Euro Crisis: Time for Greece to Exit the Euro?

ATHENS, GREECE - FEBRUARY 12:  People clash wi...
ATHENS, GREECE - FEBRUARY 12: People clash with police  (Image credit: Getty Images via @daylife)
Is Greece about to fall out of Europe? Is "Grexit" (Greek exit from the Eurozone) a solution for the Euro-crisis?

A Grexit would cost the Euro-zone "several hundred billion euros" according to former Deutsche Bank Chief Executive Officer Josef Ackermann: it's definitely something that bankers don't relish.

As I am writing, the finance ministers of the Eurozone are holding a conference call on Greece to figure out how to avoid a Grexit. Views are still widely divergent on how to proceed and don't expect a solution to emerge today. But there's no doubt that the next four weeks will be crucial.The IMF suggests Greece needs another debt cutback, Germany is against it. At most, it seems it will consider a debt buyback (this is known as the "Asmussen Plan"). 

Meanwhile rumors are flying around the Internet, see articles below. It would seem the Troika (i.e. experts from the IMF, the European Central Bank and the European Commission sent to Athens to oversee conditions to release bailout money) whose report is eagerly awaited, is about to tell the Eurogroup of financial ministers: “It is clear that Greece is off track and there is no chance they will cut the debt to 120 percent of GDP in 2020 as envisaged. It will be rather 136%. New prior actions will be needed, on top of the existing [ones] before any new tranches of eurozone and IMF emergency loans to Greece can be paid." Bloggers have zeroed in on the sentence I've bolded here. Adding to the buzz, German news magazine Der Spiegel reported in this week’s edition that the Troika is to propose a debt restructuring for Greece that would require public-sector lenders to take heavy losses - meaning you and me, as taxpayers, will get hit in our pocketbook. 

That's something that stirs up Germans who from the start of the crisis have felt no sympathy at all for the Greeks whom they view as "profligate and corrupt".

Now we don't know yet whether this conclusion will be part of the Troika report and even if it were, there's really nothing new in this. Only one fact is certain: if the Greek government doesn't get the next tranche of its €130 billion bailout plan, i.e. 32 billion Euros it needs to stay solvent, in 10 days funds will have dried out, the government machine will grind to a halt.

Last week the statistics were finally in proving once and for all the uselessness of austerity measures: both the IMF and Eurostat reports show that despite the push for austerity, EU debt has continued to increase. Greece is among the European countries that have made most progress in closing the budget gap, yet overall debt load has soared. Greece’s ratio of debt to gross domestic product has hit a new high of 170 percent. Experts all agree now (including the IMF) that a less rigid stance on austerity is needed, that debt relief is inevitable over the long run if Greece is to return to meaningful growth - the only way for it to repay its debt obligations.

But is debt relief around the corner? Hardly. European politicians are mum on the subject, they fear losing votes from their taxpayers who'd have to foot the bill. In the meantime the situation for average Greek citizens is steadily getting worse.

In the last three years since the launch of austerity policies, the Greek economy has contracted by 25 percent, unemployment has reached the highest levels in Europe, together with Spain, hitting young people the hardest: one out of two is unemployed. The young Greeks that have both an education and experience are leaving their country to find work abroad: Greece is leaking its young and brave.

