tag:theconversation.com,2011:/uk/topics/greek-debt-1002/articlesGreek debt – The Conversation2019-06-11T09:40:46Ztag:theconversation.com,2011:article/1185442019-06-11T09:40:46Z2019-06-11T09:40:46ZBoris Johnson’s threat to not pay Britain’s Brexit bill is dangerous for the UK economy<p>The frontrunner in the Conservative Party leadership contest, Boris Johnson <a href="https://news.sky.com/story/boris-johnson-i-wont-pay-39bn-unless-eu-gives-britain-better-exit-terms-11738084">announced</a> that, if elected to be the UK’s next prime minister, he would refuse to pay the UK’s Brexit divorce bill unless better withdrawal terms are on offer from the EU. This £39 billion bill is the amount agreed <a href="https://theconversation.com/the-brexit-divorce-bill-explained-74466">to settle the UK’s obligations</a> towards the EU budget and includes future spending commitments by the EU in Britain, beyond any exit date. </p>
<p>Johnson’s intention took most people – colleagues and EU counterparts alike – by surprise. Europe <a href="https://uk.reuters.com/article/uk-britain-eu-johnson-france/uk-not-paying-brexit-bill-would-be-debt-default-french-source-says-idUKKCN1TA0NU">responded immediately</a> to say that such an action would be considered a sovereign default by financial markets. While it’s hard to say if this will be the legal outcome of not paying, it’s safe to say it would seriously affect the UK’s finances and international standing.</p>
<p>Not honouring payment commitments isn’t something that developed countries are known for – especially not a G7 economy and leading financial centre like the UK. Not all debts are the same, however, and not all defaults have the same consequences. </p>
<p>Missing a payment owed by a state could technically be considered a sovereign default. But the answer as to what really happens as a result would be hidden in thousands of contractual terms and conditions and in the rules of credit reference agencies. Reneging on the Brexit divorce bill may be similar to the experience of the last developed country economy to experience a default event: Greece.</p>
<h2>Lessons from Greece</h2>
<p>At the end of June 2015 Greece became the first developed country in history to default to the International Monetary Fund, by failing <a href="https://money.cnn.com/2015/06/30/news/economy/greece-imf-default/index.html">to make a €1.5 billion payment</a>. Before the missed payment, rating’s agency Fitch had downgraded Greece, <a href="https://www.telegraph.co.uk/finance/economics/11709473/Greece-defaults-on-the-International-Monetary-Fund-after-launching-11th-hour-attempt-to-agree-new-rescue-deal.html">citing</a> the country’s breakdown in talks with the EU and the threat of a disorderly and permanent break from the eurozone’s payment system. </p>
<p>Nonetheless, default to the IMF did not constitute a “sovereign default” in the eyes of rating agencies and did not trigger a series of cross-default clauses on the country’s other outstanding debt. So if the Greeks got away with it, why shouldn’t the UK?</p>
<p>Unlike <a href="https://www.newstatesman.com/politics/2015/03/nation-states-arent-households-debating-their-economies-if-they-are-stupid">frequent attempts</a> to explain state finances through the lens of home economics, a nation’s balance sheet is not like one’s personal bank account. Nations owe large sums to a variety of private and institutional creditors, and this is normal. It is also normal to run significant budget deficits and finance a large volume of public debt. </p>
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<img alt="" src="https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/278728/original/file-20190610-52739-1b3ahvn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Britain should learn from Greece’s debt default.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/greek-flag-against-sun-dark-clouds-531556552?src=U_nQ4huwA4InjXbKiqhJAQ-4-23&studio=1">Shutterstock</a></span>
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<p>General UK government gross debt was £1,837.5 billion at the <a href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/december2018">end of 2018</a>, equivalent to 86.7% of its gross domestic product (GDP). And the UK deficit (or net borrowing) was £32.3 billion in 2018, equivalent to 1.5% of its GDP. </p>
<p>While these amounts sound frightening, the UK has no problem borrowing money from markets, paying a mere <a href="https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk">1% interest</a> on its five year bonds, for example. But these low borrowing rates are a consequence of the UK’s good <a href="https://tradingeconomics.com/united-kingdom/rating">credit rating</a>, which has been largely unaffected by uncertainty over Brexit.</p>
<h2>Junk status</h2>
<p>Where Johnson’s new government would run into trouble is that, by defaulting on its Brexit bill payment, it would likely suffer a blow to its credit rating. Greece’s drop from the top to the junk status of <a href="http://www.worldgovernmentbonds.com/credit-rating/greece/">credit ratings</a> during 2015 led it to complete reliance on institutional lenders for its funding needs. When a country is in tense negotiations with the same institutions on which it entirely relies on for its everyday funding, you can imagine what this means in terms of <a href="https://www.huffingtonpost.co.uk/entry/boris-for-pm-varoufakis-without-the-leather_uk_5ce80f6fe4b0ebf79ad33ce2">negotiating</a> power.</p>
<p>Whether a default on the Brexit divorce bill would merely put pressure on UK ratings, or whether it would plunge them to junk status is hard to predict. Yet, what is known is that any type of default event makes borrowing more costly, sucking funds away from public spending. This cannot be good for the UK treasury or the country. </p>
<p>In a worst case scenario, not paying the Brexit bill could result in a sovereign default and trigger cross-default clauses on a variety of financial products. Then the UK would face an immediate funding gap and be called to pay back immense amounts of money – this would severely hurt the economy. Just ask anyone from Argentina, which has gone through numerous defaults and is <a href="https://www.forbes.com/sites/jonhartley/2014/08/04/argentinas-default-lessons-learned-and-what-happens-next/#6a796d592384">struggling to recover</a>.</p>
<p>Considering that <a href="https://www.nytimes.com/2019/02/24/world/europe/britain-austerity-may-budget.html">almost everyone acknowledges</a> the difficulties created by the austerity drive of Conservative governments since 2010, it is unlikely that a sharp contraction in public spending due to borrowing difficulties would be positively received by the British public. Add to this the disruption to trade and manufacturing caused by a <a href="https://theconversation.com/no-deal-brexit-experts-on-what-the-uk-governments-advice-means-102074">no-deal Brexit</a> (which would accompany not paying the divorce bill), and the UK could face a very unpleasant Autumn indeed.</p><img src="https://counter.theconversation.com/content/118544/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ioannis Glinavos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s hard to say if, legally, not paying the Brexit bill will classify as a sovereign default. But credit agencies will take serious notice.Ioannis Glinavos, Senior Lecturer in Law, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1091622019-01-09T13:30:34Z2019-01-09T13:30:34ZLike Greece, Brexit negotiations leave the UK a rule taker from the EU<p>Since the beginning of the referendum campaign on EU membership, a section of British politics has been immersed in a grand illusion: that the UK would be in a position to leave the EU without making painful concessions. </p>
<p>Some hard Brexiteers have even fantasised that they can blackmail Europe into accepting their terms. This type of illusionary thinking, which persists despite being rebutted repeatedly by what has actually happened, is not surprising. We learned a lot about it during the Greek economic crisis and the negotiations between Greece and its European counterparts.</p>
<p>At first, there appears to be little in the way of comparison between Greece and Britain. The UK is a big economy and a hegemonic European power with superior negotiating capabilities and a rich record of securing numerous opt outs from the process of European integration. Greece by contrast, is a regional player and a small eurozone economy on the verge of going bankrupt. In addition, the UK has decided to leave the EU, while Greece has been struggling to stay a member of the eurozone.</p>
<p>But despite these fundamental differences, the UK has ended up in a similar negotiating position to Greece in 2015: a deal where it must concede the most, or a no deal where it is the biggest loser. The UK, like Greece, is now a rule taker, not a rule maker. And the UK’s position is more similar to Greece’s than one might imagine.</p>
<p>The UK and Greece are the weakest players in their negotiations with the EU, though for different reasons. Greece because of its bankrupt economy and the need for liquidity. The UK because it decided to leave the EU. While a member of the union, the UK enjoyed the strong bargaining power of being within its institutions. Once it began the withdrawal process, the bargaining power became asymmetrical, working in the EU’s favour.</p>
<h2>A hard bargain</h2>
<p>Both Greece and the UK adopted hard negotiating strategies against the EU. In both countries, this was mainly due to domestic constraints, particularly negative public opinion and a hostile media, significant opposition from both within and outside the ruling party, and the dynamics of coalition politics. </p>
<p>After years of <a href="http://dx.doi.org/10.1080/13501763.2016.1154977">wrangling with the EU</a> over the terms of its bailout programmes, in February 2015, the newly-elected Greek prime minister Alexis Tsipras, declared an immediate end to austerity and tough negotiations to renegotiate the “onerous” terms of Greece’s bailout. In the months that followed, Greek officials went to <a href="http://www.xinhuanet.com/english/2015-03/25/c_134096793.htm">China</a> and <a href="https://www.cnbc.com/2015/04/23/power-play-why-is-greece-flirting-with-the-russians.html">Russia</a> in search of financial assistance. In June, the government broke off negotiations with the EU and then held a referendum on the terms of the programme, which <a href="https://theconversation.com/victory-for-politics-of-defiance-in-greece-means-the-real-crisis-starts-now-44317">voters rejected</a>. </p>
<p>The problem with such uncompromising posturing, however, is the tit-for-tat dynamic that ensues. Research on the Greek crisis showed that hard bargaining from the weaker side led to <a href="http://dx.doi.org/10.1080/13501763.2016.1154977">harder bargaining</a> from the stronger side. Eventually, Tsipras was <a href="https://www.bbc.co.uk/news/world-europe-33934238">forced to accept</a> a third bailout programme with <a href="http://dx.doi.org/10.1080/13501763.2015.1087215">even harsher terms</a> in August 2015. </p>
<p>The UK has also maintained a hard negotiating position on Brexit. Once Theresa May, the British prime minister, triggered the article 50 process that started the UK’s withdrawal from the EU in March 2017, she set a series of hard “red lines”, especially in respect to ending the free movement of people. This culminated in May declaring in mid-2018 that a hard Brexit “wouldn’t be the end of the world” and warned European leaders not to treat the UK unfairly. Despite the diplomatic niceties, May was told first by the EU’s chief Brexit negotiator, Michel Barnier, that she needed to soften her red lines to reach agreement. Once agreement was reached the European Council told her there would be no renegotiation.</p>
<h2>High stakes</h2>
<p>In both Greece and the UK, hard bargaining raised the so-called “reservation price”. This is the minimum the governments of both countries are willing to accept in Brussels before walking out of the negotiations in fear of losing face at home. The EU also has a reservation price: the preservation of the existing rules and the integrity of the single market.</p>
<p>As <a href="http://dx.doi.org/10.1080/13501763.2015.1087215">happened in Greece</a>, the UK government and many prominent Brexiteers think that by raising the stakes of the negotiation they are raising the cost of disruption for the EU in case of a no deal. The problem with this logic is that the alternative of a no deal in both Greece and the UK’s case is less disruptive for the EU than for the negotiating counterpart. It means that any deal will be weighted towards the EU to reflect this. </p>
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Read more:
<a href="https://theconversation.com/will-theresa-mays-brexit-deal-survive-game-theory-has-an-answer-107532">Will Theresa May’s Brexit deal survive? Game theory has an answer</a>
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<p>The UK is faced with a choice between the deal on the table and a no deal, which is the worst possible negotiating outcome. </p>
<p>The rational expectation is that it would opt for the lesser of two evils and accept the deal on offer, like Greece did when it accepted the bailout programmes. Unlike Greece, though, the UK seems unable at this stage to reach a similar level of pragmatism about the extremely disruptive outcomes of a no deal. The problem is in parliament, where politics is trapped between two illusions: while some politicians believe the country they serve is a great world power that can afford to crash out of the EU, others believe they can renegotiate a better deal. </p>
<p>The deadlock is here to stay, unless more drastic measures are taken. As the Greek case showed, domestic opposition to the outcome of negotiations with the EU can be overcome by resorting to the people. The deadlock from the July 2015 referendum in Greece was finally overcome by a <a href="https://theconversation.com/greek-election-tsipras-trounces-his-opponents-but-at-what-cost-47790">general election in September 2015</a>, which gave a clear mandate to Tspiras and his Syriza coalition to press ahead with the bailout deal. The hard opponents to the third bailout programme walked out of the party and subsequently were annihilated electorally. </p>
<p>This is exactly what hard Brexiteers fear. They do not want to risk a vote that could send them to obscurity given that public opinion in the UK favours a compromise to a no deal, if does not outwardly favour to remain in the EU. It is high time that the prime minister took a calculated political risk. British democracy is deadlocked and only a vote – either a general election or a referendum – can take the country out of the impasse.</p><img src="https://counter.theconversation.com/content/109162/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Athanassios Gouglas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A lesson from Greece on why driving a hard bargain with the EU does not end well.Athanassios Gouglas, Lecturer in Politics and Public Policy, University of ExeterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1017092018-08-20T10:43:57Z2018-08-20T10:43:57ZGreece exits its third bailout – but eurozone still has much to learn from the crisis<figure><img src="https://images.theconversation.com/files/232653/original/file-20180820-30605-w1thdc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Greece nearly crashed out of the eurozone in 2015.</span> <span class="attribution"><span class="source">Bill Anastasiou / Shutterstock.com</span></span></figcaption></figure><p>After nine years of unprecedented peacetime economic hardship, Greece <a href="https://www.bbc.co.uk/news/world-europe-45207092">exits its IMF bailout programme</a> on August 20. So ends a series of three bailouts organised by the so-called troika of the IMF, European Central Bank and European Commission. A total of €336 billion was lent to Greece in the wake of the financial crisis, to stop it defaulting on its national debt, with approximately €300 billion used so far. </p>
