Eccellente articolo
Greece and the euro
My big fat Greek divorce
Greece and the euro zone are stuck in an abusive relationship
Jun 20th 2015 |
From the print edition
IT IS never pleasant to watch a relationship founder. Greece’s prime minister, Alexis Tsipras, has charged its creditors with trying to humiliate the country; he has accused the IMF of “criminal responsibility” for Greece’s suffering. Prominent euro-zone politicians are saying openly that, without a deal to release rescue funds in the next few days, default and “Grexit” loom.
The urgency is because of a repayment of €1.5 billion ($1.7 billion), which Greece seemingly cannot afford, to the IMF on June 30th and because Greece’s European bail-out expires that day. Cue the last-ditch negotiations that have become a Euro-speciality: just after
The Economist went to press, finance ministers were to assemble in Luxembourg; leaders may meet over the weekend; a European Union summit is scheduled at the end of next week. It may come down to a head-to-head between Mr Tsipras and Angela Merkel, Germany’s chancellor. A deal is still possible, but the sides have come to loathe each other. If this were a marriage, the lawyers would be circling.
In this section
Divorce would be a disaster—for everyone. The trouble is that, unless Greece and the euro zone change the terms of their relationship, staying together would not be a great deal better.
Exit Greece, stage far-left
To see why, start with the results of a default and Grexit. After arguing on and off for five infuriating years, some have begun to welcome the prospect. They are making a mistake.
For Greece the gains from defaulting would be slight, and the costs potentially vast. True, the country could walk away from debts of €317 billion, or almost 180% of GDP. But that is worth less to Greeks than it sounds. Although the debt is huge, it is at bargain-basement interest rates and repayable over decades. Interest payments until the early 2020s are just 3% of GDP a year. Even for Greece, that is manageable. Nor would leaving the euro do much good. In theory, with a new drachma and its own central bank, Greece could devalue and gain competitiveness. But Greece’s trade is modest. And it has already lowered nominal wages by 16% without a boom in exports.
The costs of Grexit still outweigh the benefits
By contrast, the cost of Grexit would be exorbitant: bust banks, slashed savings, broken contracts and shattered confidence (see
article). Politics could be devastated. Syriza, Mr Tsipras’s hard-left party, is anti-market and anti-enterprise. Neo-fascist Golden Dawn and the Communists, with a combined 12% of the vote, would thrive. Most of the parties in the middle, already discredited, would struggle. This week Mr Tsipras was due to play footsie with Vladimir Putin in Russia. Ejected from the euro, and possibly the EU, a country with a history of coups would risk becoming violent and even more corrupt.
That is one reason for the euro zone to think twice before ditching Greece. A failing state on the Aegean would be the EU’s problem regardless of whether its politicians accepted bribes in euros or drachmas—indeed, it would be a greater and less tractable problem than Greece is today. In addition, monetary union was supposed to be irrevocable. If, in fact, its members risk ejection, then contagion will be more likely to spread to other vulnerable economies, such as Portugal and Cyprus—if not in this crisis, then in the next.
Some people, including possibly Mr Tsipras, have concluded that the price of Grexit is so high that Greece can count on the euro zone giving ground at the last minute. But that is reckless. If the euro is to endure, its rules must be enforceable. So long as the monetary union is forged between sovereign states the principles of irrevocability and enforceability are contradictory. Yet you can be sure there is a limit to what the euro zone will tolerate—even if nobody knows where it lies.
Till debt do them part
The upshot is that Grexit is a process, not an event. Even if talks fail, even if Greece defaults, even if it introduces capital controls and the government starts to issue paper IOUs because no more euros are left—even then, a referendum or a new government could still offer Greece a way back.
But a deal is a process, too. Though it would doubtless be hailed as a triumph, it would mark only a step towards the eventual restructuring of Greek debt. Trust is so low and Greece’s reluctance to honour its pledges so evident, that each slug of new rescue money will depend on Greece showing that it has kept its side of the bargain. Such conditionality is necessary and economically desirable (see
article), but in today’s poisoned environment comes at a high cost. Relations between the euro zone and Greece are defined in terms of the “concessions” each has screwed out of the other. The marriage may endure, but even more unhappily than before.
Debt relief boosts growth, but only when it comes with conditions
A change of mindset is needed. Both sides have bungled the Greek crisis. Especially at the outset, the creditors put too much weight on rapid fiscal adjustment, in a doomed attempt to limit the size of Greek debt. As well as needlessly impoverishing Greece (GDP has shrunk 21% since 2010), this was a distraction from the real task, which is to sort out the structural impediments to growth—rampant clientelism, hopeless public administration, comically bad regulations, a lethargic and unreliable justice system, nationalised assets and oligopolies, and inflexible markets for goods and services and labour.
But Mr Tsipras has made a bad situation worse. In 2014 the Greek economy grew. Now it is shrinking again, partly because Syriza has proved incompetent and even more clientelist than its predecessors. But also because posturing in negotiations has absorbed all Syriza’s attention and set the country back years. The need for a crisis to bring the talks to a head and to wring concessions from the other side has wrecked market confidence. Capital has flooded out of the banking system. Investors have kept away. Every reform has become a bargaining chip that must not be traded away before a deal and will not be exceeded once a deal has been struck. The idea that reform is actually good for Greece has been lost.
Most Greeks want to stay in the euro. But their politicians still look to Berlin for salvation, rather than to reform at home. Greece must understand that, if this does not change, the creditors will lose patience. Avoiding divorce would be better for everyone. But this marriage is not worth saving at any price.
