Greek Drama: What the Oracle Will Say?

As a last minute effort to find a compromise with European Union (EU) lenders, Greece did seek a fresh two-year bailout programme from the European Stability Mechanism for a 30 billion euro line of credit “to fully cover its financing needs and the simultaneous restructuring of debt”, but the European leaders did not evince any interest in considering it. Indeed, the German Chancellor Angela Merkel maintained her stance when she reportedly said, “Before the referendum Germany can’t negotiate a new request.” With the result, Greece has become the first developed nation to default in paying its dues—1.5 billion Euro—to the International Monetary Fund (IMF).

Now, the question is: What next? The answer is obvious: with no inkling as to how the European Central Bank (ECB) will respond to Greece becoming a defaulter of IMF, nothing can be presumed about ECB extending Emergency Liquidity Assistance, and if what the economist of UniCredit SpA is reported to have said—provision of ELA “will not be taken without political cover at the highest level”—is correct, then Greece is evidently on the brink of a financial precipice.     

That aside, with banks having been already closed to limit the outflow of capital from the country and the government having limited the daily withdrawals to Euro 60 per day, the life for the Greeks has already become challenging. Now, with the funding lines cut off, it is said that Greece cannot even effect pension payments—at the most, it might effect payment of pension and wages in the form of issuing ‘scrip’. All this, cumulatively, is sure to make life more miserable in Athens.

That being the reality, some observers have commented about Tsipras’ adamant behavior at the negotiating table with the ‘Trioka’—the European Commission, the European Central Bank and the International Monetary Fund—as ‘irresponsible’.   But here one cannot forget the fact that the present Prime minister, Tsipras came to power in January with a promise to end austerity, of course, ensuring that Greece would stay in Euro. He indeed asserted that he would secure huge capital support from the European partners to rebuild the economy. He also said that he would persuade the IMF to reduce its debt obligations to enable it to rebuild its economy. All this makes it obvious as to why Tsipras is hell bent upon resisting the austere measures imposed by the Troika, which, as many economists too have observed, are of course draconian.

While talking about the austere measures, one must not fail to examine what they indeed did for Greek economy all along. True, the Greeks spent beyond their means in the late 2000s. Incidentally, Greek economy was not all that sound vis-à-vis Germany and France right at the time of launching Euro—its inflation, unemployment rate and fiscal deficit were far above the parameters prescribed for joining the Euro group—and yet it joined, and the EU admitted it, for it promised to set right its finances soon.

Nevertheless, the Greek adopted all the austere measures foisted by the Troika, but they, instead of   correcting its finances, pulled down its revenues that were already low. According to Joseph Stiglitz, the imposition of Troika had only resulted in a 25% decline in Greek’s GDP. On the other hand, measures such as repeated raising of taxes and slashing down of pension payments by about 45% since 2010, wage cuts, etc. have resulted in a fall in government employment by about 25% and a rise in the un-employment rate of youth by 60%, inflicting terrible woes on the common man on the street.

Over and above all this, there are economists who have observed that whatever lending that the Troika made to Greek has not gone into its treasury; instead, they say it went to the pockets of its private creditors—German and French banks. To sum up the Greeks’ plight, one must borrow Paul Krugman’s words: “Greek economy collapsed, largely as a result of those very austerity measures.”

That being the reality, no wonder Tsipras resisted further imposition of austere measures and instead struggled to win concessions on a new bailout deal. However, having failed in his mission, Tsipras has now called for a national referendum on whether or not to accept the Troika’s demands.

This challenge—challenge of saying ‘Yes’ or ‘No’ is no easy task to the Greeks; for both carry huge risks.  A ‘yes’ vote would mean even harsher austerity, leading to harrowing depression with no end in sight. A ‘no’ vote would mean, perhaps, an exit from Euro and grasping of its own destiny in its own style. In the short run, this approach, no doubt, will inflict greater pain, but having already suffered a lot, it may not be that difficult for the Greeks to face the financial chaos resulting from sudden withdrawal from Euro.  But it can surely bounce back by launching its macroeconomic corrections such as depreciating its reintroduced currency, Drachma, to such a level where its exports become competitive, besides encouraging the tourists to flock their cities as the depreciated currency is sure to encourage more people to visit the cradle of western civilization. And, indeed there is no better alternative to kick start an economy that is stuck in recession. 

So, let us wait and see what the future has in store.