The rationale from the troika creditors is, 'once Greece are running a current budget surplus or living within it's means, then it's economy will become successful again and Greece could then repay the loans'.  This austerity regime has been in effect since 2010 - however there's a fly in the ointment - it hasn't worked.

Most of the 240 billion Euros bailout money Greece has had since 2010 has been going towards paying off international loans, rather than helping to rebuild the Greek economy. Since 2010 Greek GDP is down 25%, and youth unemployment is at a horrifying 60%. Greek unemployment overall is high at 25.6%.  Clearly the Greek economic model needs rejigging, but the creditors refuse to make any major concessions, and the Greek government are currently ambiguous as to whether they will agree to more austerity. Although the Greek government don't want to agree to continued austerity. Greeks would be most benefited if they vote no in the referendum this coming Sunday.

I guess people could think - 'hang on but the Eurozone are giving Greece big loans, surely the creditors are helping Greece by doing this?'. But Greece are only allowed the loans on condition they keep up a huge debt repayment schedule and agree to the austerity, the creditors want Greece to run a current budget surplus now. But  these lender conditions are putting the brakes on Greece's economy and creating problems for them similar to a 1930's style US Great Depression. Note that the way the US eventually got out of the Great Depression was fiscal stimulus, at first the US government tried austerity, to cut their way out of the Great Depression and it didn't work.

I do of course understand and agree that Greece, or any country or individual needs to 'live within it's means' - and indeed the austerity measures insisted by the creditors call for the very same, but they don't make strategic allowance for Greece to defer loan repayments, it can't currently make anyway - until such a time as their economy is robust enough to be able to restart repayments. When the economy starts to recover is the time to move into current budget surplus, not at the point when your in economic jeopardy. Even George Osborne concedes this point, by running large current budget deficits himself 2010-2015, and also by calling for a new law in the UK to guarantee a current budget surplus but 'only in normal times'.

A game of  brinkmanship is currently playing out between the forces of the Eurozone, headed up by German Chancellor Angela Merkel and the left wing Syriza Government in Greece headed up by Alexis Tsipras. In an interesting development last Thursday the IMF conceded that without debt relief Greece have little chance of a sustained recovery.

My analysis says this - The troika of creditors should agree to provide Greece with a long debt repayment break.  I'm talking about loan repayments to be eventually made, but deferred to a later date when the Greek economy is strong enough to pay them again. Greece's main industries of shipping, tourism and agriculture need to be encouraged, nurtured and protected. Greece has plentiful natural resources and developed industry to work with. Yet currently the Greek economy is sick, the creditors need to agree to put Greece into hospital patient status - not twist it's arm for debt repayments it can't make, if you think about it, these unreasonable debt repayment demands are crippling Greece's economic growth (a liquidity crisis) and if this is so - how are the creditors going to get their money back? If the creditors change tack and adopt a more realistic and honest approach to Greece's current requirements - eventually everyone could get their loan money repaid.

The Greeks preferred option is to stay in the European Union, but with a lower debt burden, according to EU treaties Greece cannot be forced to leave, concerns about a perception of a devalued Greek Euro and uncooperative EU partner countries would make this a challenging road. Of course these issues could be overcome in this scenario, as economics is not an exact science and we are talking about future potentials here. A big advantage of Greece staying in the Euro + long debt repayment holiday strategy - is the Euro would be a much more stable currency base for Greece to start rebuilding it's economy.

My view is Syriza need to continue to be brave, if the creditors won't help them configure a recovery program with a better chance of success, they need to take unilateral action to defer debt repayments to such a time as they can afford to restart them . I sense Syriza are rightly concerned about being responsible for a post Grexit humanitarian disaster. Jonathan Loynes and Jennifer McKeown, economists at Capital Economics won the Wolfson Prize in 2012 for their paper on how an exit could be successfully accomplished without catastrophe. You can read the 2015 update to their study here.  Nobel Laureate economist Professor Joseph Stiglitz suggests in the long term things could be better for Greece if they leave the Euro.

So, in the event of Greece leaving the EU, in the short term things would be very unstable. The early panic could be shored up with capital controls such as those already in existence now. At this point, if necessary bridging loans from the rest of the world could help. Also I think an alternative austerity program would  need to be temporarily employed. But austerity that made sure food got into mouths of Greek children, austerity that made sure Greek pensioners got paid - and one that did a lot more to help create jobs and nurture business growth. Post exit - government funds from general taxation would need to be prioritised not to repaying money grabbing lenders - but to support essential services to alleviate the potential of a humanitarian crisis. Also, a free trade agreement with the Eurozone could and would need to be negotiated asap.

In the mid term after an exit, if the economy was set up more realistically - things would very much start to stabilise, international money markets would start to see that the new Greece was more economically competent - Greece could start to take sensible loans for investment that it could afford to repay within it's new economic model. Mid term post exit Greece would be on the mend. Long term post exit there is no reason for Greece's economy not to become one of the best in the world.

Syriza may as well now insist on substantial policy change. Syriza are the ones that fate is asking to step up to the task in question and make some really tough historical choices that are going to be painful short term, but with great reward in the long term. Syriza promised pre election to be radical and are doing their best to fulfil those pledges .Grexit would work as long as Greece had loans to smooth the transition to the Drachma and stabilise their economy. This is the last resort however, the best option is for Greece to stay in the Euro and be granted  debt relief by their creditors, if the creditors won't agree to this, Greece can hold back debt repayments until their economy is stronger.

I do think a face saving solution for both sides could be that the creditors say no debt 'haircut' (write off) at all but they agree to debt repayment breaks. Angela Merkel could go back to the Germans (the biggest lenders here) and say we haven't lost a Euro so to speak and Alexis Tsipras could tell the Greek people we have won a long debt break. As for the argument about austerity or not, both sides could meet at a midway point.

James Bickle