Time for Greece to exit the Euro? It would seem the cost exacted from Greece to receive bailout funds may have now far exceeded the (potential) benefits. Let me count the ways, just hitting on the most obvious "wounds" and I'm sure my Greek readers can add more to this necessarily short list:
  • 400, 000 children go hungry. That's right, in the "rich" Euro zone, there's so much poverty that people go actually hungry and some 400,000 children in Greece are affected, that's almost one third of the total population under 15 years old! People stand in line for donated food, something no one has seen in Europe since World War II. The government has just passed a law allowing supermarkets to sell expired food at a discount;
  • the National Health system has collapsed and people can't get medicine or treatment; there are some harrowing cases of cancer gone untreated for too long with heart-breaking suffering, cases recently documented in the New York Times reporting the remarkable selfless support given by some generous Greek doctors to the patients who cannot pay for their cures;
  • the education budget will be hit: for example, serious consideration is reportedly given to suppressing some 2000 posts of assistant professors at university level; cutting back on education and research is a sure recipe to consign a country to a permanent under-developed status;  
  • the cultural heritage and historical monuments are threatened by austerity cuts, maintenance has already ground to a halt; clearly such an approach threatens one of Greece's major sources of wealth: tourism;
  • business can't get the credit it needs to run daily operations as banks are emptied of cash and face collapse; as a result, the number of bankruptcies of otherwise perfectly healthy businesses is on the rise; 
  • the lack of savings is threatening the economy: for the past three years, Greeks have pulled their savings out of their home banks and placed their money abroad; there's a list of some 2,000 Greeks who have opened accounts in Switzerland that is at the center of an on-going growing scandal exposing a culture of corruption, with several Greek politicians and the government trying to cover up for their buddies (business leaders, journalists, architects, employees of the Ministry of Finance...);
  • the single industrial sector that is still going strong in Greece, shipbuilding, enjoys full immunity from taxes: historically, no Greek government has ever touched it, no austerity measure, no tax is envisaged, nothing; as a result, no relief or push can be expected from this sector that is "frozen" out of the economic picture...
  • the political rise of the neo-nazi Golden Dawn party closely linked to the police is a growing threat to democracy: most recently, 15 anti-fascist protesters arrested by the police after a clash with Golden Dawn activists reported that they had been tortured and humiliated in Abu-Ghraib style while detained at the Attica General Police Directorate; also, the journalist who uncovered the scandal of the Swiss bank accounts is facing trial three days after his arrest - an unusually fast response from the authorities - while Golden Dawn party members accused of wrongdoing go free and relatively unhampered (trials facing them take a slow course as usual).
So should Greece exit the Euro? No so simple. On the other side of the balance, a Grexit would be extremely costly for Greece:
  • 10 percent imediately lopped off gross domestic product  in the first year after a return to the Drachma, according to the IMF;
  • the new Drachma would be worth between 30 and 50% of the Euro according to most economists;
  • inflation would explode as consumers and business would have to pay 50 to 70% more for imported inputs: Greece imports nearly 40 percent of its food, most of its medicine and almost all of its oil and natural gas;
  • Greece exports very little: exports of manufactured products account for only 10 percent of gross domestic product, compared with a 30 percent average for the rest of the euro zone. 
That means the boost from a cheap Drachma would have relatively limited effects on exports. Greece is not well poised to take advantage of devaluation: setting aside shipbuilding, nationalization policies that followed the troubled 1970s has caused an erosion of the industrial base, a flight from agriculture and absorption of redundant employees in the government bureaucracy (which explains the exceptionally large government bureaucracy). 

But Greece draws income from other sources, like tourism and it does successfully sell its olive oil and dairy products (yogurt, cheese) abroad. Could a cheap currency help kick start economic growth, the way it did for Argentina? Not so certain. There may well be a trickle down effect on the rest of the economy but it's likely to be both small and take time.

Also consider the logistics: a departure from the Euro cannot be accomplished overnight. It requires complex legal procedures generating tremendous uncertainty and more capital flight. Already, big operators in Greece like Vodafone and Diageo bring back their cash to Britain every day to limit their exposure. Also, as mentioned above, since the beginning of the crisis everyone, from French and German banks once very present in Greece to Greek citizens, have taken their money out of Greece to safe havens and foreign banks have sold off their holdings.

So is the scene ready for Grexit? Tourism operators, hoteliers, business leaders in Greece are understandably against leaving the Euro: a grexit would be "bad for business".  

Would it be bad for the Eurozone as a whole? Europeans are weary:  what about the domino effect? Could Grexit bring down the whole Eurozone? While this should properly be the subject for another pos, here's a hint: Greece only accounts for some 2 percent of overall Eurozone gross domestic product, but it's not a simple matter of numbers...

My opinion? I think Greece should stay in but the bailout should be done keeping in mind:
- the population's basic needs in terms of health and education: hunger and physical suffering in 21st century Europe is not acceptable;
- fiscal equity: everyone should contribute, including the rich and shipbuilders; tax evasion is not acceptable;
- preserving the cultural heritage and historical monuments for future generations and of course tourism: it remains one of Greece's most important sources of income

Greece is the cradle of Europe...

What is your opinion? 
Enhanced by Zemanta

Comments

Unknown said…
An excellent post - as usual,Claude. It's certainly given me more food for thought.
Thanks, Faith, I'm glad you enjoyed the post! I know of your special interest in that part of the world and your knowledge of it...I'd love to know what your line of thinking is! I'm sure you've come across some heart-breaking situations...
Emma Calin said…
Thanks once again for your insightful analysis of this issue. It seems to me that the further we come from the original philosophical raison d'etre for the European project, the more the cracks show. If we are to build a proper European federal entity it will need to arise from a profound democratic desire for it. Such a desire I fear may need to be rooted in ashes. If we do not create a true federal state with shared responsibilities and benefits and where all citizens see themselves as stakeholders, then we will awake from the Euro dream and be unable to remember its content. One of the problems is that "Europe" is perceived as being about business and money rather than about people. In hard times, one would need leadership extraordinaire to focus on anything above the bottom line. The fact that no leader in Europe defines herself/himself as a European leader and is prepared to fight out of that corner tells us where we are.