Category Archives: Finance

Greece can’t vote its way out

thelma-louise As Greeks head to the polls tomorrow in a national referendum to ratify (or defy) additional austerity measures demanded by international creditors, I can not escape the feeling that I am rooting for a “No” vote.

While I have argued here for a balanced approach to the Greek debt crisis, leftist Prime Minister Alexis Tsipras has been pushing his luck in a game of chicken he just cannot win.  His strategy seems to boil down to this:  back down or we will jump off a cliff… and take a few of our Mediterranean neighbors along with us!

Tsipras is campaigning for Greeks to vote down more budget cuts and other reforms that creditors insist are needed to justify the release of new bailout funds.  Somehow he calculates that the Eurozone will be swayed by the democratic will of his electorate, which he is agitating with provocative accusations of “criminal” behavior by outsiders seeking to “humiliate” the Greek nation.  What he overlooks is the increased capacity of the Eurozone to withstand economic shock waves of a Greek exit from the common currency.  That, as well as the fact that fellow member nations have to be responsive to their own restive populations, who are weary of supporting continued Greek profligacy.

Many analysts have sympathized with Greek concerns, insisting that austerity is a self-defeating policy because it further dampens demand and drives the economy into an ever deeper hole from which it will never escape.  Greeks have suffered enough, they insist.  Forgive debt and let Greece reopen its public sector spigots of spending.

While long-term debt does need to be restructured, more stimulus is unlikely to solve deep-seated issues with deficient Greek productivity.  Greek austerity measures to date have hardly reformed its public sector or labor markets.  The vast majority of job losses have come from the private sector, which has been crippled by ever-increasing tax burdens.  And what does it say to the people of the other struggling European economies, such as Portugal, Ireland, and Bulgaria?  The Portuguese and Irish bore great difficulties to weather the changes imposed as conditions to their own bailouts.  They know what it takes to right the ship, and they are among the least sympathetic to Greek pleas for leniency.

There would be no hope for fiscal discipline of any kind going forward if the Greeks could win concessions by threatening self-destruction.  So if the Greek public votes to support the defiant Greek government, it is signing its own European exit visa.

As George Will has argued, a Greek exit from the Euro might just be the medicine the Eurozone needs to scare its members straight.  Yes, it will establish a previously unthinkable precedent that European economic integration is reversible.  But maybe that is not such a big deal after all.  The economic dislocation of a “Grexit” will be most painful for the Greeks themselves.  Radical politicians elsewhere along the spendthrift Mediterranean coast will have to think twice before campaigning to follow the suicidal road paved by Greek leftists.

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Brother, can you spare a drachma?

A lot of hand-wringing has been going on since the Greeks elected Syriza, the leftist anti-austerity party, to lead its new government.  It seems that the Greek people, while preferring to remain in the “eurozone,” have had their fill of the the harsh medicine that public and private lenders are imposing as conditions to a liquidity lifeline.  To sum things up, Greece, the European poster child for public corruption, fiscal profligacy, and tax evasion, can’t pay its bills as they come due.  European banks and public institutions such as the IMF and ECB have continued to finance debt restructuring (including interest rate reductions and maturity extensions) in exchange for commitments to cut public spending and raise taxes.  Greeks understandably complain that the austerity measures make it even harder to generate the new revenues needed to make good on its piled up debts.  What’s an honest spendthrift nation to do?

Two schools of thought have emerged on the issue.

One side argues that everyone needs to bite the bullet and let Greece default, exit the currency union, re-denominate accounts in drachma, and let the comparatively cheap currency lubricate the economy with tourism and trade.  This point of view suggests that further bailouts simply delay the inevitable.  While a “Grexit” would cause tremendous harm to domestic savings and purchasing power — not to mention bring renewed scrutiny to other weak eurozone economies — continuing to finance Greek debt throws good money after bad.  Politically it’s untenable in Northern Europe.  Let the chips fall and get on with it, these tough-love advocates insist.

The other side cautions that politics and rhetoric need to be kept in check.  Be careful what you ask for, they seem to be saying.  Letting Greece default would reignite eurozone “contagion,” throwing the entire European project into jeopardy.  While Greece represents only a small part of the world economy, default would trigger pressure on Spain, Portugal, and Italy, among others.  Capital would flee, interest rates would soar, and there would not be enough collective resources to bail out everyone.  The export industries that have powered Germany over the past decades would lose their fuel.  Continue to shelter the ne’er-do-well Greeks to prevent a Continental melt-down.

Is it too much to ask that policymakers entertain a third way out of this mess, one that is premised on support for shared economic prosperity?  Why is it that they must choose between the moral hazard of rewarding fiscal irresponsibility and shooting themselves in the foot by bringing the house crashing down?  Yes, the Greek people need to learn to live within their means.  Yes, they need to reduce the public sector and free up labor markets.  And by and large, there has been very little genuine reform to the Greek economy.  But even if the political leadership had pushed such reform through, why should it be pressed to add punitive tax hikes?  Higher taxes simply exacerbate the evasion problem and deter whatever business investment liberal reforms would otherwise inspire.  Why not unshackle the Greek economy with dramatic reductions of tax and regulation?  Give the Greek people a reason to believe in themselves and to hope for a better future.

While we are at it, let’s not condition further liquidity support on static budget arithmetic.  Changes which liberate the private sector and spur sustainable growth will rejigger the budget calculus.  Here in the U.S., Republicans in Congress are finally ensuring that fiscal responsibility be assessed while taking measure of productivity.  It’s time for the powers that be to stop treating Greece as if it operated in an economic vacuum.  Economic growth will be the cure of many ills — let’s use our influence to support it.


Filed under Finance, International