It’s Groundhog Day for Greece
Published in Business Spectator (Melbourne), 25 June 2015
The best cartoon on the Greek crisis just ran in London’s Daily Telegraph. Five identical images depict a sternly looking German Chancellor Angela Merkel. Facing a Greek counterpart at one minute to midnight she threatens: “This is your last chance.” The only thing changing across the sequence are the years: 2011, 2012, 2013, 2014 and 2015. Touché!
It is incredible that Greece’s debt crisis has been dragging on for five years (indeed, the Telegraph’s cartoonist could have started in 2010.) It is even more astonishing that all previous attempts to solve it have followed the same pattern: endless negotiations, deadlines, last minute deals – always followed by the claim that this was the last such deal.
If anyone had predicted back in 2010 that five years later we would still be debating the same issues with Greece, they would have been declared mad. However, based on past performance it is not such a wild forecast to predict that in 2020 we may still be talking about Greece and its debt. There is just no political will (and no politically viable option) to deal with the Greek question once and for all. The drama will go on no matter what will be decided in Brussels today.
Let’s assume that at the end of this week, everything will be settled as usual. That means the European Union will grudgingly give Greece an extension of its bailout package, release a few billion euros and continue its life-support for Greece’s banking system. In return, the Greek government will promise some vague and ill-defined measures.
It would be precisely the kind of deal we have seen in the past and it would produce the same outcomes. Greece would stay afloat for a few months until a new rescue package is requested. Indeed, there are persistent rumours about the third bailout package for Greece before the second is even concluded.
It is just not very plausible to expect the new Greek proposals to yield any long-term results. They were tabled at the last minute precisely to prevent the EU from scrutinising them properly. The current Greek government has no interest in complying with the EU’s demands for genuine economic reform and austerity in any case.
The bits and pieces that the Greek government has tabled all show how insincere it is about reform. Instead of increasing the retirement age, it rather wants to increase contributions to the public pension system. Instead of promising growth enhancing reforms, it focuses on increasing tax revenues.
None of these measures have the potential of improving productivity or generating more growth. Quite on the contrary, the massive tax hikes are likely to plunge Greece further into recession. It is madness to think that Greece could be reformed by just increasing taxes.
And what happens next? There will be a request for that third formal bailout package. The way things are going it will necessarily come to that. To be realistic, even if Greece received the remaining tranche of its last package, the money would go straight towards settling previous loans. What it would not do is improve Greece’s economic condition.
It is only matter of time until Greece requires additional support. Within just a few months, we would be back to square one. There would be the next acute crisis as Greece would again run out of cash.
Why is there no end to this vicious cycle?
The answer is because the EU’s crisis management only ever deals with the symptoms of Greece’s crisis. That the Greek government is regularly running out of cash is unfortunate but only the tip of the iceberg.
To survive within the eurozone, Greece needs an economy that is competitive. It needs an economy that (roughly) exports as much as it imports. At the moment, it is far from such a scenario.
While the Greek government may be kept afloat by the EU’s concerted efforts, the Greek economy would remain moribund. It would not be able to generate growth, jobs and tax revenues. No matter how much assistance the Greek government receives, it would not change the competitiveness position of the Greek economy.
It is therefore predictable that before long, Europe would be sent back to the drawing table.
What is the alternative to this scenario? Well, the only option to break the cycle is to end Greece’s eurozone membership. Being part of the eurozone stands in the way of Greece’s eventual recovery because it blocks the path of external devaluation.
And why will it not come to that? Because the moment that Greece leaves the eurozone behind, it will have nasty consequences for Greece’s creditors. They would then need to realise losses on their guarantees and lending.
For all the drama we are once again seeing this week, it is just a form of Groundhog Day. We have had similar crises in the past and we will have many more such crises in the future.
The Greek situation will only change for the better once the country is allowed to do what it should have done five years ago: default on its debt, leave the eurozone and regain competitiveness by devaluing its new currency.
If it does not do that, it is only a matter of time until the crisis will resurface. And then we can even recycle old cartoons by just changing the dates.
Yes, the Greek crisis has become that predictable.