Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

No Grexit, but a miserable summer for Greeks

Posted by butalidnl on 7 July 2015

On 5 July 2015, the Greek people voted NO to the 26 June proposal of the Eurogroup. Strictly speaking, the proposals were no longer on the table by that date, since the bailout program it was part of had expired on 30 June. I am sad that the Greeks voted NO – because they unwittingly rejected what was the best deal that their country could possibly get.

Greek Prime Minister Tsipras claims that the NO vote strengthens his hand in negotiations with the Eurogroup. This is not true. The other Euro countries understood the NO as a Greek demand for a fee pass – money without conditions – and they consider this unacceptable.

The EU does not create money to cover fiscal deficits. It is unlike the US which can print money to finance its deficit because the US dollar is the world’s reserve currency. Money for bailouts has to be sourced from national budgets. The Greek bailouts of 2010 and 2012 were shouldered by the 334 million citizens in all Eurozone countries (or 323 million if you exclude Greece). They paid for these bailouts through cuts in government services and increased taxes in the various Eurozone countries. In the Netherlands, for example, the VAT was raised from 19% to 21%, medical insurance expenses also rose.

Now, 3 years after the last bailout program started, the Greeks have voted NO to austerity in a referendum. This actually means that they want the rest of the Eurozone citizens to shoulder the cost, while they themselves will be exempted. This is what NO means; and this is why a bailout deal after the referendum will be opposed by the majority of citizens of Eurozone countries.
Citizens of Eurozone countries are perfectly willing to support Greece; but only if Greeks implement reforms that will put their national budget in order. For them solidarity means that  Eurozone citizens contribute their money to help Greece, and that the Greeks also do their part.

Reforms Required
Eurozone governments proposed a list of reforms for the Greeks to implement before they give it money. This is the only way that the 18 other countries with the Euro could accept any deal. What Greeks derisively call ‘austerity’ are simply minimal reforms that Euro citizens feel are needed to have a fair deal. Any deal without these measures would simply not be approved by 18 governments.
Any proposal that Greece makes should contain enough reform measures to be acceptable. A particularly important reform will be on pensions, specifically on raising the pension age to 67 years. Greeks in government service benefit from an early retirement scheme in which they can retire as early as the age of 52. Eurozone countries, which have a retirement age of 67, could not accept giving money to Greece so that it could retain its early retirement scheme.

There are other proposed reforms, e.g. a reduction in the military budget (Greece has a bloated military, with a budget comparable to that of Iraq, and more tanks than the UK). I think that there is flexibility in putting together an acceptable mix of these other reforms,

Grexit?
While the NO vote increased the chance of a Greek exit from the Eurozone (or ‘Grexit’), a Grexit is not yet inevitable. There is still a big possibility that a Grexit can be avoided.
Talks will take place between Greece and the other Eurozone countries, and I think there could be enough basis for an agreement on a bailout package. I believe that such a bailout package should include structural reforms, as well as some restructuring of Greek debt..

But it will take time to forge such an agreement.
First, the Greek rejection of the proposed reforms means that it will take time before they can backpedal and agee to most of them.
Second, a totally new agreement has to be made, and for a significantly bigger amount. This is because the previous bailout program had expired on 30 June. Extensive consultations (and parliamentary debates) would be needed before agreement on it could be made. Greeks underestimate this, thinking that all it takes for an agreement is for Merkel to say yes. But in reality, democratic consultations within 18 countries are needed, and Germany cannot dictate the result of these. (Merkel, in fact, seems to be one of the leaders who is most sympathetic to the Greeks.)
Third, the dire state of the Greek finances (e.g. the capital controls and shortages of cash) would need to be addressed by many stop-gap measures. Arranging these will take time, and this will delay the process of negotiating a bailout.
Fourth, Greece’s default on the IMF loan (on 30 June) and an impending default on an ECB loan (on 20 July) are factors that will complicate any negotiations. It would be extremely difficult to get both institutions to participate in a bailout agreement when the Greeks had defaulted on their loans.
Fifth, Syriza’s haphazard, amateurish approach to negotiations would introduce all kinds of delays in the process.
Sixth, after a bailout agreement would be reached, it would still need to be ratified by all 18 countries (with unanimity). This process will mean an additional week delay, or longer.

The Greeks’ decision to have a referendum instead of just negotiating on a deal before the 30 June deadline unnecessarily extended the time such negotiations would take. If instead of declaring the referendum it went on negotiating, the Greek government could have signed an agreement before 30 June, and there would be no bank crisis, or default on the IMF loan. By this time, the Greeks could be talking about debt relief etc with its Eurogroup partners.

At the same time,the ECB would need to take urgent measures would need to be taken to avoid an accidental Grexit (the ‘Grexident’). In order to do this, the ECB would need to be armed with political decisions from EU leaders, because it would require amending or stretching ECB rules.

The Greeks would need to wait a couple of months before a bailout agreement will be signed. There is a chance that banks will remain closed for weeks, with the economy remaining in deep freeze.
In the end, the NO vote would mean that the Greeks had to wait 2 or more months before a bailout agreement is implemented, with conditions similar to the ones they voted against..

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