<p>What’s more, over 90% of the funds were not directed toward investment projects, but went on <a href="https://www.palgrave.com/de/book/9783319522913">servicing Greece’s national debt</a>. And the financial aid was provided on the basis of severe cuts to spending – a harsh regime of austerity. </p>
<p>It had tragic results. A quarter of Greece’s 2009 economic output has been wiped out, 20% of its workforce is out of work, and youth unemployment is at about 40%. At the <a href="https://theconversation.com/syriza-surges-ahead-of-january-election-as-greek-voters-reject-austerity-35829">height of the crisis</a>, in 2014-15, unemployment reached a staggering 27%, with youth unemployment exceeding 50%.</p>
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<a href="https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">IMF analysis shows how Greece’s depression has been as bad as the Great Depression and has lasted longer.</span>
<span class="attribution"><a class="source" href="http://www.imf.org/en/Publications/CR/Issues/2018/07/31/Greece-2018-Article-IV-Consultation-and-Proposal-for-Post-Program-Monitoring-Press-Release-46138">IMF</a></span>
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<p>The strict nature, implementation and dramatic social costs of the EU bailouts prompt questions about their effectiveness – and whether they should be used in the future. Greece suffered the most. But bailouts, with strict conditions and severe consequences were meted out to Ireland, Portugal, Spain and Cyprus. The exact nature of the bailouts differed in each country, but they all shared the same draconian nature and rationale.</p>
<p>The IMF, which helped with Greece’s bailout loans, has <a href="http://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf">since admitted</a> that it underestimated the negative effects that austerity would have and the scale of the recession that would ensue. But this is <a href="https://www.palgrave.com/de/book/9783319522913">not enough</a>.</p>
<h2>Blame game</h2>
<p>The repercussions of the bailouts raise a core question. Whether the eurozone debt crisis was caused by the fiscal profligacy of the countries that were crisis-stricken and needed bailing out? Or whether it was down to deeper issues with the eurozone system as a whole?</p>
<p>There is no concrete answer to this fundamental question. Many observers focus on the aspects of the crisis that fit their particular narrative. For example, there is no doubt Greece and Portugal had overspent for decades before 2010. But politicians in the eurozone’s north <a href="https://www.reuters.com/article/us-eurozone-greece-schaeuble/dont-blame-others-for-your-problems-germanys-schaeuble-tells-greece-idUSKBN1CT2YX">focused</a> entirely on fiscal profligacy when assessing the causes of overspending. </p>
<p>Other factors – such as consistently higher military expenditure than the EU average in Greece; the country’s unique geography, which includes 2,000 islands of which 200 are inhabited; the lack of an industrial base, and a political system based on a clientele relationship between the state and its citizens – were completely ignored. For politicians in the fiscally prudent north of the eurozone, tax avoidance and overspending was more than enough to justify the bailouts. </p>
<p>But fiscal laxity was far from the norm in Spain and Ireland. Both countries had very low debt-to-GDP ratios up to 2008 (considerably lower than the EU Maastricht Treaty’s 60% limit) and yet they were subjected to the same draconian bailout provisions. </p>
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<p>Some <a href="https://www.tau.ac.il/%7Eyashiv/Wyplosz%20The%20Eurozone%20Crisis.pdf">critics</a> of the bailout perceive the crisis to be primarily institutional and so oppose the punishing measures that came with them across the board. They claim that had the European Central Bank acted decisively in 2010 by introducing <a href="https://theconversation.com/eurozone-qe-creates-breathing-space-heres-what-governments-must-do-now-70355">quantitative easing</a>, the extent of the required cuts would have been significantly reduced, thanks to the extra liquidity.</p>
<p>And despite Greece’s obvious need for extra liquidity from 2010-15, it was the only eurozone country to be excluded from the European Central Bank’s quantitative easing policy from 2015-18. The ECB’s intervention in 2010 could have mitigated the effects of the cuts and ultimately made the recession less severe, as was the case in Ireland and Portugal.</p>
<h2>The way forward</h2>
<p>Somehow, the eurozone has survived the experience of the bailouts and remains intact. But the lack of consensus over the causes of the crisis makes it difficult for the eurozone to move forward in the best way possible.</p>
<p>Alongside a central fiscal authority to oversee the budgets of all eurozone countries (in effect, a eurozone finance ministry that would take considerable time and effort to establish as it would have to aggregate national preferences over taxation and spending), the eurozone urgently needs a complete banking union to prevent future crises. This would involve a pan-eurozone deposit guarantee scheme. Had such a scheme existed in 2008, depositors would not have had the incentive to move their assets from one eurozone country to another when the crisis hit, thereby exacerbating it. </p>
<p>Attempts to create such a union over the last five years <a href="https://www.ft.com/content/003af25a-396e-11e8-8b98-2f31af407cc8">have stalled</a>. Eurozone countries like Germany, the Netherlands, Austria and Finland want depositors to participate in bank bailouts, as in the case of Cyprus in 2013, as a means of preventing the need to nationalise banks and their liabilities. The authorities in these countries fear that it would be their taxpayers that would be called upon to bail out banks in southern eurozone countries, in particular Italy <a href="https://theconversation.com/italy-and-the-euro-sergio-mattarella-has-opened-a-window-of-opportunity-to-save-the-single-currency-97428">where economic crisis looms</a>. </p>
<p>This is a perfectly rationale argument. But so is the southern eurozone authorities’ point, that it is very difficult to maintain sufficient liquidity in their banking sectors in the absence of such a banking union, as the mere suspicion of financial difficulty or political instability could precipitate abrupt and massive flows of capital out of their countries. Hence the current deadlock. </p>
<p>Yet a banking union is the best way to boost confidence in the eurozone and make it less prone to economic shocks that it may find difficult to withstand, let alone to absorb. Greece has taught us this much.</p><img src="https://counter.theconversation.com/content/101709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimitrios Syrrakos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The strict nature, implementation and dramatic social costs of the EU bailouts prompt questions about their effectiveness.Dimitrios Syrrakos, Deputy Head - Department of Economics, Policy and International Business, Manchester Metropolitan University, Manchester Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/730912017-02-16T14:06:48Z2017-02-16T14:06:48ZLiving through the Greek crisis: an anthropologist reports from Thessaly<figure><img src="https://images.theconversation.com/files/157122/original/image-20170216-12960-1x7m1so.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/raffaxxi/10706888945/in/photolist-hj8B4x-2VUZLe-2VV1sD-4Pgqy1-4f2eZY-CavZ8-4WBfX6-4WFwr7-4WFxq3-9PJfs8-9PM7wq-4WBfDD-4WBg4M-4WFwuC-4WFwP1-4WFxvG-9PM7Ys-icXYKh-icY2CE-icXSTs-icYpoJ-icYwp7-icXyFf-icXTBv-icYDK1-icYkvo-icXGz1-icXPmf-icXRk6-icZaED-icYfok-icXjiX-icYbzB-icYN8v-icYWKR-icXRk5-icYAYh-icXYLD-icYH6r-icXVzY-icXW3U-icYxMu-icYMEC-icYGHf-icYUFk-icYrjY-4PbWZt-91vsRR-8ZBDJd-4Pgieh">Raffaele</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The prospect of another Greek crisis <a href="http://nationalinterest.org/feature/can-the-eu-stop-yet-another-greek-debt-crisis-19426">could be back on the cards</a> if things do not go to plan at an upcoming meeting of European finance ministers on February 20. With a €10.3 billion loan repayment due in July, the meeting is seen as critical for once again preventing the possibility of a Greek default and potential exit from the eurozone. </p>
<p>But while the international media returns its lens to Greece, it’s worth considering that for people in Greece the crisis has never subsided. In fact, the consequences of austerity are getting more painful by the day. My work in the central mainland captures local experiences of this national and international crisis.</p>
<p>Since 2003, I have conducted field research in Trikala, a town of 80,000 inhabitants located on the agricultural plains of Thessaly in mainland Greece. Famous for the great landed estates of the Ottoman era, the region was incorporated into the modern Greek state in 1881 and is still known <a href="http://eu.wiley.com/WileyCDA/WileyTitle/productCd-140518681X.html">as the country’s “bread basket”</a>. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=800&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=800&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=800&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1005&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1005&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157117/original/image-20170216-12960-u3xguz.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1005&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trikala Old Town.</span>
<span class="attribution"><span class="source">Daniel M Knight</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Before the financial crisis struck, you could breathe the overwhelming air of prosperity on the bustling streets of Trikala. The expanding construction industry, a buoyant public sector, and secure agricultural markets supported by EU initiatives and eurozone membership represented 30 years of almost uninterrupted socioeconomic prosperity. Nobody could have imagined the horrendous consequences of the full-blown economic meltdown that would explode onto the scene in 2009.</p>
<p>It was in October 2009, in the context of global economic recession, that the government “discovered” unsustainable levels of debt and an insurmountable budget deficit. Since then, Greece has received €326 billion of bailout money from the European Central Bank, European Commission and the International Monetary Fund <a href="https://theconversation.com/a-tragedy-in-three-parts-how-the-greek-debt-crisis-unfolded-44680">in return for stringent austerity measures</a>. </p>
<h2>An everyday crisis</h2>
<p>Athens-centric media coverage has portrayed the consequences of austerity primarily through images of <a href="https://theconversation.com/life-under-austerity-shows-why-syriza-is-fighting-it-so-hard-42953">mass protests</a>, the rise of the far-right <a href="https://theconversation.com/how-greece-crisis-sparked-a-new-era-of-extremist-politics-44193">Golden Dawn party</a>, and the struggle to accommodate refugees <a href="https://theconversation.com/how-a-double-migrant-crisis-is-halting-greeces-recovery-57137">fleeing conflicts in the Middle East</a>. Athens is the centre of political and economic power and home to approximately half of Greece’s population so this focus on the metropolis is understandable. </p>
<p>But it means that the <a href="https://www.routledge.com/Ethnographies-of-Austerity-Temporality-crisis-and-affect-in-southern/Knight-Stewart/p/book/9781138204577">subtleties of living with crisis everyday</a> have been overlooked in favour of dramatic headlines. In Trikala, people grapple with the everyday tasks of heating their homes, putting food on the table, supporting their families, and maintaining social status. They poignantly discuss their fears of history repeating itself, of neo-colonialism, occupation, and poisoned futures.</p>
<p>Witnessing an array of new taxes, pension cuts and soaring unemployment, the dozens of people I’ve interviewed often delve straight into the vaults of history to make sense of <a href="http://www.palgrave.com/gb/book/9781137501486">life in austerity Greece</a>. The fear of returning to times of hunger, as experienced in the Great Famine during World War II, for example, is common. And an EU scheme aimed at decreasing national debt by placing solar panels on agricultural land is locally perceived as a return to an era of German or Ottoman occupation. </p>
<p>I am regularly told that “history is repeating itself”, “time is standing still”, and “we are being thrown back to previous times of suffering and poverty”. This all adds to the sense of temporal vertigo experienced in Trikala today – confusion as to where and when people belong on the timeline of social progress that was once promised <a href="http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/pdf/DiscussionPapers/KamarasDiscussionPaper4.pdf">as a birthright in neoliberal Europe</a>. People describe feeling “dizzy” and “nauseous” with the crisis.</p>
<h2>Feelings of occupation</h2>
<p>The way that energy policy has been managed since the economic crisis is a key area that people feel particularly vexed about. Since 2011, solar energy has been heralded by the Greek government and the European Union as a <a href="http://aq.gwu.edu/v90-1-articles.html">means to repay national debt</a>. From home installations to developments on agricultural land and large solar parks, a solar program has been rolled out across the region.</p>
<p>But, despite its significant uptake, the energy produced rarely services the local community. Instead it is used in Greek urban centres, with long-term plans to export to Germany. This means it is little more than a new extractive economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157113/original/image-20170216-12960-36m8tn.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Solar panels are a sign of the economic dysfunction.</span>
<span class="attribution"><span class="source">Daniel M Knight</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Because people could no longer afford high petrol prices to fuel their central heating systems and there is no mains gas in the town, the winters of 2012–2016 witnessed a return en-masse to wood-burning open fires and stoves last popular during the 1970s. Thick smog now engulfs Greek towns in this region, as people burn whatever they can, including old varnished furniture, shoes and clothes, and unsuitable firewood. Open fires have turned into a national health and environmental hazard, resulting in repeated government appeals for people to revert to petrol heating. </p>
