Archive for February 9th, 2015
In 2008 the global economic crisis unmasked the structural weakness of the economies of southern Europe. Greece was by far in the worst shape. In 2010 the EU brokered a bailout deal for Greece, predicated on the country embracing a very painful austerity program. In 2012 Syriza campaigned against the cuts and urged Greeks to chart a course not dictated by the EU. Greek voters, skittish about loosening ties with Europe, said no, and Syriza won just 78 out of 300 seats. Three years of painful recession later and the Greeks have had enough – Syriza won 149 seats, just short of an absolute majority. The left wing party joined in a coalition with ANEL, a small right wing conservative party to form a government.
Greece has a debt of about $500 billion, 180% of it’s GDP. 60% of that debt is owed to the Eurozone, so a default would have serious, though not disastrous implications. Very little of that debt is held by Greece. After the election Greece’s 10 year treasury bond yield skyrocketed to over 10%, meaning rising the debt would be prohibitively costly.
Syriza’s leader, new Prime Minister Alexis Tsipras, vows to keep this campaign promises, all of which violate the conditions of the bailout. These include increasing the minimum wage, cutting property taxes, increasing pensions, rehiring fired public sector workers, and giving free electricity to those “suffering the most.” Since he doesn’t want more debt, the only way to do that is to print money – but Greece is in the Eurozone and monetary policy is controlled by the European Central Bank (ECB). So what next?
One might wonder if Tsipras is out of touch with reality, wanting to increase spending to get out of debt. But he makes a good point that austerity simply increased the scope and depth of the recession. The ‘bailout’ benefited Eurozone banks more than the Greek people. He believes his policies would stimulate the economy so that Greece will be able to pay back its debts and show itself to be solvent.
Unfortunately the Greek economy was built on sand – debt and public sector employment hid the fact the Greek economy is structurally flawed. Just ending austerity won’t change that, nor alter the dynamics that created the crisis in the first place.
Last week Tsipras and his Finance Minister Yanis Varoufakis visited European leaders to try to assure them that they weren’t going to rush out of the Eurozone, and to convince them to support a bridge loan to fund the government through September. On Sunday Tsipras said that the Euro was a “fragile house of cards” and if the Greek cards were pulled it would collapse. On Wednesday Eurozone finance ministers are meeting to discuss what to do next.
Tsipras is playing a game of chicken – pushing the EU to accept his policies and offer help in exchange for Greece holding on to the Euro. More importantly, if he were to leave the debt owned by Eurozone banks would become toxic, threatening a banking crisis.
Still, the threat to the Euro is much smaller than it was back in 2010, or even during the election of 2012. At that point high bond yields threatened a number of countries, especially Spain and Italy. Today Italy’s bond yield is 1.76%, while Spain’s is 1.38%. Those are below the US yield of 1.94%! This suggests the fears of contagion no longer exist and Greece is being treated as an isolated case. With 19 countries now using the Euro – Lithuania joined last month – it could withstand a Greek departure.
But the Prime Minister does not want to leave the Eurozone, and therein lies the rub. Greeks know that leaving the Eurozone would put them on a path towards increased isolation and continual crisis. He’s betting he can arrange a bridge loan through August, and that while Greek debt is high, the Greek economy is small. The cost to the EU member states would not be prohibitive.
While some European leaders are sounding cautiously optimistic about making a deal with Tsipras, German Chancellor Angela Merkel is having none of it. While not dismissing anything out of hand, she says it’s up to Greece to come up with a plan. Tsipras has said he’s working on further reforms designed to mollify EU critics, but it’s unlikely he’ll convince Merkel, who fears this will simply enable Greece to go back to its old ways.
1. Those predicting the end of the Euro will be disappointed. Countries are politically committed to monetary union as the best way to assure economic stability. Businesses and banks – the people who really run the show – are almost unanimously in favor of it. Now that Italy and Spain are no longer seen as “the next to go” if Greece leaves, the Euro is not in existential danger.
2. Tsipras and EU leaders, particularly German Chancellor Merkel and French President Hollande, will engage in tough negotiations, but are likely to reach a deal. It’s in their interest. The EU leaders do not want their banks to suffer due to the Greek debt they hold, nor do they want instability associated with the first departure from the Eurozone. Prime Minister Tsipras knows that the Greek economy would be severe crisis if he actually tried to go back to the drachma, perhaps worse than the last few years of recession.
3. The agreement might work. Merkel needs to be firm on the need of Greece not just to stimulate their economy, but to restructure it. Greece needs to develop a productive and sustainable economy. They do not have one now. Tsipras has to recognize that reality..
The telling point is that nobody involved wants Greece to leave the Eurozone. It is in their interest to maintain it, even strengthen it. It is in the EU’s interest to have Greece develop a sustainable, productive economy. The bailout and austerity program didn’t work – even though the Greek voters gave it a chance back in 2012. With some creative thinking, it may be that contrary to expectations, the victory of Syriza may end up being good for the EU.