The recent election
in Greece of a far Left government presents a challenge to decades of thinking
in the halls of European Union and the 19 nation Eurozone group. Always oriented to the Left in spite of the
usual “conservative/democratic socialist” pendulum swings among the governments
in the member nations, the treaty based organizations now find themselves
dealing with a revolt against fiscal discipline in a small nation that
ironically is “too entrenched in the system to fail”.
New Prime Minister
Alexis Tsipras led his Syriza party to a parliamentary plurality with the
appeal of his defiance of a punishing austerity program imposed on the Greek
economy by its bail out saviors, the European Central Bank and the
International Monetary Fund.
Years of corruption,
tax evasion and profligate government spending to support the never ending
demands of a huge and highly unionized public labor force and the purchase of
voters support through the unsupportable expenditures of an advanced welfare
state, brought about the inevitable reality of economic crisis.
The crisis is not
new but the tipping point was the 2009 world-wide recession. In 2010, when Greece faced the possibility of
not being able to pay its international debts the EU and IMF extended two “bailouts”
in the form of $140 billion and $165 billion. Private sector investors (banks) wrote off
three quarters of the value of their Greek government bond purchases and recast
the remaining balances to longer maturity dates and lower interest rates.
These actions did
not represent “gifts”. Conditions were
attached which included significant government spending cuts, tax increases and
major “labor market and government pension reforms” (cuts). However, so dependent by the government on the injection
of liquidity into the economy by its spending patterns that the “austerity”
reforms had the effect of drastically reducing government tax revenue. The result was a kind of circular and self
-reinforcing crisis. The crisis also led to potential bond purchasers to demand
significantly higher rates of return which also heightened the burden of future
repayment of interest and principle.
In spite of the
hardships and contradictory outcomes of the austerity conditions ECB officials,
led by Germany and IMF officials held fast to their determination that any
relief demanded that the Greek government bring about future financial
stability and live up to their repayment obligations for the loans already paid
out. That resolve remains today as tax
payers (and voters) in financially stable Eurozone nations object to bailing
out what they see as irresponsible excesses by former Greek governments.
Eurozone finance
ministers in 2012 gave Greece until 2016 to meet the required deficit reduction
requirements. This is a huge problem as
Greek debt and the interest payments it produces amounted to $407 billion or
175 % of GDP. With government tax revenue, already low because of
rampant evasion, it was, and remains,
grossly inadequate.
The politics of the
crisis represent a seemingly impossible conundrum. From the point of view of the ECB, private sector investors and the IMF, loan
forgiveness, new loans and below market interest rate concessions without the
necessary cuts in spending which demand cuts in public services, public
employment, and tax reform, creates a permanent black hole of international
support.
However, without
support in the short term the Greek government is in danger of default on its
sovereign debt. This debt is issued in
the Eurozone currency, the Euro. Default
would result in the devaluation of the Euro across the zone and would probably
require Greece to drop out of the Eurozone.
That in itself would exacerbate the crisis since a return to the Greek
drachma currency would immediately result in a major devaluation of that
currency since Greek debt would no longer be propped up by the Euro. This would make it almost impossible for
Greece to borrow in international financial markets as well as cause
hyper-inflation in Greece as everything imported would be much more
costly. The prospect of a nation
essentially going bankrupt would loom on the horizon. EU leaders want to avoid such a scenario if
at all possible.
This would seem to
point to tough negotiations to achieve some sort of compromise which afforded
new bail out monies and a continuation of, if somewhat less stringent, austerity
measures.
Now the context of
negotiations has changed with the new Greek government. The hardships of the situation on the Greek
people have produced a reaction which focuses on relief from the austerity
program without concern for the longer term prospects of a lack of reform. This should not be a surprise given the
growing strength of the political Left in Greece and in other southern European
nations hard hit by the recent financial crisis, especially Spain and Portugal.
The victor in the January, 2015
Greek election, the Syriza party is led by Alex Tsipras. Syriza is actually an acronym for the group
named the Radical Coalition of the Left, itself an umbrella group of leftist
parties. Mr. Tsipras, a forty year old activist
and now Prime Minister, came from the youth wing of the Greek Communist Party,
and was a candidate for mayor of Athens in 2006.
He campaigned on a vow to reject
the austerity program required by the extenders of the billions of bail out
money and to demand a renegotiation of all terms. That such a promise was politically popular
is no surprise. What is a bit unusual
and reflective of the widespread unhappiness with the conditions is the
creation of the “strange bedfellow” of Right wing party New Democracy with
which Tsipras formed a coalition government in order to create a parliamentary
majority.
It remains to be seen how long
this “marriage of convenience” will last.