<p>Thus, two starkly different energy sources – high-tech solar panels and open wood-burning fires – have become highly visible symbols of the economic crisis. One is associated with clean, green energy, futuristic sustainability, ultra-modernity, and international political energy consensus. The other conjures images of pre-modern unsustainability, pollution, poverty, and a return to peasantry status. Both are symptomatic of how people negotiate the fiscal austerity measures, arousing notions <a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-9655.12287/abstract">of neo-colonialism and occupation</a>.</p>
<h2>What future?</h2>
<p>One question I am often asked by locals is: “When will it end?” It is difficult for people to see beyond ever-increasing taxes, pay cuts and government failures. Exhaustion after seven years of crisis, apparently without respite anytime soon, has defeated their ability to imagine a better future. Feelings of resignation and helplessness are expressed by both younger and older generations. But while the older ones know they will not be around to live the post-crisis future, exhausted young people are full of distrust, contempt and apathy. </p>
<p>Successive governments have promised growth and emergence from crisis – promises that have turned out to be hollow. My friend Stella, a shopkeeper and mother of two teenage boys in Trikala, sums up the mood: “Bureaucrats and politicians in Berlin and Brussels will decide whether I have a future or not. They will decide if I live or die.” That’s what is on the cards at the meeting of European finance ministers, not simply a matter of negotiating debt repayments – their decisions will bring us one step closer to knowing where the future lies.</p><img src="https://counter.theconversation.com/content/73091/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel M. Knight receives funding from the Leverhulme Trust. He is affiliated with the Hellenic Observatory at the London School of Economics and is co-editor of History and Anthropology journal.</span></em></p>Before the financial crisis struck, you could breathe the overwhelming air of prosperity on the bustling streets of Trikala.Daniel M. Knight, Lecturer in Social Anthropology, University of St AndrewsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/715892017-01-23T11:26:58Z2017-01-23T11:26:58ZGreeks are overworked and exhausted from the debt crisis<p>The OECD think tank recently announced its Average Annual Hours Actually Worked per Worker <a href="https://stats.oecd.org/Index.aspx?DataSetCode=ANHRS">survey</a>. Contrary to popular belief, Greek workers are once again at the top of the list. With 2,046 hours a year, the average Greek worker spent nearly 50% more time at work than the average German worker (1,371 hours). Meanwhile, the earnings of private employees in Greece <a href="http://cdn.tradingeconomics.com/embed/?s=greecewag&v=201701032126s&d1=20070101&d2=20171231&h=300&w=600">have declined by 25%</a>, with the country’s <a href="http://www.economywatch.com/economic-statistics/economic-indicators/GDP_Per_Capita_PPP_US_Dollars/">GDP per capita</a> now nearly half that of Germany’s. </p>
<p>Yet things are only getting worse and Greeks are – understandably – losing hope. The country is in desperate need of a government that will take responsibility for its bloated public sector. Instead, it continues mismanaging the economy and placing the blame for Greece’s problems elsewhere. After eight torturous years in crisis, employed Greeks work long and hard with very little to show for it in their take-home pay.</p>
<p>To have a sense of how bad things are at the moment, many Greeks find themselves celebrating simply getting paid at the end of the month; it is frequently the case that employers owe their staff several months’ of wages in <a href="http://greece.greekreporter.com/2016/03/21/greek-private-sector-employers-owe-an-average-of-5-monthly-salaries-to-1-mln-employees/">arrears</a>. Those that do get paid are burdened with steep taxes which have been introduced to prop up the country’s failing public finances. And payments go into a <a href="http://www.kas.de/wf/doc/kas_44877-544-2-30.pdf?160415140444">failing pensions system</a> which they feel is unlikely to serve them in the future. Consequently, a number of Greeks are financially exhausted and unable to pay their taxes, leaving the government with a <a href="http://www.ekathimerini.com/214992/article/ekathimerini/business/tax-debts-to-greek-state-rise-to-more-than-94-bln-euros">€94 billion</a> hole in its tax revenues.</p>
<p>If there were some light at the end of the tunnel, perhaps more Greeks would be able to cope, but depression and suicides are on the <a href="https://www.thenationalherald.com/146589/economic-crisis-greeks-mental-health-takes-beating/">rise</a>. Greece started 2017 with a barrage of new taxes and a high probability that new financial pressures will be placed on them, to secure the country’s next loan payment from its international creditors. Meanwhile, capital controls are still in place at Greek banks, limiting the amount of money people can withdraw – an indication of how little the government trusts its people and how little people trust their government.</p>
<p>Many will have friends with similar skills who have moved abroad, getting paid significantly more and, more importantly, being treated by their host countries with more respect. In fact, it is estimated that around 500,000 professionals <a href="http://greece.greekreporter.com/2017/01/05/elstat-more-than-500000-greeks-left-greece-over-past-5-years/">have already left</a> with many more actively searching to follow in their footsteps. </p>
<p>While Greece prides itself on having a culture that supports education, its current brain drain is stripping it of the valuable human resources it needs to rebuild its economy. Even the high-tech start-ups that have sprung up cannot find as many qualified programmers as they used to, since many have left the country. It is not uncommon for those who have remained to work remotely on projects for foreign clients, invoicing through foreign-based companies. In this manner, they bypass the Greek public monster that has devoured companies on its rampage.</p>
<h2>In need of an overhaul</h2>
<p>The only solution is an overhaul of the bloated public system that <a href="https://www.theguardian.com/commentisfree/2012/feb/20/greece-crisis-ignorance-protest-corruption">employs one in four Greeks</a>. The alternative is to continue with an inefficient system that does not foster entrepreneurship and kills productivity. The hopeless Greeks that remain will be easily convinced that everything is the fault of foreign lenders that push for more austerity measures. </p>
<p>The result is that an increasing number of people support the idea that entering the <a href="http://www.express.co.uk/news/world/751028/Greece-regrets-joining-Eurozone-fears-European-Union-collapse-Grexit">euro was a bad choice</a>. It makes a favourable environment for the politicians that have failed to restructure the public sector and may want to cultivate the country’s exit from the currency. </p>
<p>But this would be jumping out of the frying pan and into the fire. While going back to the drachma would potentially render the economy more competitive, away from the known structural flaws of the euro, competitiveness would be achieved by further depreciating people’s salaries. </p>
<p>Any change in the currency would extend the current problem of maintaining an expensive and inefficient public sector as it would enable irresponsible politicians to finance any deficit as they did in the past: by <a href="https://books.google.co.uk/books?id=ofZZCwAAQBAJ&pg=PA100&lpg=PA100&dq=deficit+financing+greece+drachma&source=bl&ots=NsnMGGlqCr&sig=FzhDCGG2003WtAk3NeWTfdfkimI&hl=en&sa=X&ved=0ahUKEwjZ2NDZ9NLRAhUG7xQKHTl6CDM4FBDoAQgZMAA#v=onepage&q=deficit%20financing%20greece%20drachma&f=false">printing inflationary currency</a>. Further, the increased currency risk would add another burden to the much-needed exporting firms, while the country’s debt would still remain in euros.</p>
<p>As the current government celebrates two years in power, Greece is in desperate need of politicians that are willing to create a modern and efficient state, no matter what the currency. The current and previous governments have preferred to take care of their own <a href="http://www.nytimes.com/2012/10/11/opinion/the-cost-of-protecting-greeces-public-sector.html">cronies</a> and have been unwilling to modernise. And the country’s overworked and exhausted workers (not to mention the 23% of the population <a href="http://www.tradingeconomics.com/greece/unemployment-rate">that is unemployed</a>) could be surprised by how things can get even worse if they keep electing irresponsible politicians.</p><img src="https://counter.theconversation.com/content/71589/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vasilios Theoharakis is a member of the Investment Committee of the PJ Tech Catalyst Fund, a venture capital fund that invests in seed stage start-up companies in Greece.</span></em></p>After eight torturous years of crisis, Greeks are working long and hard with very little to show for it.Vasilios Theoharakis, Reader in Marketing & Entrepreneurship, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/597542016-05-24T08:57:58Z2016-05-24T08:57:58ZA false morality tale blocks the resolution of the Greek debt crisis<p>Optimists hope that Greece will soon be able to put its crisis behind it following the latest meeting of eurozone finance ministers. The optimism is not unfounded. Key lenders like the <a href="http://www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf">IMF</a> and the <a href="http://www.theguardian.com/world/2016/may/08/greece-has-basically-achieved-reform-goals-says-jean-claude-juncker">European Commission</a> have stopped <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">pretending</a> that Greek debt is sustainable. More importantly, the obvious is at last recognised – that Greece cannot exit its debt crisis until the very problem of its debt is addressed. </p>
<p>Yet <a href="https://mainlymacro.blogspot.co.uk/2015/07/the-ideologues-of-eurozone.html">economic</a> <a href="https://ineteconomics.org/ideas-papers/blog/joseph-stiglitz-deep-seatedly-wrong-economic-thinking-is-killing-greece">sense</a> has been largely irrelevant in the unfolding of the Greek drama. Following a <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">typical pattern</a> in the <a href="http://www.mhpbooks.com/books/debt/">history of debt crises</a>, it is a tale that has been predominantly framed and managed in terms of morality. </p>
<p>For example, Wolfgang Schäuble, Germany’s finance minister, <a href="http://www.wsj.com/articles/germanys-schauble-sees-no-need-for-immediate-decision-on-greece-payments-1457438844">insists</a> that he cannot support Greece’s claim for relief because he lacks “a proper argument for the German lawmaker and the German public”. The truth is that there are overwhelming economic arguments for debt relief, including the fact that the current plan is <a href="http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion">self-defeating</a>. The requirement that Greece generates <a href="https://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06?barrier=true">massive budget surpluses</a> will only accelerate the <a href="http://www.politico.com/agenda/story/2015/07/greece-death-spiral-ahead-000152">death spiral</a> of the Greek economy, inevitably deteriorating its debt-servicing capacity.</p>
<p>But it is vain to fight with economic reason, when the problem is, <a href="http://www.theguardian.com/commentisfree/2015/jul/16/jurgen-habermas-eu-greece-debt-deal">among</a> <a href="http://www.iwh-halle.de/d/publik/iwhonline/io_2015-07.pdf">other</a> <a href="https://www.rt.com/news/310223-Strauss-Kahn-Greek-deal/">things</a>, profoundly governed by moral sentiments. An important issue when it comes to resolving the crisis is whether the Greek population – which has been <a href="https://pogiblog.atlatszo.hu/2015/06/27/corrupt-lazy-greeks-debunking-ethnic-stereotyping-substituting-economics/">systematically</a> <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">morally downgraded</a> – deserves debt relief. </p>
<p>The underlying moral struggle and associated <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">political impasse</a> was recently captured <a href="http://www.nytimes.com/2016/05/14/opinion/time-to-end-the-greek-debt-tragedy.html?_r=0">in a New York Times editorial</a>: </p>
<blockquote>
<p>The problem is Germany, Greece’s main national creditor: German federal elections will take place next year, and many German citizens feel that their hard work and thrift should not be squandered on rescuing the Greeks from the pain of their fiscal sins. </p>
</blockquote>
<p>According to the <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">dominant narrative</a> that has shaped public imagination, Greeks have been repeatedly rescued in order to maintain a profligate lifestyle. Against this backdrop, it is understandable that the prospect of debt relief is resisted on moral grounds. </p>
<p>But the underpinning story is flawed. </p>
<h2>False logic</h2>
<p>The root cause of Greece’s fiscal problem was public expenditure on a bloated and dysfunctional public sector, structurally designed to service <a href="http://eprints.lse.ac.uk/33826/">political clientelism</a> – not the Greek citizen. Greek cronyism was in turn heavily fed by profit-seeking institutions. They <a href="http://www.ft.com/intl/cms/s/0/8db1ae58-23b9-11e5-9c4e-a775d2b173ca.html#axzz498p15b5s">recklessly bought debt</a> from the eurozone periphery that was back then <a href="http://www.nytimes.com/2011/07/22/business/global/europes-new-bank-rules-still-favor-government-debt.html">treated as risk-free</a>. </p>
<p>But investors had underestimated how the waves triggered by the 2008 global financial crisis would affect the <a href="http://www.tandfonline.com/doi/abs/10.1080/09644008.2012.739614?journalCode=fgrp20">poorly designed</a> European monetary union. It was an accident waiting to happen and was first felt in Greece in 2010 when it became increasingly evident that Greek bonds could not be paid in full. </p>
<p>Shockingly enough, the solution was neither to have investors shoulder the consequences of their bad bets, nor to drastically fight the budgetary cause of the Greek deficit. <a href="http://www.independent.co.uk/news/business/comment/greece-crisis-imf-was-pushed-around-by-angela-merkel-and-nicholas-sarkozy-and-now-it-is-being-10356247.html">Defying even the IMF rulebook</a>, Europe’s political elites decided to keep both a dysfunctional state and an unsustainable sovereign debt in place. This was possible by financing Greek clientelism; but more importantly (and <a href="https://global.handelsblatt.com/edition/423/ressort/politics/article/study-finds-greek-bailouts-saved-banks-not-people">disproportionately</a>), by bailing out private investors – <a href="https://www.foreignaffairs.com/articles/greece/2015-07-07/pain-athens">especially</a> <a href="http://www.newyorker.com/news/john-cassidy/greeces-debt-burden-the-truth-finally-emerges">French and German banks</a>. </p>
<p>Of course, what was essentially a reimbursement of imprudent buyers of public debt has been deceptively depicted as a lofty act of European solidarity towards the Greek population. Greeks supposedly received money that could be fully repaid in due course. Likewise, Greek politicians equally misleadingly portrayed bailouts as “success stories” <a href="http://www.theguardian.com/world/2011/jul/17/greece-not-bankrupt-papandreou">helping Greece</a> from <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">going bankrupt</a>. </p>
