A Few Observations about Greece, Debt, and the Euro

New twists and turns in the current Greek disaster keep coming rapidly. Last Saturday (Friday in the U.S.), Prime Minister Alexis Tsipras announced a surprise referendum to take place next Sunday (July 5) on the latest offer by the troika for an extension of the “bailout.” The Greek parliament subsequently approved this referendum. The European Central Bank then announced that it capped the amount it will lend to Greek banks, which are faced with large withdrawals by understandably nervous depositors. This forced the Greek government to close the banks until at least next Monday and to limit Greeks to withdrawing 60 euros per day from ATMs. Tourists with foreign bank cards are not limited, and one assumes that Greeks who have foreign bank cards can get around the restriction. However, ATMs are running out of cash and the lines to use them are long. Then on Tuesday morning came the news that Tsipras had written a letter saying he is willing to accept the terms of the latest troika offer with some amendments. The Germans maintain though that there is nothing to negotiate until after the referendum, and Tsipras is still urging Greeks to vote no, that is, to say that they do not accept the troika’s offer.

There has obviously been a negotiating failure here on a scale that one rarely sees. The Greeks want to stay in the eurozone; most European governments want Greece to stay. (There may, though, be some disagreement between German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble.)  The apparent dislike and disdain of each side for the other, along with less than diplomatic public statements and differences on the underlying economics, has made agreement difficult, if not impossible. It is often remarked that the Europeans, when faced with problems, like to kick cans down the road; in the current situation, they have yet to find the right can to kick.

What is distressing is that the Europeans do not want to admit what is perfectly obvious; the Greeks cannot pay all of their debts.  It needs to be restructured and effectively partially forgiven (as would happen if there were a bankruptcy option for  countries similar to that available to corporations). It is not in anyone’s interest to perpetuate a situation where Greek creditors effectively advance new loans to pay off old ones, all the while strong arming Greece to follow economic policies that hinder economic growth. This hurts Greece and the creditors, since it weakens Greece’s ability to pay down its debt. The creditors need to admit that they will not be fully paid back.

The pressure being applied to Greece suggests that some of the Europeans want to cause the current Greek government to fall. What other reason would there be not to discuss how to restructure and partly forgive the outstanding debt? If the goal has been to punish Greece for its profligate ways, that certainly has been accomplished. The past, though, cannot be changed; the parties need to agree on what is the best for all of them going forward.

Also, what the current crisis demonstrates is the folly of the euro. (In 2011, I wrote about this.) Too many countries, with different economic situations, cultures politics, languages, legal systems and so on were allowed to join. There is no way that the current eurozone is an optimum currency area. Moreover, the necessary additional surrender of some sovereignty to a central government with respect to fiscal policy has not been accomplished. And Greece got admitted to the club by cooking the books, while the other members apparently looked the other way.

Catherine Rampell of the Washington Post wrote in a recent column about the euro:

“…Milton Friedman, among other Cassandras, explained why nearly two decades ago in an essay detailing the best (the United States) and worst (Europe) conditions under which to create a currency union. In Europe, where countries are divided by language, customs, regulatory regimes and fiscal policies, a common currency would inevitably prove disastrous, he wrote. Shocks hitting one country would heave themselves across the continent if individual countries could not easily adjust prices through their exchange rates.

“Rather than promoting political unity, Friedman argued, ‘the adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.’”

Finally, the mishandling of this crisis by both sides may have some very bad political consequences. It raises questions about whether “the European project” can go forward. Not only is Greece an issue, but the UK is trying to negotiate what amounts to associate membership in the EU before their referendum on EU membership. The National Front in France is pleased with the developments, since it wants to take France out of the EU. The political ramifications in other “periphery” countries, such as Portugal, Spain, and Ireland, is uncertain and there may be growing doubts about Italy’s economic situation. It is not that difficult to imagine the movement towards an “ever closer union” shifting into reverse.

If the Greek situation continues to be handled badly, this may result in Greece moving closer diplomatically to Russia during a period that tensions are on the rise between Russia and the West. Also, Greece is one of the countries that migrants to Europe first go to; a less than cooperative and impoverished Greece would not help address this problem.

Finally, there should be concern about the internal political situation in Greece if its economy continues to deteriorate. The regime of the colonels ended in 1974 and Greece became democratic. That was forty-one years ago, which may seem like a long time, but many people are still alive who had direct experience of that regime. While a military coup would seem to be unlikely, it is unpredictable what will happen when countries are subject to depression for a long time or high inflation, or, worse, both at the same time.