The debate over Greece leaving the Eurozone has been raging for a matter of years now. Some believe that Greece staying in the Eurozone is axiomatic, in that a Greek exit from the Euro would ravage the economy, perhaps causing hyperinflation. Others argue to look at the other side of the coin, and propagate the idea that a Greece exit would attenuate the suffering of the Greek people, as they might only have to suffer for the next 10 years, rather than the next 50. Personally, it is my firm belief; my avowal, if you will, that Greece should leave the eurozone, and start a new era, having ended the old era of economic pain.
Almost at the very command of Angela Merkel, the Greek Prime Minister Alexis Tsipras was forced to impose harsher austerity members than the previous weekend’s “No” vote had suggested. This paves the way for increased value added tax, increased privatisation of organisations previously owned by the state, and an increase in the retirement age, making the years that people have to work longer. The harsh austerity measures outlined in the plan forced on Tsipras make the deterioration of the economy an inevitability, which forces the Greeks to sell public assets. We can all agree on the fact that this is a malfeasance in itself, and that the Greek people should not be subjected to having the public assets sold in the interests of paying down Greece’s loans.
It can be clearly seen that Greece is in the midst of an economic depression. The latest measures imposed on Greece by Merkel will only make this worse, with the economy getting worse by the day. If Greece, however, exits the Euro and returns to the Drachma, they will have a substantially weaker currency on their hands, which will be a massive influence in helping Greece get themselves out of their deflation and debt. If Greece does get out of this negative spiral of deflation, they will be alleviated from the economic stagnation and high unemployment that currently pervades the country. This can only be a good thing, as more people can sustain a living due to an increase in jobs.
Moreover, it is arguable that the Greek economy will find it very hard to recover within the Eurozone. Greece needs a complete devaluation of its currency through a flexible exchange rate in order to make economic growth a likely scenario again. It is clear as a bell that the short term consequences would be quite damning for the Greek people, however this is a far better alternative than the other scenario, in which the people are suffering from hardship and poverty for the next half a century, potentially. This whole saga with Greece has affected other economies as well, which has led to fears of an Italian, or even a Spanish exit. If one of these two countries exits the eurozone, the ramifications of this would be irreversible for the euro and it would likely never bounce back.
Finally, it is a definite fact that this whole drama has caused deep political instability and rifts within the Eurozone, which means that the tension between the people in the Eurozone has never been higher. It was revealed earlier that a majority of German citizens want Greece to exit the Eurozone, and if this is the case, then there will be gargantuan pressure on Angela Merkel to force this to happen (some would argue that she is already exhibiting this). In order to put this tension within the Eurozone to rest, Greece needs to exit so we can have some semblance of peace in the Eurozone. All these factors combined show that it is in the best interests of all the countries involved that Greece does exit the Eurozone, and although this may have significant short-term impacts, it is definitely the best thing to do to secure long term economic prosperity for all involved.
As the new Greek government tries to fumble its way through the business of running a struggling country, more and more questions are being asked about the future of Greece and of the Eurozone. As this column asks, we need to know if Greece is, actually insolvent, and if so, how that can be reconciled with its position within the Eurozone. – FD
By James Saft
Feb 3 (Reuters) – Much hangs on the interpretation of a word, and in the case of Greece and the euro zone that word is: insolvent.
New Greek Finance Minister Yanis Varoufakis has been unusually frank, likening his country’s case to that of a jobless person being advised to take out advances on her credit card to pay the mortgage.
“Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?” Varoufakis said days after taking office under the new Syriza-party-led coalition.
“This is the trouble over the last five years with Greece. Our European partners and the previous Greek government have been extending and pretending.”
Keeping up the pretense that one can honor one’s debts if only given room to maneuver and time is an old if not glorious tradition among the deeply indebted. Coming straight out and coping to insolvency, on the other hand, is not.
That’s because certain things tend to follow from an admission of insolvency. Creditors decline new advances, existing loans, where possible, are called and the debts of the insolvent, Greece, are no longer acceptable as collateral.
Guntram Wolff, Director of the Bruegel think tank, argues that Varoufakis has set a rapid clock ticking, making its debts theoretically beyond the pale for the European Central Bank and creating a pressing need for a new deal.
“When a Finance Minister declares the insolvency of his country, then the quality of all the debt he has issued should fall below the relevant thresholds for Emergency Liquidity Assistance as well as standard monetary policy operations. While I do not believe the ECB will be so consequential as to do this immediately, I also cannot believe that it will just continue lending for a long time,” Wolff wrote in a Bruegel piece.
“By talking about insolvency, he has raised the funding needs for Greece’s banking system and made government fund-raising on capital markets impossible,” Wolff said.
Insolvency is a state, Default is an event
Important to remember that extend and pretend as a strategy, while obviously unfair to many participants, can sometimes work as a means of keeping an entity ticking over. Many leading U.S. banks were very likely insolvent during the crisis.
Like all relationships, good and bad, extend and pretend requires the participation of two partners, the creditor and debtor. All true, but these things are never simple, and far less when, as in Greece, the insolvency includes a euro member state.
While Greece’s liabilities may shortly exceed its ability to repay, its creditors and partners maintain that with current low interest rates and a very long repayment schedule its ongoing debt maintenance burden is not out of line with that of France, for example.
Varoufakis sees the situation as a debt deflation spiral, in which the conditions imposed on Greece stifle demand, pushing prices and output lower and making the debt ultimately impossible to repay without ruin. There is some justice in this position.
Varoufakis’ slapping down of the insolvency card is best seen as a gambit to bring the other side more rapidly to the table and to extract better concessions.
As for the ECB, it seems to be standing on ceremony, maintaining its hands will be tied as for extending Greek banks more credit when the Greek program extension expires at the end of February.
“We (ECB) have our own legislation and we will act according to that,” ECB council member Erkki Liikanen said.
That angle, that the ECB will have to follow its rules and that Greek debt and its banks will be high and dry, is heavily overplayed, argues Karl Whelan, an economics professor at University College Dublin.
Whelan believes that even in March Greek access to ECB enabled credit will be based on discretionary decisions rather than mechanical outcomes. Greece and its negotiating partners can conceivably limp along together because both the ‘rules’ and the meaning of insolvency are such woolly concepts, offering insulation if not clarity.
Thus we have two sides, both seeking to pressure the other by creating what could be a false urgency to negotiate, and both hoping the other crumples and gives way. Meanwhile, capital, sensibly, flees Greece and the chance rises that an overplayed hand by either side leads to a bank run.