<p>By not dealing with the essence of the debt crisis, the 2012 and 2015 bailouts were unavoidable in order to refinance an unpayable debt and recapitalise Greek banks (that were since suffering the side-effects of disastrous crisis management). And while the early bailout of debt was described as a bailout of Greeks, the subsequent <a href="https://rwer.wordpress.com/2015/07/15/stop-the-frenzy-please-its-just-about-rolling-over-the-debt/">rolling over</a> of the debt is even more <a href="http://www.ft.com/intl/cms/s/0/395ae5a0-142c-11e5-9bc5-00144feabdc0.html#axzz498p15b5s">misleadingly</a> portrayed as an endless influx of <a href="http://blogs.ft.com/brusselsblog/2015/06/25/leaked-greece-bailout-plan-sent-to-eurogroup/">desperately-needed</a> <a href="https://www.yahoo.com/news/eurozone-ministers-approve-first-tranche-greek-bailout-funds-181037147.html?ref=gs">injections of cash</a>. </p>
<p>Moreover, the conditions imposed on Greece in return for <a href="http://www.theguardian.com/world/2015/jun/29/where-did-the-greek-bailout-money-go">supposedly</a> <a href="http://www.cnbc.com/2015/06/16/cramer-greece-on-a-death-spiral-of-total-insanity.html">generous help</a> had <a href="https://theconversation.com/greek-parliament-passes-debt-agreement-but-european-democracy-is-on-its-knees-44624">little to do with economics</a>. Greece undoubtedly stands in needs of structural reforms (necessary for the modernisation of the Greek state – <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">not</a> the resolution of the debt crisis). But <a href="http://prospect.org/article/what-reform-strange-case-greece-and-europe">the “reforms” demanded from Greece</a> are mostly a mix of <a href="http://www.wsj.com/articles/SB10001424127887324235104578239563893526152">destructive austerity</a> and <a href="http://www8.gsb.columbia.edu/chazen/globalinsights/node/300">punitive policies</a>. They might be best understood as moral reforms of the sort commanded by a <a href="http://www.d.umn.edu/cla/faculty/jhamlin/1095/The%20Protestant%20Ethic%20and%20the%20Spirit%20of%20Capitalism.pdf">Calvinist ethic</a>. </p>
<p><a href="http://www.huffingtonpost.gr/christos-papadimitriou/story_b_7627596.html">Predictably</a> <a href="http://www.ft.com/intl/cms/s/0/9a030cee-24f5-11e2-86fb-00144feabdc0.html#axzz498p15b5s">enough</a>, not allowing Greece to sustainably restructure its debts on the one hand, while imposing unreasonable “bailout conditions” on the other, marked the <a href="http://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html">greatest economic collapse in modern times</a>. All the while Greece is <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">again blamed</a> for failing to recover. </p>
<h2>Reshaping our moral imagination</h2>
<p>In moving beyond a false morality tale, it is high time we start appreciating that recovery is not possible precisely because of the bailout programmes – not in spite of them. In so doing, we must restructure the way the crisis is framed, since the very words we use nurture an irresistible inclination to blame Greece for not achieving what successive “rescue aids” and “reforms” actually render impossible. </p>
<p>The associated fallacy that Greece is paying for its own fiscal sins must also be put to bed. This was mostly true until 2010. But if punitive economics could be somehow justifiable in the offset of the crisis, they have since become root causes of the current state of the Greek economy. German leadership cannot for much longer afford to claim a higher moral ground and put the blame squarely on Greece – let alone pretend to be the saviour of an ungrateful and defiant population. </p>
<p>I do not even go so far as to contend that Greece deserves debt relief on moral grounds. What I more moderately maintain is that the debt problem is unlikely to be resolved soon due to a moral imagination that has been misguided by the toxic belief that Greece has repeatedly received generous help, and is still suffering for its original fiscal sins. As an antidote, we need to disarm the vindictive morality tale that has been deceptively constructed and allow economic sense to take center stage.</p><img src="https://counter.theconversation.com/content/59754/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stratos Ramoglou does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economic sense has been largely irrelevant in the unfolding Greek drama. Instead, morality has been at its heart.Stratos Ramoglou, Associate professor, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/459082015-08-12T05:37:55Z2015-08-12T05:37:55ZDealing with Greek debt needs a radical rethink – lessons from Japan<figure><img src="https://images.theconversation.com/files/91437/original/image-20150811-11101-imo50m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/gallery-578401p1.html">shutterstock.com</a></span></figcaption></figure><p>After weeks of negotiations and months of uncertainty, Greece <a href="http://www.bbc.co.uk/news/business-33858660">has agreed to</a> an €86 billion bailout deal with its international creditors. But there are uncertainties about whether its terms are sufficient – particularly the question of <a href="https://theconversation.com/greece-when-is-it-time-to-forgive-debt-44022">debt relief</a>. And then there is Europe’s underlying need to come up with a more sustainable way of dealing with growing sovereign debt. </p>
<p>The big question is how? We certainly don’t want to go through the same kind of crisis we have seen in Greece if other European countries such as Portugal, Spain or even Italy find themselves in trouble. </p>
<p>And yet, Greece’s sovereign debt is not the world’s largest. Though presented as a mountainous <a href="http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina225&plugin=1">177% of GDP</a>, Japan is the global leader in public sector debt, which lies at a far more impressive level of <a href="http://www.tradingeconomics.com/japan/government-debt-to-gdp">234% of GDP</a>.</p>
<p>Given such an astounding number, I wondered what I might see when I stepped off the plane in Tokyo recently. A few weeks prior, I had been in Athens and witnessed long queues outside cash machines, impassioned political debate from nearly everyone you met, and massive street protests. Greece was a <a href="https://theconversation.com/why-the-no-vote-was-a-triumph-of-democracy-over-austerity-44316">society on the edge</a>. </p>
<p>But Japan was utterly different. The cash machines dispensed any amount of cash. The banks had healthy balance sheets. In a week of criss-crossing Tokyo, I only saw one tiny protest manned by a few elderly people. Those I spoke to knew their nation faced challenges. But the big issues of national debate were <a href="https://theconversation.com/japan-is-regaining-lost-military-muscle-and-the-us-needs-it-42277">defence policy</a> and the <a href="http://www.theguardian.com/world/2015/jul/17/japan-scraps-zaha-hadids-tokyo-olympic-stadium-design">Olympic stadium</a> – not national debt. </p>
<h2>Big differences</h2>
<p>Why, I asked myself, should Greece be on its knees, while Japan appeared to be quietly performing well? As I started to dig, I discovered a few important differences. The first is that the Japanese government debt is partially the creation of accounting. A significant chunk of Japanese government debt is owed to itself. If you account for the amount of debt owed to other parts of the government, the debt to GDP ratio falls to <a href="http://www.telegraph.co.uk/finance/comment/10392248/Its-not-yet-the-end-of-the-world-as-we-know-it-but-watch-Japans-debt-grow.html">140%</a>. </p>
<p>The second distinguishing factor of Japanese debt is that it is largely owed to Japanese investors. About 90% of debt is <a href="https://cama.crawford.anu.edu.au/amw2013/doc/DefyingGravityEconomicPolicy20130317.pdf">held by Japanese residents</a>. The Japanese have very high rates of household savings, and much of this is invested in Japanese government bonds. This is strikingly different to Greece, where the great majority of the country’s debt is owed to foreigners – the IMF, eurozone countries and the European Central Bank. This means that, while Japan relies on its own population (such as pensioners and depositors), the Greeks have to negotiate with Northern European technocrats. And as they have recently discovered, this can significantly undermine national sovereignty. </p>
<p>The third big difference is that Japan still has significant room to raise taxes to pay off its debt. Currently the country’s consumption tax <a href="http://www.ft.com/cms/s/0/438d8d36-b2a0-11e4-b234-00144feab7de.html#axzz3iQ4B9wD1">stands at 8%</a>. This is much lower than rates in other developed countries such as the UK <a href="https://www.gov.uk/vat-rates">where VAT is 20%</a>. The rate in Greece is currently <a href="http://www.theguardian.com/business/2015/jul/13/greece-bailout-agreement-key-points-grexit">between 6.3% and 23%</a> for different kinds of goods. </p>
<p>However, there is a catch. Recently, the Japanese government tried raising the rate to 10%, which <a href="http://www.ft.com/cms/s/0/a0a023c0-2f2f-11e4-a054-00144feabdc0.html">caused the economy to go into reverse</a>. As a result, the government delayed the tax rise until 2017. Some Japanese economists claim the country’s debt is unsustainable and have urged the government to tackle it more aggressively <a href="http://www.ft.com/cms/s/0/1ccc6df2-a86f-11e3-a946-00144feab7de.html#axzz3gYFcJlxS">through wide-ranging austerity</a> measures. Demographic factors make this more urgent. Japan’s rapidly ageing society will mean that tax receipts fall as the workforce shrinks in the coming years. </p>
<h2>The issue of control</h2>
<p>The next big difference from Greece is that Japan has control over its own monetary policy. If it wants to start printing money, it can. Thus, the Bank of Japan has been printing money to buy government debt, helping turn its public debt burden <a href="http://www.project-syndicate.org/commentary/japan-monetization-government-debt-by-adair-turner-2015-03">into an illusion</a>. Greece, in contrast, does not have this option. Tied as it is to the eurozone, it cannot decrease the value of its currency in order to make its debt cheaper and exports more attractive. </p>
<p>Then there is Japan’s recent fiscal policy. In response to lacklustre economic performance (and consequently low tax receipts), the Abe government has launched a programme of <a href="http://www.cfr.org/japan/abenomics-japanese-economy/p30383">massive fiscal stimulus</a>. This traditional Keynesian measure has led to modest growth. Rather than savagely cutting back state spending at a time when the economy is languishing (as Greece has done as part of its bailout packages), Japan has done exactly the opposite – used state spending to encourage economic activity.</p>
<p>Japan has also continued to have many basic economic strengths. It has leading global companies which are well run (think big companies like Toyota and Sony). But it also has strengths in a wide range of other sectors including finance, retail and information services. It also has an <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp242.pdf">effective public sector</a> which is able to deliver public services and support Japanese industry. By contrast, the Greek economy’s strengths are largely in two areas: shipping and tourism. Its public sector is <a href="http://www.theguardian.com/world/2014/dec/03/greece-corruption-alive-and-well">notoriously corrupt</a>. </p>
<p>The final significant difference is that while Japan is seen as a reputable borrower on international markets, Greece has lost legitimacy with most of its creditors after tense negotiations and repeated rounds of bailouts. The IMF has publicly stated it <a href="http://www.nytimes.com/2015/07/15/business/international/international-monetary-fund-proposed-greek-debt-relief.html?_r=0">doubts Greece’s ability to repay its debts</a>. This is not the case for Japan.</p>
<h2>Lessons from Japan</h2>
<p>Everything is not rosy in Japan and the country clearly has to deal with its huge national debt. But these striking differences show there are lessons that Greece – and Europe more widely – might learn from living and dealing with debt, without it being such a crisis: </p>
<ol>
<li><p>When debt is owned by foreigners, they are often more keen on appropriating assets and enforcing harsh austerity policies that they don’t have to live with. </p></li>
<li><p>You can cut debt by creating growth rather than just implementing austerity. Japan has showed that traditional Keynesian policies can create growth, which raises tax receipts and can be used to pay down debt. </p></li>
<li><p>Having control over your monetary policy is important. As the eurozone controls how much money is created, individual countries can’t print their way out of debt. </p></li>
<li><p>Building a strong industrial and public sector base for ongoing wealth creation is vital. This means building companies which offer genuinely excellent products and services and ensuring an effective and well-run public sector. </p></li>
<li><p>Maintaining legitimacy with your creditors seems to be of the utmost importance. Although many of Yanis Varoufakis’s detractors now admit that the former finance minister’s analysis of the dynamics behind the Greek debt crisis were broadly correct, they also <a href="http://www.ft.com/cms/s/2/edb4cfe8-2b0b-11e5-acfb-cbd2e1c81cca.html#axzz3gYFcJlxS">clearly loathe the man</a>. This might not be the best negotiating position when asking for some leniency from debtors. </p></li>
</ol>
<p>Ultimately, however, Japan shows that alternatives to hard-nosed austerity are possible. The European experience has shown us that debt crises can effectively shift the power to decide on policies from democratically elected national governments to unelected technocrats from international financial agencies. Furthermore, debt crises can often trap economies in negative spirals of declining tax receipts, cuts to spending and a rapidly shirking economy. </p>
<p>Fresh thinking is clearly needed if we want to avoid a perpetuation of the Greek and eurozone crisis. The very idea of sovereign debt being written in stone is <a href="http://blogs.lse.ac.uk/lsereviewofbooks/2014/05/23/book-review-rethinking-sovereign-debt-politics-reputation-and-legitimacy-in-modern-finance-odette-lienau/">worth challenging</a> along with a rethink of how risk is shared more fairly between creditors and debtors, so that when things go bad they both share the pain. </p>
<p>As Japan shows, living with high levels of debt does not have to be the Greek tragedy we have seen in recent months and it’s time to get out of the one-way street of austerity.</p><img src="https://counter.theconversation.com/content/45908/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Japan has higher debt levels than Greece and yet it doesn’t need international bailouts. Why?Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/446322015-07-14T10:25:05Z2015-07-14T10:25:05ZAfter Greek deal, Germany is once again seen as Europe’s villain<p>The German chancellor, Angela Merkel, and her team of negotiators seem to have pulled it off once again. Or so it seems. A deal on Greece has been done at a time when many thought it would no longer be possible. Official German announcements regarded it as Europe coming together in a time of crisis and Greece staying “<a href="http://www.theguardian.com/commentisfree/2015/jul/13/euro-family-angela-merkel-greek-bailout?CMP=share_btn_tw">in the euro family</a>”. The outlines of the deal look very tough indeed, tougher than what Greece proposed and tougher than the deal Tsipras had rejected earlier in the year. </p>
