Greece’s unecessary crisis

Despite the IMF having strong-armed Germany into giving way on the principle that private banks should share the pain, Eurozone ministers still can’t agree on a bailout package, so the Greek crisis has not been resolved. Nor will it be anytime soon. Assuming the ‘new’ Papandreou government can push more cuts through the Greek Parliament (far from certain), the brake on growth created by the cuts means the Greek debt/GDP ratio will continue to rise—and the anger of ordinary Greeks will mount. Eventually, Greece will default—and probably leave the Eurozone.

British euro-sceptics are crowing once again that monetary union was never workable.[1] But the truth is that the crisis need never have happened. While Greek politicians are hardly blameless, two key points have been overlooked by much of the press: the early role of the ECB and Germany in producing the crisis; and the politically retributive nature of the cuts imposed as part of the EU/IMF bailout package.

Had Germany moved to aid to Greece in January 2010, or had the ECB not threatened to cease accepting Greek bonds two months later, the crisis might have been contained in its early stages. It will be recalled that at the beginning of 2010, the Greek fiscal deficit for 2008-09 was found to be closer to 12% that the 3% Maastricht limit, in part because Goldman Sachs massaged the figures. One consequence was that Greek Eurobond prices tumbled (and yields rose)—between late 2009 and March 2010 the spread between German and Greek bonds widened by over 400 basis points.

Germany complained loudly about profligate Greek spending but essentially sat on its hands. Meanwhile, the ECB, which engages in weekly “refinancing operations” to add liquidity to the European banking system, announced in early March that it would return to the old A- standard for loan collateral. In essence it was the fear that Greek Eurobonds held by banks would not be accepted by the ECB—not the fear of the Government ‘going broke’—that lay at the heart of the refinancing problem. The crisis deepened when Greek sovereign debt was downgraded by S&P. By April Greece was forced to ask for a bailout, and (with reluctant German approval) a strongly conditioned package of EU and IMF loans began disbursement in May.

The second crucial point is that to appease centre-right deficit hawks in Germany and elsewhere in the EU, Greece was forced to accept impossible bailout conditions, including cuts in public wages, pensions and steep VAT rises. The rate of interest on the loan is over 6%, at least twice that at which Germany can obtain international funds, while the drastic budgetary cuts imposed have caused growth to turn negative (an annualised minus 5.5% compared to 2010Q1). The Greek debt-GDP ratio has risen to 150%, and its further rise is inevitable is even greater stringency is imposed. That is why most economists agree that sooner or later Greece will default.

Was this necessary? Clearly not; the EU could have borrowed money at 3% and lent it to Greece at the same rate or lower. Similarly, the harsh conditionality imposed was not merely unnecessary but, as many have argued, deeply counter-productive. Greece did not need to cut social spending then, nor does it today. Rather, it needs to raise productivity, particularly in the export sector. This can best be done by means of new investment.

A sensible EU bailout plan would direct cheap funds at productive expansion rather than insisting on punitive contraction. Indeed, Greece needs concessional lending (at less than 3%) —which could be financed by means of a new E-bond, a Tobin tax, un-sterilised quantitative easing, or some combination of these and other instruments.

In short, the real lesson of the Greek debacle is not that that peripheral countries should exit the eurozone (although that is now a distinct possibility); rather, it is that the current situation results from the increasingly rightward drift of Europe and the short-sightedness of our political class. Sadly, most European social-democrats have been complicit in this deplorable state of affairs.
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[1] See Larry Elliot ‘Greece must exit the Eurozone’, The Guardian, 20 June 2011.

  • Arbaches

    Most of protests are Staged and very well Orchestrated, they pretend fighting but do not hurt each other. This is worth it to get hundreds of billions from EU. Greeks are very smart; the deception started with the Trojan Horse and is going on with very well orchestrated “PROTESTS”. If you want Greece to be paid off, for the Enormous Army, Universal Free Health Care, Lucrative Pensions, and Taxes that they never Pay, then you pay them by yourself, PAY THEM OFF, BY YOUR OWN POCKET.

    DON’T LET GREECE TO DRAG YOU DOWN. CUT THE ROPE AND LET THEM GO FIRST…

    • Ellinis

      Staged protests:

      True as far as it concerns men holding weapons and clashing with the police in violent ways. Those groups have been around for many years now and it has been proved by videos ,pictures and IDs that they are policemen themselves sent to disorganize and "break" the peaceful protests.

      False when it comes to men-women and youngs getting hurt,diying or being sent to the hospital from tear gas ,chemicals and beating by the police and those armed groups.

      Enormous Army:

      Not much i could say. I dont know from where you heard this.If you had said Enormous public Sector i would have agreed.

      Universal Free Health Care:

      "Free Health Care" is what the employees in the public sector "enjoy". Translated in hospitals that you wouldnt even want to walk in and services that have been pre-paid from the salary you never get fully paid and its actually only partly-free health care. That means that every time you go to the hospital, apart from having to wait for hours to see a doctor, you need to be seen by a committee that will decide if you need or dont need a treatment or surgery and how much of the amount the government will pay (most of times the answer is ..no, unless you are diying )

      Lucrative Pensions:

      This is to laugh at..seriously.The average pension right now is around 540 euros. I would kindly ask you to check the salaries and pensions and expense ratio in the other European countries.

      Taxes:

      The taxes myth once again. Yes..of course, there are people who dont pay the taxes as they should. But taking this as a common practise of the entire greek population is ridiculous. Those who have a lot to hide, those are most of times those who dont pay properly. On the top of the pyramid you have the system itself-politicians. We pay taxes…All our lives we have been paying taxes and now we pay taxes that havent even been approved! There is only one truth about this myth…soon it will be the common practise only because we will have no more money to pay taxes!

      If Greece left the eurozone before the memorandum and if Greece defaults before foreign banks make sure that we will pay back in euro and not in a national currency European economy will be destroyed. So dont take this subject lightly. Its Europe that holds us in until its safe for them to let us go. Not the other way around. We will be hungry either way. Either we stay for a while longer or we default and leave the zone now, we will become poor. If Europe wanted to save Greece, its common sense that they would have let Greece find money from any possible source. Germany would have paid back what it owes to Greece etc. Europeans are seeing their salaries being cut for a so-called rescue plan for Greece that is totally fake! There is no rescue plan. Only "quickly steal as much as you can" plan.

      I'm sorry if this will sound mean, its not my intention but, Italy owes more than Greece does for example…has the European press been moking and insulting everything Italian for months now? I dont think so! We've always been poor dear Arbaches, others more others less. We can live with a few money as long as we live under our sun. And thats what North Europeans hate. We go to work and after that , no matter the time of the year, we can walk under a bright sun beside a blue sea and a green mountain. Enjoying our life doesnt mean that we dont work or that we dont pay taxes. You think that if Greeks stop going out ,stop dancing,stop laughing and stop …swimming at the sea, the economy will get better? Wake up !

  • http://calgaryrealestate.ca/ David

    When certain countries objected their contribution to the rescue packages they came under strong criticism but now it is clear that their reasoning was right. We can't expect that the crisis can be resolved by collecting more and more money from the rich countries as well as from the poorest ones. The Greek default would at least force France and Germany to save their own banks instead of promoting this unfair scheme.

  • http://www.google.com/ Charleigh

    You really found a way to make this whole porescs easier.

  • Tanya Rastid

    George Irvin is a Research Professor at the University of London (SOAS). Perhaps he should do some research into buying a dictionary or does he think that unnecessary?