So here we are at the
precipice of both the US’s 239th birthday and one of the most confused,
potentially-calamitous votes in recent history, the Greek referendum.
Our 4th of July offers much
cause for celebration. US unemployment is now as low as it has been – 5.3% -
since 2008, although wage growth continues to lag for many people. The Supreme
Court said “yes” to re-validating the Affordable Care Act with the Chief Justice’s
strong support, and to making same-sex marriage legal throughout the US.
Finally, the US women’s team said “yes we can” and will play in the World Cup championship
game against Japan on Sunday.
Unfortunately, Greek citizens
are worlds away from celebrating; they are confronting "no." And they are suffering in the midst of an
on-going economic tragedy of the first-order. Why; because the European Commission
(EC), the European Central Bank (ECB) and the International Monetary Fund (IMF)
[aka, the “Troika”] and the Greek government are getting to “no” in their
mystifying negotiations regarding Greece’s outsized debt. Greece’s total public
debt is 173% of its GDP; ranked 2nd in the
world, behind Japan.
As many now know, Greece is a
small nation of 11 million people (roughly the size of Paris, France), its GDP
is ranked 53rd
largest, $284 billion (PPP; which is about the same size as Missouri’s GDP), and
its per capita income is ranked 67th, $25,800 (PPP) – a bit less than one-half
of the US. Last year its GDP shrank by 25%, unemployment is 25.9% due in part
to the economic policies mandated by Greece’s creditors. Simply put, Greece is
a “demerging” nation.
Understandably, the Greeks
aren’t at all interested in suffering any more or any longer, especially
because of mistakes and misdeeds done by past governments. This reasonable reluctance
was magnified after the “radical leftist” Syriza political party won the Greek
national “snap” election in January and promised to end the imposition of
“unilateral austerity” on Greece.
Greece owes its international
creditors a great deal of money. Confusingly, there is a fairly broad range of estimates for what Greece owes
the Troika; from €243 billion
(B) to €323B. I’ve
talked before about
Greece’s dire problems and the possibility of Greece’s leaving the euro-zone,
called the “Grexit.” Over the past 6 months, nothing positive has happened for
Greece and there haven’t been any “happy trails” for its citizens to travel. Grexit
now seems as real as ever.
Since January, the Greek
government and the Troika have held endless and unproductive meetings where
they’ve basically continued to talk past each other in an attempt to score
political points. Greece’s Prime Minister, Alexis Tsipras, has managed to
alienate virtually everyone at the bargaining table with his inconsistent,
disparaging tactics. At the same time, Europe’s de-facto majordomo, Angela
Merkel, the empress of austerity, and her EU cohorts seems incapable of appreciating
the actual pain being suffered by Greek citizens (and in the recent past, of Spain,
Portugal and Ireland) in the name of balanced budgets and illusory growth. Austerity
hasn’t worked in Greece. It’s only provided pain and despair, not recovery or
growth. But the Troika refuses to consider any
other economic approach.
Unfortunately, the Greeks
have been ill-served so far by their Prime Minister and his Finance Minister in
their failed efforts to change the Troika’s unequivocal bargaining position –
that more austerity is the only answer for the spend-thrift Greeks.
At this point, with Greece
not paying the IMF its $1.7 billion that was due on June 30, negotiations
broken off, and Greek banks and stock markets closed until further notice, the Greeks
are attempting to live without cash or money. Unsurprisingly, it’s going badly,
and will get worse. And it’s 2 days before a public referendum called by Mr
Tsipras whose purpose is unclear, no matter whether a “yes” or “no” vote
prevails. As one Athenian voter said, “No one is telling us about what it [the
referendum] means.” More concerning, no public figure among the dozens involved
with the negotiations seems to know how to resolve this crisis. As they say,
“mistakes have been made by everyone.”
It’s a fantasy that politics
won’t overwhelm economics here, but from an economic perspective several
realities need to be acknowledged and addressed in order to get from “no” to “hopefully
yes.” Both sides of the negotiations will need to modify their current
truculent positions; they both need to blink when they come back to negotiating.
First, it’s practically
impossible to imagine how Greece could effectively leave the euro and switch back
to the lamented-but-not-really-missed drachma. The highly-devalued, new drachma
would only increase the debt costs that Greece will be facing. The EC took more
than 3 years to create and implement the euro in 1999. If Greece exits the
euro, the government will have the nearly-impractical task of re-introducing
the drachma as their currency ASAP, certainly within a month or so, and plunge
into fiscal never-neverland. The EC knows this, as does Greece. This is a very
pragmatic motivation for why Mr Tsipras hasn’t openly called for withdrawal
from the euro-zone.
Second, Greece will not be
able to pay off the entire €283B (splitting the sizeable difference between
€243B and €323B) debt it now owes. Only the IMF seems to understand this now. The
Troika will need to restructure their Greek debt, probably taking a “haircut,”
as international financial institutions have done before – like in Argentina
(2001), Greece (2012) and Cyprus (2013). I’d propose as much as a 25% haircut,
where creditors eventually receive only 75% of what they’re owed – together with
a 33% time extension for the reduced payments.
Third, in return for having
the EU, ECB and IMF restructure its debts (say “thank you” Mr Tsipras), Greece
must bite the structural reform bullets it’s been avoiding for too long and provide
an explicit and unalterable implementation schedule.