<p>Comments from insiders suggest that Tsipras was exposed to “<a href="http://www.theguardian.com/business/2015/jul/12/greek-crisis-surrender-fiscal-sovereignty-in-return-for-bailout-merkel-tells-tsipras">mental waterboarding</a>” and “<a href="http://www.zeit.de/wirtschaft/2015-07/griechenland-aktuell-alexis-tsipras-live-150713?utm_content=zeitde_redpost+_link_sf&utm_campaign=ref&utm_source=twitter_zonaudev_int&utm_medium=sm&wt_zmc=sm.int.zonaudev.twitter.ref.zeitde.redpost.link.sf">crucified</a>”. Tsipras was made to cave in. He was made to agree to demands that he – and <a href="https://theconversation.com/victory-for-politics-of-defiance-in-greece-means-the-real-crisis-starts-now-44317">60% of the Greek electorate</a> – had regarded as unacceptable only a few days earlier. If anything is power, this is.</p>
<p>But Germany is now perceived to have won by humiliating its opponent. There have been calls to boycott the country’s goods, and Nobel prize-winning economist <a href="http://krugman.blogs.nytimes.com/2015/07/12/killing-the-european-project/?_r=1">Paul Krugman agreed</a> with the take of #ThisIsACoup. Talk of a “Fourth Reich” is back as well in full force. Germany has come out as the winner in only the most basic sense.</p>
<p>This is at best a pyrrhic victory. At worst, it is a diplomatic disaster – and it is not even certain yet that the deal will have public support in Germany. The German electorate’s preference would probably have been not to do a deal, although there now seems to be a <a href="http://www.zeit.de/wirtschaft/2015-07/griechenland-aktuell-alexis-tsipras-live-150713">small majority in favour of what has been achieved</a>. </p>
<h2>A failure of diplomacy</h2>
<p>Of course, the crisis and negotiations are far more complex to be attributed to Merkel and the German government alone. But it is worth asking what her leadership has achieved – and what it hasn’t. German finance minister, Wolfgang Schäuble, proposed, at the 11th hour on Saturday, the possibility of Greece <a href="http://www.ft.com/cms/s/0/f908e534-2942-11e5-8db8-c033edba8a6e.html#axzz3flTmlcs5">temporarily leaving the euro</a>. Whether or not this was a serious proposal or merely a negotiating tactic, it was a disastrous move in terms of public diplomacy. </p>
<p>It has exposed Schäuble, and thus Germany, as chief scapegoat in the European public realm. That may work to rally the troops in domestic politics, but it does not play out so well from a foreign policy perspective. </p>
<p>The French president, François Hollande, and his Italian colleague Matteo Renzi will not have been amused: they had just made it clear that they wanted to keep Greece in the euro. As a result, Hollande has emerged as the mediator, within Europe and across the Atlantic. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"620578579978539009"}"></div></p>
<p>Germany, meanwhile, has once again become the embodiment of what is wrong with Europe; it is seen as a callous operator that shows little interest in the suffering of the Greek population. These perceptions will matter in the coming months and years as the European Union grapples with the political fallout from this crisis. </p>
<h2>New order</h2>
<p>But the German government’s tactics in Brussels last weekend gave away even more. Merkel and Schäuble’s open display of power may have cost Germany the key foundation on which that power was built: trust – and the belief that it was Germany that would come to Europe’s rescue and heal the wounds of division. </p>
<p>Ultimately, German domestic politics triumphed over German foreign policy. That is not a good outcome. Good leadership would have meant balancing the two. It would have also meant communicating Germany’s aims and interests effectively. </p>
<p>To be sure, the politics behind these negotiations are the results of broader shifts in the landscape of European politics since 1989/90. We are witnessing the <a href="https://theconversation.com/greece-a-europe-forged-in-one-crisis-may-have-laid-the-foundations-for-the-next-44607">unravelling of the late 20th-century European order</a>. In that order, the balance between national sovereignty and European bureaucracy was hidden behind lofty values. </p>
<p>“Europe” was attractive then as a project of civilisation and anti-Communist social and political liberalism, and as a way to avoid war. This is why Greece applied to join the European project in 1975 – and this is why it was admitted in 1981. But this is also why any problems were overlooked along the way. The Cold War froze this consensus. But when the Cold War was over and when the memory of the World War II was beginning to fade away, only a few academics and commentators thought about what would happen to the European project and the values on which it was built.</p>
<h2>The problem with Merkel</h2>
<p>This is where another problem with <a href="https://theconversation.com/what-angela-merkel-does-next-will-define-the-future-of-europe-44328">Merkel’s leadership style</a> comes in: she delays decisions in order to build pressure on the opponent. She works within structures rather than using a crisis as opportunity for positive change. </p>
<p>None of the issues that emerged during the recent incarnation of the Greek crisis was new: the threat of populism, the lack of capacity of the Greek state, the serious wounds that austerity has wrought on Greek society. The lack of social solidarity between EU members was already in evidence before the crisis.</p>
<p>Merkel and her government are not the only ones to have sidestepped these issues. The failure of German foreign policy is a symptom of this larger problem with the European Union. But Merkel and her government do not even appear to have tried to tackle the underlying issues. </p>
<p>By the time she had a last chance this weekend, it might have been already too late. But Merkel’s leadership style and the fallout of the crisis have made a serious problem even worse. The Greek crisis is a textbook example of how not to handle public diplomacy. Germany has emerged as the scapegoat, and the European Union (not just the eurozone) has been left exposed to national sentiment and populist politicking. And amid all this, the Greek people are still hurting.</p><img src="https://counter.theconversation.com/content/44632/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Holger Nehring does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Angela Merkel chose domestic politics over foreign policy, and the results could be disastrous.Holger Nehring, Professor in Contemporary European History, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/445992015-07-14T01:18:49Z2015-07-14T01:18:49ZA Greek tragedy: the long-lasting damage of Tsipras’ adventurism<p>The same economic package Greek voters so vehemently rejected just a week ago is back with a vengeance, this time with the support of their Prime Minister Alexis Tsipras.</p>
<p>Most likely, this is the best possible outcome for all parties involved, especially the Greeks. </p>
<p>The alternative would have been a disorderly exit of Greece from the Euro area (the so called “Grexit”). This would have led to high inflation, more fiscal profligacy, the collapse of the banking system, and ultimately a further impoverishment of middle and lower income Greeks. </p>
<p>There would be scope for celebration if it wasn’t for the damage that Tsipras’ adventurous negotiating strategy has caused to the European social construct. </p>
<h2>Same conditions, a week after</h2>
<p>The package of conditions on which Greece and other European countries agreed yesterday is remarkably similar to the package that was rejected in the Greek referendum of 5 July.</p>
<p>According to the Euro Summit statement from the <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">European Council</a>, Greek authorities have agreed to a first set of measures to be approved by the Parliament within the next 48 hours:</p>
<ul>
<li>Streamlining the VAT system and broadening the tax base to increase revenues</li>
<li>Improving the long-term sustainability of the pension system</li>
<li>Introducing quasi-automatic spending cuts in case of deviation from ambitious primary surplus targets</li>
<li>Safeguarding the independence of the National Statistical Office</li>
<li>Adopting a new Code of Civil procedure to accelerate the judicial process and reduce costs (to be approved by 22 July).</li>
</ul>
<p>Subsequently, Greek authorities will need to:</p>
<ul>
<li>Carry out ambitious pension reforms</li>
<li>Privatise the electricity transmission network</li>
<li>Review and modernise collective bargaining institutions and align labour market policies with international and European best practices</li>
<li>Strengthen banking governance and take decisive action on non-performing loans</li>
<li>Develop a significantly scaled-up privatisation programme</li>
<li>Reform public administration to reduce costs and increase its efficiency.</li>
</ul>
<p>In exchange for that, Greece should receive between €82 and €86 billion, of which €7 billion by 20 July (when a repayment to the European Central Bank is due). Part of this package, for a total of up to €25 billion, may be used to constitute a buffer for the banking sector in order to address potential bank recapitalisation and resolution costs.</p>
<p>The language is different, the details are still a bit sketchy, but it is easy to recognise the many similarities between this list and the document that was rejected in the <a href="http://theconversation.com/grexiting-why-you-should-not-only-blame-the-big-bad-creditors-44125">referendum</a>.</p>
<p>So, Tsipras has taken Greece, and whole of Europe, through a new odyssey just to end up exactly where he had started. It is not surprising that many within his party are unhappy with this outcome and threaten to stop, or at least slow down, the approval of the first set of measures.</p>
<p>At the same time, what should the Greeks who voted no in the referendum think? Wasn’t the referendum supposed to reaffirm Greece’s sovereignty and to strengthen Tsipras position at the negotiation table? The mind goes back to Shakespeare and his Much Ado About Nothing. </p>
<p>The referendum did not help Tsipras and Greece to obtain a “better deal” with creditors simply because the deal on the table two weeks ago was already very reasonable. It did not involve any new austerity measures, but it only set some sensible requests to address structural weakness in Greek’s budget and public administration. </p>
<p>Making things even easier for Greece would have been impossible without creating serious issues of moral hazard. </p>
<h2>New scars, a long way into the future</h2>
<p>Not only did the referendum not improve Greece’s position in negotiations, it also contributed to creating new grievances and to alienating support for Greece in the rest of Europe.</p>
<p>By voting against the bail-out plan, Greek citizens (ill-advised by their government) sent a signal to the rest of Europe. Decoded, the signal sounded like “bail us out at no conditions”. A minority of Europeans might have fallen for the romantic idea of David fighting Goliath. </p>
<p>But the majority will now start wondering why their taxes should be used to rescue Greece if its citizens were unwilling to make a minimum effort to re-dress their own fiscal and financial situation.</p>
<p>The risk here is not the package being rejected by the Greek parliament or by a hypothetical new referendum in Greece. </p>
<p>The real risk is European citizens demanding to be given the possibility to vote on the question “are you willing to bail Greece out once more?”. A referendum like this could really put an end to European unification experience.</p>
<p>The loss of financial capital in this crisis has been considerable. But the greater cost, one to which Tsipras has significantly contributed with his tactics and rhetoric, is the destruction of social capital and the loss of trust upon which a community of States or Peoples is funded. </p>
<p>Unfortunately for the European “community”, this is a cost that nobody can bail out.</p><img src="https://counter.theconversation.com/content/44599/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics..</span></em></p>The bail-out package that Greeks rejected is essentially back. The chaotic process that led to it has lost Greece the trust of the eurozone.Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443232015-07-07T05:24:17Z2015-07-07T05:24:17ZAs the Greek crisis deepens, academics must encourage the public to think again<p>On a surprisingly cool summer evening in Athens, I walked down a shallow slope onto a well-manicured athletics field encircled by a 400m running track. As hundreds of business school professors scanned the dozens of tables for a convenient place, we talked about scandals in our research areas, the latest round of divorces, the depressingly poor quality of papers at the conference and the stupid things our university senior managers have been doing in the past year. </p>
<p>This is a familiar scene for many academics. But there was something odd about this particular conference dinner. And it was not that it was held in the middle of an athletics field. What was really strange was the location of this particular athletics field – half-way between two huge political rallies held in Greece on the Friday before the country’s first referendum in decades.</p>
<p>In two days’ time, Greeks were going <a href="https://theconversation.com/the-real-question-being-asked-of-greek-voters-in-the-referendum-44203">to the polls</a> to vote on whether they agreed to the terms and conditions of a third bail-out package proposed by the troika (the International Monetary Fund, European Union and European Central Bank). As the Greek economy unwound, more than 1,000 business school researchers who were dining on this athletics field had met to <a href="http://www.egosnet.org/2015_athens/general_theme">discuss “the examined life”</a>.</p>
<p>As the protests got more heated, the shouts and strains of music wafted across the running track to us diners. Fearing the conversation might be disturbed, the band played louder. One Danish professor appeared among the diners waving two Greek flags. He was quickly disarmed of these dangerous weapons by two angry conference-goers who were worried that this show of partisanship might put their children in danger. The children, it emerged, were asleep in a hotel room two kilometres away. </p>
<h2>Stark disconnect</h2>
<p>While professional hierarchies were momentarily abandoned on the dance floor, the two huge protests outside began to wind their way to a close. As the protestors carrying placards started slowly making their way home, they passed by the athletics field. A few of the observant noticed something was going on inside, and took a closer look through the gates at what must have looked like a grand summer wedding party.</p>