What they have in common is a strong anti-austerity position. New Democracy leader Panos Kammenos has
described the nation’s creditors as “foreign conquerors” but unlike the Sryiza
Party’s current position which endorses continued membership in the Eurozone, New Democracy feels that Greek sovereignty has
been diminished by the EU and IMF.
The prospects for a workable
negotiated compromise are daunting.
Market factors which are not controlled by either side are having a
dramatic impact on the problem. In
response to the new Left wing government’s election, concerned investors drove Greek stock prices
down and borrowing costs up. Bank shares lost 27% after the election.
In simple terms the short term
Greek situation is as follows:
The bail out in progress by the
ECB, the European Commission and the IMF is scheduled to end on February 28,
2015. Under prior agreement an
additional 1.8 billion Euros could be provided in the form of loans if the new
Greek government fulfilled the “austerity” conditions previously required. However estimates of the amount Greece will
need to meet its obligations in the first quarter of 2015 run as high as 4.3 billion
Euros leaving the Greek government
little leverage in negotiations to renegotiate debt already outstanding.
The Greek Prime Minister and
Finance Minister are traveling the capitals of Europe (2-4-15) for meetings with top political and
European Union officials in an attempt to negotiate the required terms to keep
the Greek economy afloat. Early reports
indicate that the Greek officials have “blinked” with regard to their domestic
assertions that Eurozone held debt would have to be “written down” i.e.
forgiven at least partially. Resistance
by Germany and EU officials made this a non-starter in negotiations . However, there have also been some
conciliatory remarks from the President Hollande of France with respect to the need to find
some compromise.
However the political situation
which results from Prime Minister Tsipras victory has made his ability to
negotiate much more difficult even if he wanted to, which is dubious given his
background and ideological orientation.
He promised to increase government spending, not reduce it.
Included in this effort was to be forgiveness of electrical bills,
expansion of food stamps and an apparent abandonment of a proposal to raise
revenue by privatizing government owned entities, as well as the more general
promise to seriously diminish the austerity program through renegotiation. Failure to live up to these election promises
could create significant political problems for his government coalition.
The political stakes are also
significant for the Eurozone since major concessions to Greece will not be lost
on Leftist and populist movements in other struggling countries such as
Spain. Germany and the EU Commission
which is executive branch of the entire European Union, are very concerned that
such a turn of events could destroy the cohesiveness of the Union and
drastically affect the value of the Euro.
Nonetheless, a failure of Greece
to take the necessary steps to stabilize its economy and default on its debt
could bring about a voluntary or mandatory withdrawal from the Eurozone which
Germany and the Commission also want to avoid.
The multiple causes of the
Greek crisis may offer lessons for other EU and Eurozone nations which are
already known and may come too late to avoid .
A fundamental flaw in the structure of the Eurozone contributed and
remains. The European Central Bank, a
rough equivalent of the U.S. Federal Reserve Bank was charged with managing
monetary policy for the Eurozone nations.
The difficulty of imposing a single policy on nineteen different
political economies and political cultures was clearly underestimated. Inflation, employment, export vs. domestic
industrial prospects and the ability of the central banks of the individual
countries in the zone to issue debt denominated in the shared currency all
represent a weakness in the system.
Tax evasion was tolerated and public
services and ever growing entitlements expanded as deficits were funded by debt
creation. The reality check imposed by
the 2009 world recession brought an end to the cycle of debt creation, interest
obligations and unchecked social program expansion. The
debt service to revenue ratio simply became unsupportable. This is basic economics but the demands of
domestic politics turned the heads of the political leadership and the crisis
imploded.
Now citizens of Greece and
other southern European nations blame their governments for the harsh remedies
imposed by international lenders without much concern about the failed underlying
policies from which they benefitted. The
so called array of “populist” movements will try to defy the dynamics of the
self- correcting capitalist systems but will inevitably fail.
The results of the Greek crisis
do not apply equally to the U.S. but the symptoms are relevant. The U.S. economy is huge and diversified and
it enjoys the benefits of the U.S. dollar being the foremost international
reserve currency. But the constant
expansion of advanced welfare state characteristics, especially uncontrolled federal
debt to pay for associated excessive spending will have consequences. Higher interest rates to renew such debt and the
growing diversion of national income to service the debt, at some point will
put pressures for devaluation of the dollar against other currencies and will
be inflationary by making foreign imports more expensive. The Federal Reserve’s response to
inflationary pressures will be to reduce the money supply by selling government
bonds and raising short term interest rates. It is a delicate balance and the
current deficit/debt growth and the ideologically based expansion of government
demands similar attention as that being applied to Greece.
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