Monday, July 13

When a no vote to austerity actually means yes.

I noticed the Greek PM, who initially gave the impression prior to the referendum he was willing to make some overtures to his lenders to their austerity measures, has now moved to position where most, if not all of the prior measures on that table are now accepted or are acceptable in a slightly modified version. This news initially caused world stock markets to positively move upwards in anticipation of a final settlement, only to wane as it now appears a long way off.  

The PM, it seems to me, gave the impression that a NO vote would strengthen his hand and at the same time by making a few overtures gave voters the distinct impression that creditors are being unreasonable and not responding to his offers. The vote was not as close as most anticipated, but I gather many, due to the wording, were not clear as to what they were actually voting for. The only major austerity measure that is now off the table as far as I can gather is a cut in defense spending. The other point in regard to a haircut on Greek debt is still in the melting pot, but sooner or later it will have to be considered.
There seems to be a great deal of confusion talked about the position right from the outset. The continuing theme the European Creditors are to blame for imposing austerity measures which resulted in Greece’s economy contracting by about 25% is a popular theme talked about by economists. But the reality is if you clock up debts to the extent of allowing run- away government expenditure to result in a budget deficits of the order of 12% of GDP, most of which was for consumption expenditure, you will in the aftermath risk severe contraction bringing that back into equilibrium.  That inevitably must cause a contraction in any economy in the absence of offsetting stimulatory monetary policy, which in Greece’s situation was long since exhausted as a Eurozone member. Furthermore, whether in modernity or way back to the times when communities were more in tune with nature, some semblance of balance has to be always maintained between continued sustainable available resources and those consumed. The assertion by some economists that the Greek people have not received or benefited from the continuing bailouts is another popular theme which is at odds with reality.  

If Greece had not been bailed out in the past their economy and their people would have suffered far more, as the reintroduced drachma would have devalued and ratchetted up inflation by 30-40% to reduce the countries purchasing power. Benefits across the board would have to be cut and with rapid inflation those provided would be severely devalued.  Whilst some of the funds provided did end up as financier’s remuneration the vast bulk of funds were as a consequence of prior consumption expenditure exceeding tax revenues which was received one way or another in benefits or services by the Greek people.

The idea put forward by another leading economist that the economy would quickly recover in the event of a Greek exit , based on prior empirical studies, to me seems fanciful. Rather I would suggest , this would involve a prolonged period of poverty, particularly as the countries needs new investment not likely to be forthcoming where there is little by way of viable industries or infrastructure other than tourism.

As negotiations drag on the initial euphoria and misplaced satisfaction of a NO vote only highlights the underlying frustration with Greece. What this highlights as a consequence of months of fruitless talks, is an emerging  lack of trust and a lack of reliability which makes compromise much more  difficult.
In the current talks I understand the 2 largest creditor nations, namely Germany and France are taking different approaches. France is lobbying for Greece to stay in the Eurozone, whilst apparently Germany is proposing a temporary "Grexit" which might last up to 5 years.  

Bear in mind if a settlement can finally be reached it will be Greece's third bailout in just five years. Its debt now stands at around 320 billion euros ($357 billion) – representing 180 percent of the country's annual GDP. This is clearly not sustainable.  



Tom said...

It has all become so very wearisome. I would suggest that (a) Departure from the Eurozone would not necessarily mean departure from the European Union. (It's all about political choice, there being no scientific laws at risk). (b) Any threat to the integrity (take that word as you will) of the EU is more likely to become real as a result of disagreements between France and the East European states, not a Grexit. (c) Greece leaving the Eurozone might just stop the endless talking and introduce a modicum of reality into the whole business. Temporary exit for five years? Let's make that fifty years!

Lindsay Byrnes said...

Hi Tom
Nice to get your perspective from the sharp end of the pencil.
Best wishes

susan said...

From much of what I've read about the Greek financial mess these past weeks and more my chief conclusion is that Greece was never qualified in the first place to be a participant in the Euro. All that aside (and Goldman Sachs maneuvering also) the fact is they did join and, along with everyone else, enjoyed the benefits for a time. The voters decided 'no' to the austerities but 'yes' to staying with the currency - what a mess. As usual events continue to overtake our interim conclusions and Tsipras has given in to the demands of the Troika. You might enjoy David Dayan's overview in this article I read today.

Best wishes, Lindsay

Lindsay Byrnes said...

thanks Susan - I agree that Greece was never qualified in the first place to be a participant in the Euro. It is also true events continue to overtake our interim conclusions. On the re-negotiated deal the PM has ruled in more measures than previously were on the table and no doubt will need to rely on opposition parties to get the measures through parliament. Thanks for the ref- yes Germany has benefited from a lower exchange rate as the Euro is lower because of continuing concerns over Greece which gives her exports a boost. So there is something to loose in the event of a Greek exit. But as the largest creditor nation who has effectively kicked in 100 billion Euro odd its citizens probably also have an entirely different slant on things.
best wishes