<p>On one side of the fence there were a large number of Greeks facing evaporating economic prospects with only <a href="https://theconversation.com/life-under-austerity-shows-why-syriza-is-fighting-it-so-hard-42953">deepening social suffering</a> to look forward to. On the other side, there was a fairly small number of members of the academic elite (including myself) who are still lucky enough to have access to travel funds which allow them to fly around the world to talk about incomprehensible topics. </p>
<p>We may sit at the table and calmly discuss the Greek crisis, but we all knew we would be leaving the country the following day, so we didn’t need to take things too seriously. The protestors outside didn’t have this option. While the business school professors inside the stadium would be complaining about delayed flights as they waited at the airport the following day, the Greeks in the streets would be queuing at a cash machine to withdraw their daily allowance of €60.</p>
<p>While the academic community works towards clever theoretical syntheses in our little lawned enclave of comfortable scholarship, the world outside is quickly falling apart. We are often starkly disconnected from it. This is what happens when economists viciously debate their blackboard equations, social theorists get worked up about the correct reading of Michel Foucault’s last lectures, or natural scientists lock horns over the latest methodological advances. </p>
<p>The disconnect can be comfortable. It allows us to keep our own rituals and routines in place. But it is also potentially fatal. If we debate about the details as the world around us explodes, we will become at best irrelevant, and at worst extinct. </p>
<h2>Think differently</h2>
<p>To avoid this scenario, we must look up from our academic debates and hear the cries all around us. Some might be tempted to jump up and dash off into the streets in protest. Others may try their hand at the new and increasingly lucrative “impact” game by showing their work has had some marginal influence on government policy. </p>
<p>Both these responses are important. But we would be deluding ourselves if we think academics should all become wannabe activists or policy wonks. This would be an abdication of what we as academics do best: encourage people to think about the world in a rigorous and critical way. By asking people to think again, we can have a far more important impact than any policy intervention or street protestor might. </p>
<p>At a minimum, we should play a vital role in dismissing much of the empty and baseless talk which passes for public debate. But, when things go well, we can help to reframe public issues in ways which might have been inconceivable even a few years ago. Just think of the <a href="https://theconversation.com/piketty-has-redefined-capital-after-200-years-of-confusion-25770">impact</a> which Thomas Piketty’s book on inequality or <a href="http://www.nybooks.com/articles/archives/2013/may/09/debt-we-shouldnt-pay/">David Graeber’s book on debt</a> have had on the public conversation in the past few years.</p>
<p>Two days after the dinner ended, I was sitting at home in London watching the celebrations of a <a href="https://theconversation.com/greece-votes-no-experts-respond-44231">resounding victory for No</a> in Syntagma square on television. Scrolling through my Twitter feed, I saw the <a href="http://www.standard.co.uk/business/business-news/greek-debt-crisis-analyst-reaction-after--greeks-reject-austerity-10367959.html">dire predictions</a> from the financial analysts. While worlds apart, these two groups seem to agree on one thing: we can’t kick the can down the road any further. Something needs to fundamentally change. </p>
<p>Both those celebrating in Syntagma square and the financial analysts in London and Frankfurt have recognised that we are facing a wicked problem which will become ever more wicked by the day. We need to face up to it. Doing this requires tough decisions, and action. </p>
<p>But most importantly, it requires fresh thinking and reframing of the problem in ways which allows novel approaches to arise. What we as academics can add is this capacity for novel and unexpected thinking about pressing public issues. Perhaps, we should heed the words of the <a href="https://www.youtube.com/watch?v=IgR6uaVqWsQ">Slovenian philosopher Slavoj Zizek</a> that in times of crisis: “Don’t just act. Think.”</p><img src="https://counter.theconversation.com/content/44323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As professors, we must look up from our cosy academic debates and hear the cries around us.Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443522015-07-07T02:12:47Z2015-07-07T02:12:47ZVaroufakis exit is not the game changer the EU needs<p>Many observers of the Greek debt crisis believed that after the referendum matters should return to the negotiating table in Brussels for a new round of painful arm-wrestling between Greece and the troika. Before the referendum, it was widely held that a yes vote would shift the balance towards the troika, while a no vote would increase Greece’s leverage in the negotiations. </p>
<p>The underlying assumption has been that it is perfectly rational for the troika and Greece to return to the negotiating table after the referendum. But within hours of the humiliating referendum outcome, the troika regrouped, stood up and delivered a <a href="http://yanisvaroufakis.eu/2015/07/06/minister-no-more/">new blow</a>, resulting in the resignation of Greek Finance Minister Yanis Varoufakis.</p>
<p>It is tempting to believe the departure of Varoufakis is a paradigm changer. In reality it is a non sequitur. The eurozone is in real crisis and changing the finance minister of Greece is akin to shuffling the deckchairs on the Titanic. </p>
<p>The minister’s fate was not a shock to everyone - he failed to create <a href="https://theconversation.com/the-next-card-yanis-varoufakis-will-play-37230">sufficient ambiguity</a>. Neither Varoufakis nor the troika has ever mastered the art of tightrope walking, so the negotiations between Greece and its creditors became fraught with deeper and deeper challenges as time wore on. </p>
<p>Just before the referendum took place, the IMF had started <a>recanting its position</a> on Greece, acknowledging Greece would need far more support, along with debt relief, to turn its economy around. This makes the negotiations in Brussels a wild goose chase and both parties know of their <a href="http://www.theguardian.com/business/live/2015/jun/24/greek-crisis-eurogroup-meeting-tsipras-backlash-live">futility</a>. Would it be fair to ask whether the negotiations were a hoax?</p>
<h2>Rebuilding the flawed EU</h2>
<p>It is an open secret today that the IMF’s policy stance on Greece was a victim of Dominique Strauss-Kahn. In his usual style, he brushed aside professional advice from his economists and objections from many developed nations and put the rock of austerity around the neck of Greece, leading to economic stagnation.</p>
<p>The troika sought to make Greece compete in an international swimming championship when Greece couldn’t even float with that rock tied to its neck.</p>
<p>Deep down, the European Union has fundamental flaws. Any attempt to put a fix on the Greek crisis without rectifying these fundamental flaws will inevitably fail regardless of who is the finance minister of Greece or Germany. </p>
<p>The EU is nothing but a dualistic system with a north-south divide in productivity: most of the southern economies can’t compete with the northern ones, which inevitably leads to trade imbalances between them. Since the entry of Greece into the EU, the north has maintained a trade surplus while the south has suffered from a trade deficit. </p>
<p>The desire of southern governments to create investment booms for increasing productivity led to their indebtedness, with little impacts on their relative productivity vis-à-vis northern EU nations, but with a rising gap in their cost of production due to increasing wages. This begs a question of how the EU can overcome such long-run problems.</p>
<h2>More lessons from Germany</h2>
<p>One possible model can be found in Germany’s constitution.</p>
<p>The German Basic Law (Germany’s constitution) is founded on the philosophy of ensuring each tier of government has adequate access to financial resources. It is graphic about the allocation of revenues from the major taxes among the Federation, Länder (German states) and municipal governments. All three tiers of government share the personal income tax while the Federation and the Länder share corporate taxes and the proceeds from the German value-added tax (VAT). Beyond this agreement, even if there is no constitutional mandate, a business tax is also shared among these three tiers of government. This fiscal equalisation ensures that the poorer Länder are equalised to at least 95% of the average revenues of all Länder. </p>
<p>In the absence of fiscal equalisation and the divergence in productivity, the current Greek negotiations will fail to overcome economic dualism in the EU. </p>
<p>The EU will move from one crisis to another if it relies solely on negotiations of debts without real reforms in the fiscal arena.</p><img src="https://counter.theconversation.com/content/44352/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Partha Gangopadhyay does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ongoing negotiations between Greece and the troika are likely to prove futile - what’s needed is a complete rethink of EU’s dualistic system.Partha Gangopadhyay, Associate Professor of Economics, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443282015-07-06T16:00:02Z2015-07-06T16:00:02ZWhat Angela Merkel does next will define the future of Europe<p>In the week before the Greek referendum, leading German tabloid BILD conducted its own referendum on what should happen to Greece. The question: “Should we support Greece with further taxpayers’ billions?”, pointed out that Germany had already poured €88 billion down the Greek sinkhole. Almost <a href="http://www.bild.de/politik/inland/griechenland-krise/das-bild-referendum-41599084.bild.html">90% of BILD readers voted No</a>. Another <a href="http://www.gazzetta.gr/plus/article/768891/majority-germans-feel-compassion-greeks-bild-poll-finds">poll printed in the same paper</a> on Saturday suggested that 78% felt compassionate towards the Greek population. And 56% believed German would be unaffected by the outcome of the referendum and any consequences this may have. </p>
<p>Like many Greeks, Germans still believe – optimistically – that their government has the sovereignty to make unilateral decisions and that they are shielded against the vagaries of the international economic and financial system. But they are also still keen to show that they are the star pupils in European solidarity: this explains the high levels of compassion for the Greek population. In tune with this the German vice-chancellor, Sigmar Gabriel – a social democrat – has just <a href="http://www.eubusiness.com/news-eu/greece-politics.12xq">offered to consider humanitarian aid for Greece</a>, should it be required.</p>
<p>What does this mean for German politics? The Greek No is a major defeat for the chancellor, Angela Merkel, both domestically and internationally. Most politicians from Merkel’s Christian Democrats are pessimistic about the possibility of a new deal and many have interpreted the result as a vote against the euro, if not a vote against a European Union. Only the small quasi-socialist Left Party, whose parliamentary party had even supported a previous austerity deal for Greece, and, to a lesser extent, the Greens, <a href="http://www.faz.net/aktuell/politik/europaeische-union/reaktion-auf-griechenland-referendum-aus-cdu-und-spd-13687313-p2.html">also much diminished since the last election</a>, are arguing in favour of Syriza.</p>
<h2>Merkel’s choice</h2>
<p>All this poses a massive problem for Merkel. She is so far only on record saying cryptically that she “<a href="http://www.theguardian.com/world/2015/jul/05/germany-greek-referendum-anger-solidarity">respected</a>” the outcome of the Greek vote, and it is very likely that she will push for further negotiations. But things have got even trickier this time round. The outcome of the Greek referendum has made it obvious to a country obsessed with sovereignty that there are things even she cannot control. </p>
<p>At the same time, Merkel wants to be seen as powerful negotiator, not the deal breaker. Her legacy as a pro-European, the East German who has brought the reunified Germany into a renewed European Union, is at stake. This is why her finance minister <a href="http://www.ft.com/cms/s/0/d69ceb4c-22ff-11e5-bd83-71cb60e8f08c.html#axzz3f7gnCvMe">Wolfgang Schäuble</a> was the designated bad cop in negotiations. But this will come at a cost: the vast majority of the German population and her own party are pulling her away from clinching a deal.</p>
<p>Two of Merkel’s favourite ways of dealing with high-pressure crisis situations won’t work. The first is to hang the responsible minister out to dry and then to sack them when the plan does not work out, as was the case with her <a href="http://www.bbc.co.uk/news/world-europe-18092779">environment minister, Norbert Roettgen, in 2012 after a poor performance in regional elections</a>. But the hard line that Schäuble took towards Greece is hugely popular in the German population. And, if anything, his support base in Merkel’s Christian Democratic Union (CDU) is probably greater than Merkel’s own. </p>
<p>The second is to wait for a long time, build up the pressure and then use that pressure to clinch a deal at the very last minute, claiming that there was the need to act due to some higher authority, which places a disclaimer on her direct responsibility, just in case. This happened during previous discussions about a <a href="http://news.bbc.co.uk/1/hi/business/8656649.stm">Greek rescue package in spring 2010</a>. But buying time is unlikely to work in this situation. In fact, time is running out: the economic and financial conditions in Greece are getting worse by the day, if not the hour. And Merkel will be unable to hide behind others.</p>
<p>Merkel now faces the choice of pleasing her electorate and being remembered as the person who finished off a key element of European integration; or trying to rescue Greece, which will stoke euroscepticism in Germany and is likely to reduce the voter base for her party. There is no current alternative to the CDU on the right, given that the eurosceptic Alternative for Germany is <a href="http://www.independent.co.uk/news/world/europe/frauke-petry-appointed-afds-new-leader-as-german-eurosceptics-turn-to-the-right-10366536.html">riven by internal strife</a>. But it is only a matter of time until full-scale anti-EU populism seen in France and the UK will come to Germany.</p>
<h2>A crisis of sovereignty</h2>
<p>Merkel’s legacy is tied to the fate of the eurozone. Focused on tactics rather than strategy, Merkel’s way of dealing with things has not worked out well in this context. She has run up against structures that proved immune to her tactics: the highly complex machinery of the EU, with its many committees, forums, lobby groups and difficult decision making, and the popular will of another EU member state. </p>
<p>The crisis in Greece is an economic and financial disaster that may turn into a humanitarian crisis. It is also, fundamentally, a crisis of national sovereignty in the context of the European Union: one popular will is pitted against another, without an effective means of mediating between the two. </p>
