After Greeks overwhelmingly voted against Troika’s terms for extended debt relief assistance the world is holding its breath, waiting what’s going to happen next. Will Greece leave the Eurozone? Will EU countries bend to its blackmail and negotiate new terms? While many are afraid of what would happen if Greece returned to its national currency there are several good reasons why the EU should let them go.
Reason no. 1: Greece needs real reforms not life support
Economically speaking Greece has been in a vegetative state since 2009, kept alive by financial inflows from international creditors. It has received over €240 billion in two tranches of crisis bailout, including nearly €50 billion to recapitalize its banks and keep them liquid (otherwise the Greek banking system would have already collapsed).
There are some common misconceptions about the bailout - with most people (and media) thinking that it was some kind of a new credit line for the Greek government to blow through. Considering that for many years Greece has been doing nothing but spending money irresponsibly, it’s hard to imagine how even more spending could save it now.
In reality the bailout was about 3 things:
- Restructuring Greek debt under new conditions, allowing for its repayment over extended period of time (otherwise some of debt payments would have matured already and Greece would have no other option but to default on them).
- Maintaining liquidity of the banking sector - since without working banks and currency flow the economy grinds to a halt.
- Enabling structural reforms to reduce government spending - and for that, the Greek government needed to have a financial lifeline as well. That’s why only 10% of the 240 billion package actually ended in the form of cash spent in one way or another in the Greek economy. The rest was dedicated to keeping Greek financial system from falling apart, not to finance its daily needs.
The money came with a series of conditions, of course, but unfortunately, these conditions largely focused on the financial side of Greek problems. In other words, Troika wanted to make sure that Greek government is able to pay off its obligations thanks to a combination of spending cuts and privatization.
The overlooked issue is that government inefficiency with its ridiculous benefits, paying extra few hundred euros per month to people who wash their hands or keep the engine running, is just the tip of the iceberg.
Real problems run much deeper.
These include corruption, rampant tax evasion, bureaucratic barriers to entrepreneurship, overly generous pension system, strong trade unions and the grey market which is estimated to equal 25% of the country’s GDP. Only then you can add the hefty benefits, 14 salaries state employees are being paid each year, inefficient and indebted public companies (back in 2010 debt of Greek state railways alone equaled 5% of Greek GDP) to see the full picture of how badly mismanaged this country has been for years.
Therefore what Greece needs is not another lifeline to keep them going as they are now - but deep, serious and, unfortunately, painful reforms.
What economists tend to forget, is that economies are not made up of euros, digits, symbols, charts and tables, but of people - most notably people who run businesses that are responsible for economic activity.
Hence the only way for any economy to grow is to make it easier for these people to make more money - and to use tax proceeds to invest in the country’s future, rather than buy votes of pensioners and public servants.
Reason no. 2: Solidarity
Ah, solidarity! The word so often heard in Europe in these crisis years. Greece has repeatedly called for solidarity of other EU states, to help the cradle of democracy stand back on its feet. And nobody could accuse them of not responding.
Unfortunately, as it turns out, Greeks quickly forgot that solidarity is not a one way street and that “all for one” comes bundled with “one for all”.
Latest referendum is nothing more than blackmail. What Greek public is saying is - “either you give us more money or we default on our debts and exit the euro”. Is that how partners speak with each other? Is bringing up Nazi war history and comparing it to modern Germany - a country which holds EU together and has been a generous net contributor to Brussels’ coffers for decades - how you request aid from other members of the “union”?
Giving in to Greek demands today would mean that, in fact, there is no place for solidarity in the EU. It would mean it’s acceptable for EU countries to hold each other at gunpoint, it’s acceptable to extort money from more responsible, hardworking and productive nations, it’s acceptable to recklessly spend for decades and then turn your back on your creditors.
I don’t think there’s a single person in Europe who would like the EU to work this way.
Therefore there should be no concessions to the Greek government, nor to the Greek society, which has taken a stand in the referendum. Otherwise it sets a precedent which will be eagerly used by populists in other countries, resulting in the demise not only of the Eurozone but the EU as a whole.
Reason no. 3: Greece will not flourish outside of the Eurozone
There's a common fear that Grexit can turn into a precedent showing that not only is there life outside of the Euro - it's also a better life. The problem with that thinking lies, however, in the assumption that Greek problems stem from their membership in the common currency zone.