Public sector employment should
be cut 10% within the next 6 months, by privatizing publicly-owned businesses
and reducing Greece’s notoriously-inefficient and distended bureaucracy. Greece
has a somewhat high percentage of public workers in their total labor force; between
23% and 28% depending on who’s counting. But, according to some calculations
Greece’s percentage is not as high as Italy’s, Germany’s or France’s; oh well. Pensions
must be reduced 10%, except for those being provided to the lowest quintile of income
recipients; the retirement age should be raised. Tax revenues must increase by
20% over the next 12 months by nabbing tax avoiders, drastically improving the porous
tax collection system and raising taxes on the top 50% of income-earners.
According to The Economist, 2 out of
3 Greek workers either understate their earnings or fail to disclose them. The
“shadow/black economy” in Greece represents 24% of its GDP, the highest in
Europe. This must change. If the agreed-to implementation reform schedule is
missed by Greece, the debt restructuring is voided.
That’s my plan for having
the Troika and Greece both blink to get past their deadlocked discussions, and
I’m sticking to it until I hear from Alexis and Angela. This plan can provide a better chance for Greece’s economic
improvement and keep it using the euro, no matter how its citizenry
votes this Sunday.
7/5/15 Postscript. Today the Greek polls are open and much of Europe and beyond is anxiously awaiting the results. Yesterday, the Greek finance minister was quoted as
saying, “Europe won’t let Greece go under,” continuing Syriza’s unbending – and probably fictitious – expectation that Greece actually has quite a bit of
leverage in its now-ended discussions with the Troika. Provocative to the core,
he called the people supporting a Yes vote “terrorists.” A Greek citizen echoed
this feeling by saying that today’s referendum vote is actually about
“dignity,” not economics. If only. How much dignity, and IOUs, will buy your
next plate of souvlaki in Athens? The polls quoted in this article say that
the Yes vote holds a small (but not statistically significant) lead over the No
vote being pushed by the government. Don’t believe any of these polls,
given their recently dreadful predictive
performance. Wait until tomorrow to find out what Greek voters
actually decided in this ill-inspired referendum.
7/6/15 Post-vote postscript. What a difference a day or 2 might make.
The Greeks have decisively
voted No in the July 5 referendum regarding their interest in accepting the
European Commission’s (EC’s) now-withdrawn proposal to provide more
austerity-based funding for Greece, in concert with the European Central Bank
(ECB) and the International Monetary Fund (IMF). Greek voters followed Prime Minister
Alexis Tsipras’s endorsement of the No vote. This result wasn’t a surprise,
despite media stories – probably planted by more conservative Greek or European
organizations – about pre-vote polls showing the Yes vote was growing. It didn’t.
What will happen next is
anyone’s guess.
Greece is barely keeping
afloat in unknown financial seas. No Euro-zone nation has been in this
situation before where its banks have no reserves or cash (it’s far worse than
the 2013 Cyprus situation). So far, there have been no rescue offers from the
ECB and there is barely any trust between the Mr Tsipras and his EC, ECB or IMF
counterparts. Today’s announcement that Greek finance minister, Yanis Varoufakis, has resigned is a potentially-positive sign at least
in terms of how future negotiations can
proceed. No more snide remarks about fiscal ‘terrorists” are expected now from
the anxious Greek side of the table.
But when the new, post-vote
negotiations actually begin is an open and vital question. If they start after
Wednesday July 8, the austerians remain firmly in control.
The more conservative,
austerity-minded EC negotiators – including Germany and Finland – could simply
decide to not meet with Greece until next week under the guise of having to
formulate a new, unified, revised plan by the Troika after they receive a revised proposal from Greece. This would put huge,
additional pressure on Greece and the ECB because it’s been the ECB that’s allowed
the Greek banking system to stay in business, even with fairly stringent
capital controls on customer withdraws and deposit transfers. The Greek banks
said they would not open today – as they previously promised – and will remain
closed through Wednesday. Without immediate new emergency funding from the ECB,
Greek banks will be high and dry without cash. Bankruptcy would soon follow. More
conciliatory members of the EC, like France, are urging negotiations to start
tout suite, probably Tuesday.
Thus, the Troika’s
announcement of when actual negotiations will again start will be a clear indicator
of how serious it is in keeping Greece in the euro-zone. Mr Tsipras now has 61%
of his citizens’ votes to back up his new proposals, but no money to keep Greece
afloat. The Troika has this desperately-needed money. Hence the start date for
the negotiations is critically important, both economically and politically.
If Ms Merkel and her fellow austerity-advocates
refuse to revise their strategy, and not offer at least some sort of debt
restructuring (that includes at least a “trim” if not a real haircut, as I
suggested above), then they can simply have this happen by postponing the
negotiations and telling the ECB not to provide any new financial support. Delaying
the start of these negotiations and/or stringing them out will put Greece in
the fiscal morgue outside of the euro-zone and possibly the EU.
I expect Ms Merkel’s being
labeled the perpetrator of a Grexit is sufficiently ignominious for her that
she’ll offer a small blink with a financial trim for Greece and propose to
start new negotiations on Thursday, without providing new ECB funding until
then. Mr Tsipras will also blink – he has every incentive to do so – and accept
the fiscal trim (that he could claim as a small victory for being less than the
Troika’s previous “haircut” offers) along with the provision of convincing,
inviolable dates for needed reforms. Here’s hoping… 