<p>As French economist Thomas Piketty <a href="https://medium.com/@gavinschalliol/thomas-piketty-germany-has-never-repaid-7b5e7add6fff">pointed out</a> in an interview with the German weekly Die Zeit last week, debt relief for post-Nazi Germany after World War II was a key part of that country’s success story, a part that Germans have so far ignored. Germany has also always been less corporatist and more individualist, more free market and less compassionate than people have come to believe.</p>
<p>Merkel can now show true leadership rather than just tactical manouevres: starting an open debate about the parameters of European integration and about the German model. There is, still, a tiny bit of time left for Merkel to find her moment.</p><img src="https://counter.theconversation.com/content/44328/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Holger Nehring does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Angela Merkel is in a tight spot, and her usual tactics won’t work.Holger Nehring, Professor in Contemporary European History, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442282015-07-06T04:19:53Z2015-07-06T04:19:53ZGreece still has options, as long as panic doesn’t win<p>Even before the result of the Greek referendum, it was clear the overwhelming majority of Greek citizens want to stay in the eurozone and see an end to punishing austerity.</p>
<p>In contemplating the options now available to Greece the question is whether her creditors will allow that combination.</p>
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<p>The fundamental economic fact that must be dealt with is the inexorable logic of debt sustainability. For a nation state, this depends upon the trajectories over time of just three sets of variables: GDP growth rates, interest rates on public debt and primary government budget surpluses (budget surpluses net of interest payments on existing public debt) in proportion to GDP.</p>
<p>A viable agreement between Greece and her creditors requires mapping a feasible time path of the ratio of Greek public debt to GDP, by way of credible and acceptable figures for growth, interest rates and budget surpluses. In the course of the Greek crisis to date, the creditors have imposed unsustainable and hence impossible policy objectives on the country. She has been set up to fail, and thereby forced to return as a fiscal supplicant, to receive yet more orders from her creditors. This is a cruel and savage political game, rather like a cat playing with a mouse.</p>
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<p>What motivates the creditors? Putting aside stupidity as an explanation (though its role should not to be underestimated), it can be attributed to a particularly vicious approach to moral hazard: punishing bad behaviour so as to deter any repetition (and as a warning to others of “the south”). Perhaps some of this punitive savagery could have been imposed upon Greece’s original creditors. After all, there would have been no buildup of Greek government debt in the absence of willing lenders.</p>
<p>In any case, all rational and impartial observers (including now the IMF) agree the trajectory of Greece’s debt-to-GDP ratio is unsustainable. One way or another it will be changed. A trajectory over time of lower debt relative to GDP would then enable easing the punishing budget surpluses that have been demanded by the creditors, and hence less austerity. Big budget surpluses also compromise economic growth, exacerbating austerity and unemployment – and if GDP grows less rapidly than debt, the debt-to-GDP ratio of course will continue to deteriorate.</p>
<h2>All eyes shift to the European Central Bank</h2>
<p>Fundamentally, two options are now available to Greece: the creditors agree to a significant debt rescheduling of one kind or another (reduction in the face value of the debt, and/or lengthening its maturity), or Greece unilaterally defaults.</p>
<p>The former is to be preferred but will by no means be an easy path – merely tolerable.</p>
<p>As to the latter, the much-asserted proposition in the run-up to the referendum – that rejecting the creditors’ previous offer was synonymous with choosing to exit the euro – was false. Indeed, there is no intrinsic inseparability between even a Greek unilateral default and exit from the euro. If the default option were chosen and Greece then departed the euro, the latter outcome would be an act of political will, not an inevitable necessary corollary of default.</p>
<p>In the absence of an acceptable deal with its creditors, Greece could default and refuse to leave the eurozone. Since Greece can run a zero or surplus primary budget balance (and no more interest payments to make after default), the government could cover its expenditures, without external assistance.</p>
<p>But the viability of this scenario would depend upon the euro monetary payments system continuing to function in Greece. That would probably be impossible without the support of the European Central Bank (ECB). So long as there is significant uncertainty about Greece staying in the euro, there is motive for substantial depositor withdrawal from the Greek banking system (as is happening already). To ensure the banking system does not become illiquid, the ECB would have to stand ready to provide unlimited liquidity (as it must do right now, if the Greek banking system is not to collapse).</p>
<p>Panic breeds panic and, symmetrically, confidence in Greece enduring in the eurozone would see deposits return to the banks. Such confidence would be engendered by the ECB being prepared to do “whatever it takes” to ensure the liquidity of the Greek banking system.</p>
<p>But would the ECB be prepared to do this? If not, the only way Greece could make up for the lack of liquidity is to create an alternative means of payment, a so-called (euro-denominated) “parallel currency”. </p>
<p>The most plausible version of this is the government issuing notes that can be used to pay Greek taxes. This capacity to be used for meeting tax liabilities is what might literally give these notes “currency” as a means of payment. But here again, lack of confidence breeds lack of confidence. The probability of such a system working is low.</p>
<p>If that failed, then default would be combined with Greece re-establishing its own currency. This might be a preferable economic framework “in the long run” (!); but the transitional phase, which could be lengthy, would be horrendously painful.</p><img src="https://counter.theconversation.com/content/44228/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tony Aspromourgos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Greece could default and refuse to leave the eurozone - it all comes down to what the European Central Bank does next.Tony Aspromourgos, Professor of Economics, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442392015-07-06T00:27:01Z2015-07-06T00:27:01ZGrexit fear aside, interest rates should hold: RBA Shadow Board<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set. Timo Henckel is the non-voting chair of the Board.</em></p>
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<p>In Greece the economic tragedy appears to be in its final act, while dramatic falls in the Chinese stock market highlight the weaknesses of its economy. Domestic economic data is mixed: unemployment has fallen slightly but consumer and producer confidence have weakened. Inflation remains comfortably within the RBA’s target band. </p>
<p>The CAMA RBA Shadow Board on balance prefers to hold firm. While it attaches only a small probability to the need for a rate cut, this probability has increased from the previous month. In particular, the Shadow Board recommends the cash rate be held at its current level of 2%; it attaches a 57% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 8%, up from 2% in the previous month, while the confidence in a required rate hike stands at 35%.</p>
<p>Australia’s jobless rate, according to the Australian Bureau of Statistics, fell to 6% in May. Encouragingly, in the same month full-time employment and total employment have increased significantly while the participation rate is virtually unchanged. No new data has been released on wage growth, which recently has been at a record low of 2.3% per quarter.</p>
<p>The Aussie dollar keeps hovering around the 76 US¢ mark. Yields on Australian 10-year government bonds have continued to rise, now equalling 3.02%, implying a further steepening of the yield curve, normally an indication that the economy is improving.</p>
<p>The S&P/ASX 200 stock market index has retreated from its all-time high in April, taking some of the froth out of the market. High real estate prices, which carry the risk of misallocated investment and a costly price correction, remain a concern for many Shadow Board members and are often cited for a reason not to cut the cash rate any further.</p>
<p>Overseas, the Greek debt crisis and the faltering Chinese economy give cause for concern. While Australia’s direct exposure to the Greek economy is minimal, a complete breakdown of negotiations between Greece and the European Union, followed by a Greek exit from the Euro, may have noticeable ramifications for global financial markets. </p>
<p>Of greater concern is China, Australia’s largest trading partner, which grew by only 7% in the first quarter of this year, its weakest performance in six years. Some analysts, taking into account the recent tumble of the Chinese stock market and weak gauges of factory activity, entertain the possibility of a further slowing of the Chinese economy. Meanwhile, the US economy is looking more promising, but continued turmoil in the international economy will likely delay the long-awaited increase of the federal funds rate by the Federal Reserve Bank. Commodity prices are likely to remain soft and possibly fall further.</p>
<p>Consumer and producer confidence remain volatile and moderately weak. The AIG Manufacturing Index decreased from 52.29 in May 2015 to 44.20 in June, while the Westpac/Melbourne Institute Consumer Sentiment Index fell from 102.40 in May 2015 to 95.30 in June. The AIG Services Index increased slightly from 49.60 in May 2015 to 51.20 in June. These sentiment numbers are reflected in weak capital expenditure and weak consumer spending.</p>
<h2>What the Shadow Board believes</h2>
<p>The Shadow Board’s confidence that the cash rate should remain at its current level of 2% equals 57% (down from 60% in June). The confidence that a rate cut is appropriate has increased from 2% in June to 8%; conversely, the confidence that a rate increase, to 2.25% or higher, is called for has decreased from 38% in June to 35%.</p>
<p>The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2% equals 24% (23% in June). The estimated need for an interest rate increase lies at 69% (76% in June), while the need for a rate decrease is estimated at 6% (3% in June). A year out, the Shadow Board members’ confidence in a required cash rate increase equals 77% (down from 81% in June), in a required cash rate decrease 4% (2% in June) and in a required hold of the cash rate 19% (up from 17% in June).</p>
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<h2>Comments from Shadow Reserve bank members</h2>
<p>Paul Bloxham, Professor of Economics at Australian National University:</p>
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<p>Having delivered 50bp of cuts in the first half there is no need to consider cutting rates again this month, particularly given recent signs that the labour market is improving. At the same time, activity in the Sydney and Melbourne housing markets continues apace, with the Sydney market, in particular, showing signs of worrisome exuberance. Although a lower AUD could help to speed up the re-balancing of growth, it is not clear that the domestic cash rate setting is having much influence on the currency. What is clear, is that further rate cuts risk over-inflating the housing market. In my view, the costs associated with cutting the cash rate further outweigh the benefits that lower rates could deliver in terms of supporting sustainable growth.</p>
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<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
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<p><strong>“If there is Grexit…the RBA might reasonably cut to calm nerves.”</strong></p>
<p>In this case more than ever events in the rest of the world right up until the Board makes its decision are likely to influence the outcome. If there is Grexit then the likely ramifications for European and global economies are small, but we really can’t know. If that were to occur then the RBA might reasonably cut to calm nerves. However in the more likely event that the Europeans kick the can down the road again, sitting on their hands seems the optimal decision to make.</p>
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<p>Bob Gregory, Professor of Economics at Australian National University:</p>
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<p>I am really of the view that what we gain from lower interest rates is not worth the loss in increasing house prices.</p>
<hr>
<p>Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute:</p>
<p><strong>“Consumers remain worried about future conditions.”</strong></p>
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<p>There are signs that the economy is doing ‘alright’ – GDP growth was a strong 0.9 per cent in the March quarter of 2015, the trimmed mean measure of inflation was 2.3 per cent (2014:Q1-2015:Q1) and the unemployment rate dropped to 6.0 per cent in May 2015 (from a revised 6.1 percent in April). Unfortunately, there is no convincing evidence of momentum from forward-looking indicators. Neither the Westpac-MI Leading Index of Activity nor the Index of Unemployment Expectations are signaling steady improvements in activity. Consumers remain worried about future conditions; specifically, the Expectations component of the consumer sentiment index has been below the neutral mark of 100 since December 2013. On balance, it seems prudent to keep the cash rate steady for a while. This is especially important, considering the possibility of global “uncertainty” impacting negatively on the Australian economy. In the absence of action from the fiscal arm of policy, we may need the monetary arm to act quickly and decisively.</p>
<hr>
<p>James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:</p>
<p><strong>“Given the economic turmoil in Europe, this is definitely not the moment to start raising rates.”</strong></p>
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<p>With underlying inflation well within the RBA’s target range at 2.3 percent and the latest unemployment rate easing slightly down to 6.0 percent, the RBA should hold its policy rate steady, with a bias towards raising it in the future to return interest rates back to more neutral levels. Given the economic turmoil in Europe, this is definitely not the moment to start raising rates. It is true that Greece has little direct effect on Australia. But there are many implications for the position of other larger economies within the Eurozone if Greece were to exit. In any event, this turmoil could delay liftoff for the US interest rates, which will put upward pressure on the Australian dollar. Therefore, in the absence of domestic inflation pressures, the RBA should not raise rates until the European turmoil and the timing of liftoff for US interest rates is resolved.</p><img src="https://counter.theconversation.com/content/44239/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR).</span></em></p>China’s slowing economy is a greater concern than the Greek crisis, but booming property prices mean the RBA should hold firm.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442032015-07-03T05:28:30Z2015-07-03T05:28:30ZThe real question being asked of Greek voters in the referendum<p>Greek prime minister Alexis Tsipras is pushing ahead with plans to hold a <a href="https://theconversation.com/uk/topics/greece">referendum</a> on the terms set by his country’s creditors for repaying its debts.</p>