This couldn't be further from the truth.
As I already mentioned, Greek problems are not monetary, nor even fiscal - they are structural. They lie in corrupt, populist governments and an undisciplined society that continued to elect them. They lie in huge state presence in the economy, bureaucracy, strong labor unions and poor public management. Exiting the Eurozone will not miraculously heal of all of these issues. So regardless of what currency is in use, Greece will not grow any more than it would under the Euro.
Perhaps, then, it's a good idea to make an example out of Greece - a cautionary tale of what happens when you return to a national currency. When financial meltdown happens, people lose their deposits, value of their salaries plummets and government has to borrow at exorbitant rates just to close the budget, perhaps some will realize that the only path for a weak ex-Eurozone country is that of a cheap labor outpost, rather than a developed, growing, wealthy state.
Reason no. 4: Greece has already been forgiven over 100 billion euro in debt
Many commentators call for debt relief to Greece while leftist populists bring back post-war Europe examples, when Germany had half of its debts forfeited.
Unfortunately, they forget about (or deliberately omit) a few crucial details:
- Half of Germany’s debts came as a result of the Treaty of Versailles and post-war reparations - not a result of reckless government spending and generous benefits, but conditions imposed upon the losing side by the war’s victors.
- The other half constituted loans given out to German government and companies in the effort to aid the post-war reconstruction - in other words for investment - not benefits for public servants and generous pensions.
- This debt relief amounted to only 10% of the German GDP in 1953, while the entire external debt stood at around 20%. Greece's debt A.D. 2015? 177% of GDP.
- That takes us to the main reason for the relief - Germany had a part of its debt forgiven not because it couldn’t pay it back, but because servicing it in the reality of the 1950s, without a fully convertible currency, prevented trade - and, as a result, economic revival in the wake of Cold War with the communist bloc just around the corner.
Finally, critics are also silent about the fact that Greece has already been forgiven over €100 billion in debt in 2012. That is more than 50% of Greek GDP and comes in addition to €240 billion in various bailout packages, which prevented meltdown of Greek financial system.
To put things into perspective - 36 of the Heavily Indebted Poor Countries have received, under IMF program, around €60-70 billion in debt relief over the past 20 years. In the meanwhile, 10 million Greece, a member of the EU and OECD, gets €107 billion - and still demands more...
Reason no. 5: If there was no reckless spending, there would be no need for lending
Some people try to argue that banks and other financial institutions (and countries) providing financial support to Greece should have known better what the situation was. And because they, obviously, failed in their due diligence, they should take the hit. Astonishingly, even Greek government takes this stance, supported by Greek people who expressed their opinions in the latest referendum.
That is quite baffling, considering not only the fact that creditors have already taken a 50% hit on the money they loaned to Greece, but also Greek calls for “EU solidarity” in 2010.
Some “economists” even have the gut to call, what followed these pleas, “reckless-lending”. Well, perhaps if Greece hasn’t been running budgetary deficits for the past few decades, there would be no need for it at all?
Let’s not put cart before the horse here - Greek debt is not the fault of Germany or France, nor is it the fault of European and American banks. It’s the fault of Greek governments elected by the Greek society over the years. It is solely their responsibility.
Reason no. 6: It’s not only about Germany
Following the mainstream media one can get an impression that there are only two countries involved here - poor, unlucky Greece and bloodthirsty Germany, going berserk, terrorizing weaker states.
But Eurozone consists of 19 countries, all of which had their share in helping in Greek bailout - including much poorer states like Slovakia or the Baltic states. And with IMF involved that number grows to 188 - because that’s how many members contribute their share to the fund. It means Greek bailout was partly financed by distant overseas countries as well.
And today, after receiving all this aid and having €100 billion of debt written off forever, Greeks still demand more and portray themselves as victims of aggressive German politics and greedy bankers.
Who is really greedy here?
Unfortunately, the current crisis is about more than just money as there are more important things at stake here than maintaining the current shape of the Eurozone.
Integrity, trust and responsibility - values without which neither common currency, nor the union itself can exist. This is a test of whether the EU can confront and combat populism. If it doesn’t do it today, its rise across more troubled states is certain. And if a small, reckless country cannot be disciplined - how can anybody hope bigger states can?
Grexit might threaten the Euro - but bending to Greece will threaten the entire EU.
