Greece and the Eurozone : holding tight to nurse for fear of something worse

Robert Henderson

The   Greek referendum on the terms for a further  financial bailout was potentially  a clever move by  Alexis Tsipras and Syriza. If the result of the referendum   had been  YES to the terms put forward to deal with the Greek debt , Tsipras and his government were off the hook for reneging on their election promises. If there was  a NO to the conditions, Tsipras could  play the democracy card and challenge the Eurozone to go against the democratic will of the Greek people or simply walk away from the mess and  pass the poisoned chalice to his political opponents.

Having asked for a rejection of  the terms offered  by the Eurozone in the referendum and  got an emphatic  61% vote  for rejection,  Syriza   could  have  called the Euro elite’s bluff from a position of strength.   Regrettably for Greece’s hope of recovery they have not had the courage to do so.  Instead  they have  humiliatingly capitulated by signing up to an even more severe  austerity deal than  they could have concluded with the movers and shakers  in the Eurozone a fortnight ago. The stark realpolitik of the situation was epitomised by the Greek prime minister  Alexis Tsipras appealing to the Greek Parliament to accept the deal with the words   “We don’t believe in it, but we are forced to adopt it,” The Parliament  accepted by  his plea by voting 229 for and 64 against, but it required support from the opposition because over 30 Syriza MPs either voted against or abstained. From provisional acceptance by the Greek government  to acceptance by Parliament took three days.   Shotgun marriages often take longer to arrange.

Greece is no longer in control of its economy or its political system.  It is having forced upon it huge changes to pensions and public sector salaries, large privatisations,  and perhaps most humiliating, to sell off €50bn of Greek assets , the proceeds of which will be partially used to guarantee repayments on debts owed to the EU and the IMF. The detailed new requirements are:

“To unlock a fresh €82bn to €86bn bail-out, Greece has until Wednesday to pass laws that:

• implement VAT hikes
• cut pensions
• take steps to ensure the independence of Greece’s statistics office is maintained
• put measures in place to automatically slash spending if Greece fails to meet its targets on primary surpluses (revenue minus expenditure excluding debt servicing costs)

It has until July 22 (an extra week compared with a draft statement) to:

• overhaul its civil justice system
• implement the Bank Recovery and Resolution Directive (BRRD) to bring bank resolution laws in line with the rest of the EU

Greek MPs will also have to stomach a move to sell off €50bn of Greek assets.”

This is not the end of the matter. At best the Greek problem and the problems of the Eurozone generally have been simply been kicked down the road. The madness  at the heart of this settlement is that Greece is being further burdened  by a huge amount of extra  debt when the general consensus amongst economists is that the existing  debt was more than Greece could ever hope to repay.  Disobligingly for the Europhile elite,  the IMF  has made it clear since the agreement between Syriza and the Eurozone  that Greece requires a great deal of debt relief and that unless this is forthcoming  the IMF will not take part in the overseeing of the agreement.    But the agreement makes no provision for overt debt relief, although fiddling with the period of repayment and interest rates payable may reduce the real value overall debt (principal and interest)  somewhat.  Nor is this position likely to change, because some Eurozone countries, most notably Germany,  are determined to continue to resist overt  debt relief if Greece is to continue within the Eurozone.  At the same time Germany have made it clear that they want the  IMF involved in the realisation of the agreement. In addition to these obstacles all the other Eurozone countries have got to sign up to the agreement  and this will require some countries, including Germany,  to get parliamentary approval to the terms.  Germany’s finance minister Wolfgang Schäuble has even suggested that Greece leave the Euro for five years.

But even if the Eurozone votes collectively to accept the deal and the IMF  difficulty is overcome,  there is no guarantee it will be realised  for two reasons. The Greek people may be driven by  desperation to  resort to serious violence after they realise that voting changes nothing in Greece and the severe austerity programme takes effect , effects which are aggravated by the fact that   Greece has no real Welfare State.  This could drive the Greek political class to hold further elections with the result that a government is elected which will not implement the deal.

More mundanely,    Greece’s  politics and  public services are severely tainted by cronyism and corruption.  The country  may simply  lack the bureaucratic  structures and expertise to  implement the  complicated and far reaching reforms  which are being sought by the Eurozone.

The sad  truth is that Greece is a second world country which has been masquerading as a first world country.  Before joining the Euro it got by because it had its own currency and  received very large dollops of money from the richer members of the EU.  In those  circumstances its lending was circumscribed by the fact that its debt attracted a high rate of interest because it was seen as a bad risk.  Once Greece had smuggled itself into the Euro by falsifying its accounts,   it was treated as safe a bet as Germany  for creditors who rashly  reasoned that the rest of the Eurozone would ensure Greece did not default.

How difficult would it to be for Greece to re-establish the Drachma? The Czechoslovakian split into the Czech Republic and Slovakia in 1993 provides a reassuring  example of how it might be done.  Initially the two new countries were going to share a currency but within a matter of weeks they came to the conclusion that this was unworkable and decided that each country should launch its own currency. This was accomplished with very little trouble:

 The two countries already had capital controls, but all cross-border money transfers between them were halted to avoid further speculative flows into the Czech Republic. Border controls were tightened.

Komercni Banka, a then state-owned commercial bank, glued stamps, printed by a British firm to ensure secrecy, on 150 million federal banknotes. These were trucked around the country with the help of police and the army.

The exchange for notes stamped by Czech or Slovak stamps, at a 1:1 rate, started on February 8 and was completed in four days. Later in 1993, the stamped notes were replaced by new ones.

People could swap a maximum of 4,000 crowns — then worth $136 (87 pounds) — in cash. They had to deposit the rest. The old money ceased to be valid immediately the switch started.

The whole process, which required 40,000 people just on the Czech side, went ahead smoothly. An opinion poll showed 86 percent of Czechs experienced no problems in the operation. Capital controls were essential to stop bank runs. Secrecy in the buildup was paramount.

The Greek situation is not an exact parallel with that of Czechoslovakia because of the massive debt the country has acquired. Nonetheless, if Greece did relaunch the Drachma creditors would be forced to decide  between accepting  the new currency even though this would certainly mean them receiving far less than the face value of the loans  or in all probability getting nothing.

Would Greece out of the Eurozone be a better bet for Greeks than what is on offer within the Eurozone?  It is difficult to see how things could be worse because , as things stand, Greece is locked into many years of austerity at the least. . Most importantly outside the Eurozone  the Greeks could take charge their own destiny. Most importantly they would be able to control how much of and at what rate they would repay their national debt .  Holding tight to nurse for fear of something worse is not the answer here because long experience shows the something worse will always be the EU.