FOREIGN AFFAIRS by Peter WestmoreNews Weekly
Greece and EU stare into abyss of debt, austerity
, June 20, 2015
With Greece at the point where it can no longer meet payments to its creditors on its mountain of debt, it and the European Union stand on the edge of a precipice from which there seems no going back.
The central problem is the Greek Government debt, now estimated to exceed €400 billion ($580 billion), almost twice the country’s gross domestic product (GDP), and nearly twice the average of the Eurozone.
Since its debt crisis began in 2010, Greece has been granted two huge loans by the European Central Bank and other financial institutions: €110 billion in 2010, and a further €130 billion in 2012, making a total of $240 billion. These effectively refinanced Greece’s government debt.
In exchange for this, successive Greek governments were obliged to impose an extremely tough austerity program on the country, which has caused a contraction in the Greek economy – Greece endured four years of negative growth, making this technically a depression.
Last January, following a parliamentary stalemate provoked by the debt crisis, the radical left Syriza party, led by Alexis Tsipras, was elected to government. Syriza had stood on a program of renegotiating Greece’s debts and refusing to implement the austerity program imposed by the European Union, while insisting that it still wanted to remain a member of the EU.
Four months of negotiations have resulted in both conciliatory and angry words from both sides, but without agreement.
In the meantime, the climate of economic uncertainty has deepened, while the outflow of capital from Greece has reversed signs that Greece was emerging from the crisis, pushing it back into recession.
A majority of the countries of the European Union are unwilling to offer further loans to Greece unless its government agrees to continue the austerity program which has seen the sell-off of government assets, a crackdown on tax evasion, cuts to wages and pensions, and the size of government fall for several years.
Syriza is adamant that it will wants to balance the budget, but will not agree to further cuts in government services and pensions. For several months, it has been raiding every hidden money cache under government control, to meet its debt obligations. But that honeypot is now empty.
The Greek Government is now at a point where it will default on its loans. The question is what happens next. If Europe refuses to extend further credit to Greece, the Greek Government will become technically bankrupt, being unable to pay salaries, run hospitals or meet public health and social security obligations.
One possibility is that Greece will then reissue its own currency, the drachma, and meet its domestic obligations using this currency.
In a sense, this would put Greece into a similar position to the UK, which maintains its own currency, the pound sterling. However, sterling is a strong currency, one of the most traded in the world, and it maintains a stable relationship with the euro, the US dollar and the Japanese yen.
In contrast, the drachma would suffer a crisis of legitimacy internationally, and would probably require the Greek Government to impose tight controls on the value of the currency, and on international transactions. This would amount to a de-facto exit from the Eurozone, where countries agree to have a common currency issued by the European Central Bank.
The problem for the Greek Government is that it would still owe the European Central Bank and other international lenders hundreds of billions of euros. If Greece were to declare a moratorium on debt repayments, it would create enormous uncertainty in European financial markets and probably lead to a credit squeeze in Greece.
No Western bank would lend money to anyone in Greece, because they would fear that their money would never be repaid. In a world where international financial transactions are the lubricant of world trade, including necessities such as oil and gas, the consequences for Greece would be dire, affecting ordinary businesses in the country, including the tourism industry, which is one of the mainstays of the Greek economy.
Greece is a relatively small economy. With a population of 11 million, it has about 3 per cent of the population of the EU.
Europe could “carry” Greece, as it has been doing for several years. However, further concessions to the current Greek Government are being fiercely resisted in northern Europe, whose taxpayers have been subsidising the Greek economy, and by EU politicians who fear that “the Greek disease” of running unsustainable government deficits will spread through the EU. They are also worried by the rise of anti-EU political parties in other parts of Europe.
The EU is in uncharted waters. Since the European Union was formally established over 20 years ago, no country has left the common currency or the union. The consequences of a Greek default will undoubtedly extend into the international financial system, potentially affecting countries like Australia.