Alberto Mingardi  

The euro and the Greek blackmail

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We're showered with information and comments on the Greek crisis, and rightly so. The Greek Prime minister Alexis Tsipras has called for a referendum on the terms offered by creditors to Greece. Then night talks between Mr Juncker and Mr Tsipras apparently triggered the hypothesis of a last minute deal - but it doesn't seem that that will happen. Certainly not the week before the referendum, which is to happen on Sunday, Greek banks and the stock exchange are going to stay closed. Europe and the world have looked with anxiety at people queuing in front of ATM machines in Athens.

It might be worth remembering that, when Tsipras won elections a few months ago, the Greek situation certainly wasn't all happy - but the IMF was estimating positive growth for this year. A few months of socialism and reckless blackmailing attempts by the European creditors have stripped Greece of any hope of returning to growth, however feebly, and have brought the country to the edge of disaster. One small point. Italian Finance Minister Piercarlo Padoan explained to Corriere della sera that the Greeks did not send "technical" personnel to do the bargaining with their official creditors until but a few weeks ago. They did plenty of political lecturing, but they abstained from dealing with the minutiae of possible agreements. Other top officials confirmed, at different stages, that the Greek government's was a quintessential political game: no technicians in the room. You can't manage a country like that.

My sense is now that Tsipras is basically hoping for his compatriots to vote "yes", so that he can re-enter the negotiating room while blaming "the people" for having made the tough decision. Not an example of luminous leadership.

I find two comments of particular interest. Here's Tyler Cowen's on possible contagion and here are Guntram Wolff's economic and legal observations on capital controls. Capital controls have been imposed in Greece now, as happened in Cyprus before. Of course this decision calls into question the very nature of a monetary union: but European authorities do not seem to be bothered, so far.

Tyler Cowen makes an important point: "If only for geopolitical and also humanitarian reasons, the EU cannot wash its hands of Greece." I think AEI's Dalibor Rohac said it very wisely in a tweet: now it is time to change the treaty, to make it possible for a country to stay in the EU even if it leaves the euro, which is currently impossible. This would help in dealing with the geopolitical concerns underlined by Cowen.

At the end of the day, the crux of the Greek problem is the lack of procedures for exiting the Euro club. Orderly procedures aren't there: so expect a disordered development of the crisis.

Tsipras has attempted to blackmail the creditors, by agitating the spectre of a Greek default as the Lehman Brothers of the European crisis. The European authorities have acted so far seconding their instincts: that is, muddling through. But when push came to shove, they couldn't just accept the Greek terms, because of their most likely political effects: that is, suggesting to the Portuguese and Spanish that a deal on any terms could be ultimately made, and thus voters could heedlessly vote for anti-austerity parties.

If the Euro could be exited without leaving the EU, at this stage things would be at least a bit easier. And yet the European leadership finds the perspective most frightening. "The Euro is irreversible" is one of their favourite sentences. But you can't force people to stay in a club they feel they don't belong to. This semi-religious Eurospeech is, I fear, as effective in reinforcing populist stances, as appeasing to the Greek blackmail would be.

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CATEGORIES: Eurozone crisis

COMMENTS (5 to date)
Mr. Econotarian writes:

"...a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The "closed sectors" of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions."

Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business

John Fembup writes:

Well, yes - although extort is probably a better term than blackmail.

Thomas B writes:

Why exit the EU? Or the Euro? What is all this talk?

The Greek government can issue IOUs - bonds - with face value equal to payments it needs to make, paying them directly to recipients. If you're a government employee, you get IOUs, which you will sell to investors. Of course, you'll sell them at some discount. This will represent a pay cut, unless you hold the IOUs and maybe someday redeem them at par. That's not a good thing, but when companies run out of money, people get laid off. Here, they only face a pay cut: those who have better opportunities can take them, while those who do not, at least still have a partial income.

Meanwhile, the non-government economy can continue to operate in Euros.

That leaves the banking system. Presumably the banking system has some quantity of assets backed by loans to the Greek government, and may be insolvent if the government defaults. This, then, is where any bailout would come in, by backing deposit and checking account balances. Whoever backed them (ECB?) would then own the banks (and would take a loss on the transaction - that's why it's a bailout, but it's only a bailout of depositors, not the Greek government or the banks' shareholders or bondholders). A condition of the bailout: IOUs are accepted at market, not face value when being applied to loans.

Or the banks can mark down deposits as needed to restore solvency, after wiping out the equity and bondholders.

The end of it all: an economy still integrated into Europe; a payments system still integrated into Europe; a government making payments in IOUs but getting taxes in Euros, with the IOUs floating in price until the budget balances (or comes close enough).

As things improve, the government can start buying back those IOUs. People can hold them in hopes that they will one day get back to par, or sell them back to the government at a discount to get Euros today, Euros that can be used for groceries. If things don't improve, those IOUs will trade down and people will quit their government jobs, and the government will start buying back its own IOUs at deep discounts, both mechanisms that will help to mitigate the decline.

Arthur_500 writes:

An agreement has been made with the Greek citizens and their leaders that has brought them to this situation. Protectionism, failure to pay taxes, public sector jobs, inefficiency, etc. The Greek people should understand by now that the gravy train is over and the hangover has begun.

Instead, they elicit sympathy from the media, et al. worldwide as they try to borrow money to pay for loans. At no time does the media discuss the failure of the socialist society. At no time does the media discuss the problems of doing business or being a consumer in Greece.

Getting an aspirin from a pharmacist may help guarantee the pharmacist his income but it does so on the back of the Greek people. Likewise when that pharmacist does not pay taxes the government can't fulfill its foolish promises.

The free market does a pretty good job. Maybe it is time for the media to stop sympathizing with the Greeks (or French) and start discussing the failed policies that have got them into these situations.

After all, if your kid spent his lunch money on candy and then claimed he was hungry, at what point would you stop giving him any more lunch money?

Roger McKinney writes:

Effort to repay even small amounts of their debt have kept taxes too high for businesses to expand and hire workers. Taxes must be reduced to get the economy going again. To make that possible, all of the debt needs to be written off.

Also, the Big EZ must refuse to loan any more money at all to Greece and force them to live within their means. As Greece adjusts to that, they will automatically shrink the state because the money will no longer be there to keep a bloated public sector.

But I don't get why any of this should force Greece out of the Euro or EU.

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