Queues at Bank machines during Capital Controles
Today Greeks voted in a referendum, on whether to accept or reject further Government loans and a collection of economic and structural reforms. Overwhelmingly they voted NO to the reforms, commonly known as Austerity, but chose to stay within the euro currency.
What people were asked to vote on was a set of structural and fiscal reforms that had already expired at the same time as Greece defaulted on its IFM repayment. From the this view point the vote was pointless, something that semms to be lost the present leaders the PM, Szipras, and FM Varoufakis.
The Honourabke Mr Szipras has been calling the result a triumph for democracy, and resistence to anti-democratic measures from its creditor organisations, the IMF, ECB, and EU. Saying that Greek honour has been salvaged in this rejection of oppressive austerity measures.
In matters that concern all its citizens Demoracy extends accross Europe, in a case like this the arithmetic is simple, 80 millions Germans out-vote 11 million Greeks, which could be interpreted as Mr Sipras should sit down and mind his toungue. There are no challenges to the way a country arranges democracy within its borders, but where international affairs are concerned let the majority rule. Some might argue that honour is preserved when ones repays ones debts.
Not this this picture shows it, but Greeks turned out in 1000s to vote, 63% of them
Austerity measurs have been rejected which would have released funds it needs to repay other debts. Unfortunately, you cannot reject poverty, you have to work your way out of it. Those reforms should have put Greece back on a viable track. Rejecting them does not leave a lot of manouvering space. In 2012 €105 Billion of Greek debt was written off on the condition of implementing measurs that should have returned its public sector balances to normal levels. These funds are not just figures in a computer, but real money that tax payers have contributed to the emergency funds. German tax payers, and other countries, are not likely to accept another write-off without austerity measures guarenteeing that there will not be a third, or even later a fourth write-off. And there are those countries that have ungone austerity such as Portugal and Ireland, would coomplain if Greece were let off the hook.
To put this another way other, European leaders such as Mrs Merkel have to convince their electorate, and/or parliaments, that the taxes they pay from the wages that they work for are well spent in writing off more Greek debt.
Time has overtaken events, and the Greek economy has deteriorated further in the meatime The consequence of this is that the next set of austerity proposals from the Euro-group are likely to be tougher, demanding even more spening cuts, privatisations, and reductions the number of public sector workers.
What will Happen Next?
The ECB has no basis to reactivate flotation of the Greek Banks, as there is no change in the circumstances indicative of the insolvency of Greeks Banks (IMF default, no refinancing) - any deal is days, possibly weeks off. This means the Honorable Mr Varoufakis promise to reopen the Banks on Tuesday 7th cannot be met. But the economy is suffereing, and crisis point will be reached by Wednesday 8 July. To reactivate the economy, and peoples daily lives, the Drachma will have to re-introduced.
Part of the referendum was peoples desire to remain in the Euro, but once the Drachma hits the streets how can this be done. It is not clear if the Drachma can be used internally and the Euro still for International trade, or whether the Drachma would only be a temporary measure. What is certain is that the Drachma would devalue rapidly on International currency markets leading to huge internal inflation and consequent hardship.
One thing I will predict is that if this senario plays out the Szipras/Varoufakis duo would not accept blame for the predictable circumstances, but rather point the finger at the EU creditors. The duo are playing on EU humanitarial simpathy to avoid putting their economy in order, and continue expecting gifts from them at the same time.
How now does Greece intend to repay its debt obligations when it is refusing to rectify is efficiency and effectiveness deficiencies?
With a NO vote to austerity effectively being a vote not to repay the countries debts Mr Szipras will have to come away from the next round of negotiations with tougher more intrusive reforms to the Greek economy to ensure that it will be in a future position to repay those debts, but with extensions to its repayment plan, and possible interest write-offs. This package he will sell to his electorate as a victory....Err.
At the end of the day, a debt 180% of GDP cannot be sustained, but if Greece expects help from other peoples earnings then they will need display real conviction in working toward getting themselves out of a mess that they created. The Greek government is right in its protection of pensioners living standards, but although they were very vocal in protesting against suggested cuts to pensions they did not actively restructure the creditors conditions in consiliatory ways, instead preferring to leave this as a battle-cry.
There have been faults on both sides, but certainly the Szipras/Varoufakis insistance on Marxist economic strategy in a Capitalist world, together with an unfounded expectation of negotiating flexibility on the part of creditors, and an insistance on tapping every assistance resource possible, has exacibated the situation.
One creative way to massage the debt repayments would be to make all loans interest free as a humanitarian crisis measure, and back date that, so that previous interest repayments can be considered as reducing the principle amount, and thus the total GDP% of debt. I do not have access to the figures, so cannot assess whether this amount to a substantial figure, but a guess it might amount to 10% of GDP. Lengthening the repayment terms is also inevitable.
Addressing the debt side of the problem is a one-sided approach, what is needed is a good old fasioned German pincer movement! The other side of debt to GDP, is to raise the GDP, which, ploitically, has to be done without giving money to the country for use at its own discretion. What is needed is cash injections targeted directly at infrastructure or manufacturing projects similar to the post War Marshall Plan, we could even call it the 'Merkel Plan'. Over five or six years this might boost GDP sufficiently to reduce the debt ratio to the commonly accepted sustainable level of 120%.
QED