<p>The July 5 vote will see Greek citizens attempting to answer a highly complicated, <a href="http://www.bbc.co.uk/news/world-europe-33311422">70-plus-word question</a> that even the best informed of them could struggle to understand. But as with all referendums, the result will hinge less on the question being asked and more on how the question is presented by the opposing sides. </p>
<p>The way the issue at stake is framed will play a key role in determining the outcome of the poll. Whatever the question on the ballot paper says, the referendum will be won or lost on whether it is seen as a deal or about membership of the eurozone.</p>
<p>Most EU referendums have been either over European treaties or about questions of membership – whether it be <a href="http://www.bbc.co.uk/news/world-europe-16670298">acceding to the EU</a> or <a href="http://news.bbc.co.uk/1/hi/world/europe/3108292.stm">joining the euro</a>. They have always been about European deals struck by governments and put to voters for approval. The governments in question have therefore been campaigning for a Yes. </p>
<p>In contrast, the Greek government is campaigning for a No. As far as Syriza is concerned, the vote is not a membership referendum but one about the terms of a European deal it opposes. However, the referendum looks likely to turn into a membership question, whatever Syriza thinks it is. </p>
<h2>Why a referendum?</h2>
<p>The Greek government has called the referendum for a number of reasons. It might seem like the goal is to strengthen its negotiating hand but this hand has already been played. The referendum is being held effectively after the deadline has passed.</p>
<p>If the government had hoped the referendum announcement would scare its European partners into some last-minute concessions, it was a major blunder. Tsipras wasted whatever political capital he still had in Europe by pulling the <a href="http://www.reuters.com/article/2015/06/29/us-eurozone-greece-idUSKBN0P40EO20150629">referendum</a> out of the hat as a complete surprise and by making clear that his government would campaign against the deal.</p>
<p>More fundamentally, the government has failed to appreciate that the referendum only brings bargaining power if the European partners feel they have a great deal to lose from a No vote. European governments have <a href="http://business.financialpost.com/news/economy/european-leaders-urge-greeces-tsipras-to-step-back-from-the-brink-of-a-grexit">accepted</a> that they might have to contemplate a Grexit and have already made that clear. That should act as a strong signal that the assumption that the referendum will put pressure on the rest of the EU no longer holds. In fact the pressure has now come onto the Greek government. </p>
<p>So what, then, does the Greek government hope to get out of the move? For one thing, if the Greek public rejects austerity measures in the vote, Syriza will have post-hoc legitimation of its decision to walk away from the deal on the table.</p>
<p>What’s more, looking at the perilous state of an economy with banks closed and breath collectively held, it is not difficult to imagine the Greek voters opting to support their government as it thumbs its nose at a deal that offers only temporary relief at the price of higher suffering. </p>
<p>If, on the other hand, the Greeks vote Yes, the referendum will at least have deflected the blame for further austerity measures away from the government. And given that many members of Syriza are fundamentally opposed to austerity, this appears to be a crucial prerequisite if the government is to implement a European deal and hold the party together. </p>
<p>Ironically then, should Syriza survive a Yes vote politically, its reputation as a sceptic of European medicine will put it in a better position to push a deal through the domestic parliament – if it decides it wants to.</p>
<h2>Simple answers to difficult questions</h2>
<p>The Greek government is more likely to succeed in getting the No result it wants if the vote is seen as a decision on the terms of the European package. But if the issue is framed more broadly in terms of membership of the euro, then this could be decisive in favour of the Yes side. <a href="http://www.ekathimerini.com/198471/article/ekathimerini/news/greeks-want-to-stay-in-eurozone-two-polls-show">Opinion polls</a> do, after all, show the majority of Greeks want to keep the single currency.</p>
<p>Such a broad frame may also benefit the Yes campaign because it makes the No vote appear the far riskier option. If Yes means staying in the euro, then voters would be opting to keep the status quo. As a general rule, voters tend to prefer what is considered the safer option in referendums, particularly at times of high uncertainty. </p>
<p>Along these lines, the framing contest is in full swing. European leaders including <a href="http://www.theguardian.com/business/2015/jun/29/greek-crisis-referendum-eurozone-vote-germany-france-italy">Jean-Claude Juncker</a>, president of the European Commission, have already called on Greek voters to consider that they are effectively voting on their membership of the euro, and that they want them to stay in. Putting the referendum as a choice between the euro and the drachma, the bet is that voters will not go for the drachma.</p>
<p>Referendums look straightforward. That’s why they often seem an attractive solution to important issues. They give simple answers to difficult questions. But the question is not simply what is written on the ballot paper. The real contest in this vote will not be who will win the referendum, but rather what the referendum, and its result are really about.</p><img src="https://counter.theconversation.com/content/44203/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Taggart has received funding from the European Commission under the Marie Curie Programme for the Project 'Plebiscitary Politics in European Integration: Analysing the Causes and Effects of Holding Referendums on the EU'</span></em></p><p class="fine-print"><em><span>Kai Oppermann has received funding from the European Commission under the Marie Curie Programme for the Project "Plebiscitary Politics in European Integration: Analysing the Causes and Effects of Holding Referendums on the EU'.</span></em></p>The deadline for Greece’s latest payment has passed, so why is Syriza pushing ahead with a referendum?Paul Taggart, Professor of Politics, University of SussexKai Oppermann, Senior Lecturer in Politics, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/441342015-07-02T20:15:04Z2015-07-02T20:15:04ZPoison pill? Key events in the history of Greece and the eurozone<p><em>To navigate the timeline below, hover your mouse on the right and click on the arrow to move forward (and on the left to move back).</em></p>
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<iframe src="https://cdn.knightlab.com/libs/timeline/latest/embed/index.html?source=1dklsJgJJ1lY91wp6fHa0_M7TsvLmH1KCByQjoHmM-04&font=Georgia-Helvetica&maptype=toner&lang=en&height=650" width="100%" height="750" frameborder="0"></iframe><img src="https://counter.theconversation.com/content/44134/count.gif" alt="The Conversation" width="1" height="1" />
Greece’s membership of the eurozone has been problematic from the beginning.Charis Palmer, Deputy Editor/Chief of StaffEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/441252015-07-02T03:25:54Z2015-07-02T03:25:54ZGrexiting: why you should not (only) blame the big bad creditors<p>The Greek situation is continuously evolving. The deadline for Greece to repay a €1.5 billion (A$2.2 billion) loan to the IMF has now officially expired and with the referendum on creditors’ proposals on Sunday, Greek Prime Minister Alexis Tsipras seems prepared to make some last minute concessions.</p>
<p>In a <a href="http://download.repubblica.it/pdf/2015/economia/amendments.pdf">letter dated 30 June 2015</a> and addressed to the representatives of European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF), Tsipras indicates the willingness of the Greek government to accept at least some of the conditions set out in the document known as <a href="http://online.wsj.com/public/resources/documents/reform.pdf">“Reforms for the completion of the current programme and beyond”</a>.</p>
<p>It is however unclear whether this will be enough to convince creditors to close the deal. In particular, the German government has already made clear that those proposals are no longer on the table and that no new negotiations will occur before the referendum.</p>
<p>In the current situation, the temptation to blame the “big bad creditors” is strong. Certainly, the group formerly known as troika (EC, ECB, IMF) has made several mistakes since the eruption of European debt crisis. </p>
<p>Yet, a story that only blames the troika for the ongoing drama would be badly incomplete.</p>
<h2>A tale of odious debt</h2>
<p>In a recent interview to an <a href="http://www.repubblica.it/economia/2015/06/30/news/jean-paul_fitoussi_rischiamo_il_disastro_la_merkel_poteva_evitarlo_se_voleva_salvare_la_ue_-117988223/">Italian newspaper</a>, French economist Jean-Paul Fitoussi argued that Greek’s debt should be cancelled in the same way as the Allies cancelled the German (and Italian) debt at the end of World War II.</p>
<p>In practice, what Fitoussi proposes is to treat Greek’s debt as “odious debt”; that is, debt incurred by non-democratic regimes for purposes other than increasing the welfare of their citizens. It is largely accepted that odious debt should not be enforced.</p>
<p>However, Greek debt hardly fits the definition of odious debt. On the contrary, debt in Greece has been specifically used by democratically elected governments to finance per-capita income growth. </p>
<p>According to <a href="https://www.imf.org/external/pubs/ft/weo/2015/01/weodata/index.aspx">IMF data</a>, in the 20 years from 1989 to 2009, Greek general government debt as a percentage of GDP increased from 56% to 126%. Over that period of time, per-capita GDP increased from €14,741 to €21,380. This is a 45% per-capita GDP growth compared to a 28% growth in Germany over the same period. </p>
<p>One might argue that the choice to boost growth via debt was hazardous, if not plain wrong, because clearly unsustainable in the long term. But this does not make Greek debt odious.</p>
<p>Moreover, the post-war cancellation of German and Italian debt was attached to rather stringent political and economic conditions. In general, whenever debt has been cancelled, conditions have always been imposed to prevent moral hazard. </p>
<p>The proposals advanced by creditors aim exactly at that: establishing conditions to pave the road to debt cancellation (because in the end this is where the process is going). Demanding creditors to cancel the debt of Greece without conditions would be an unjustified pretence. </p>
<h2>The austerity that isn’t</h2>
<p>The goal of the proposals put forward by creditors is to achieve fiscal consolidation in the form of budget surpluses. Is this austerity? Well, the answer is no.</p>
<p>Austerity is when taxes on incomes are increased by several percentage points, when public sector jobs are cut, when pensions are cut, when expenditures on health and education are cut, when bank deposits are taxed.</p>
<p>Greece and other European countries experienced this austerity in 2011-2013. But the conditions that are now requested by creditors are significantly different.</p>
<p>The reform of the pensions that creditors are proposing is about discouraging early retirement and extending retirement age, which is a reasonable thing to ask given that in Greece pensions amount to 17.5% of GDP (source: <a href="http://ec.europa.eu/eurostat/statistics-explained/index.php/Social_protection_statistics_-_pension_expenditure_and_pension_beneficiaries">Eurostat</a>) and 75% of pensioners secure their early retirement <a href="http://greece.greekreporter.com/2014/12/04/75-of-greek-pensioners-enjoy-early-retirement/">before the age of 61</a>.</p>
<p>In creditors’ proposal there is no mention of increasing taxes on household income. There is a request for increasing the corporate tax rate (two percentage points). More importantly, there is a provision to standardise the VAT rate at 23%, but with discounted rates on necessary goods like basic food, energy, water, and pharmaceuticals. Probably the hardest request in this sense is to eliminate the 30% VAT discount on islands.</p>
<p>On the expenditure side, there is no proposal of cutting public employment. Instead, creditors ask for a reform of public administration to: a) ensure that the wage grid aligns with the wage bill target and b) wages are more closely linked to skills, performance, and responsibility of staff.</p>
<p>Finally, still on the expenditure side, the request is to reduce the military spending ceiling.</p>
<p>All in all, these proposals can hardly be regarded as a new wave of austerity.</p>
<h2>Power to the people</h2>
<p>Tspiras has justified the referendum as a way to give people the power to decide their own future. In fact, a counterargument is that in a representative democracy, the government is elected to take care of technical decisions like the reform of pensions, of the public administration and of the tax code.</p>
<p>Greek citizens are actually asked to vote on the technical document submitted by creditors and this does not seem like material for a referendum. The document is not necessarily easy to digest and the risk is that people will end up voting based on biased summaries – one way or the other – presented in the media. </p>
<p>But there is another potentially disturbing aspect in the decision to go to a referendum. </p>
<p>The view that Greece has been strangled by interest payments since 2010 is not entirely correct. Certainly, interest payments have been, and still are, very large. But at least until 2013-14, the inflow of financial support provided by the troika to Greece actually exceeded the interest paid, as recently noted by economists <a href="http://www.voxeu.org/article/modern-greek-tragedy">Jeremy Bulow and Kenneth Rogoff</a>.</p>
<p>This financial support provided to Greece is essentially coming from the budget of European partners; that is, from European taxpayers, including taxpayers from countries that have been in very troubled waters, like Italy and France.</p>
<p>Suppose then that Tspiras is successful in his call for Greek citizens to choose no and make default happen. Then, by reciprocity, shouldn’t citizens in other European countries be asked if they are still willing to provide financial support to Greece?</p>
<h2>Grexiting would not fix a thing</h2>
<p>If the “no” wins on Sunday, Greece will be dangerously close to a Grexit; that is, a disorderly exit from the eurozone. Those who see the eurozone as the source of all evil will rejoice: without the eurozone, Greece will return to prosperity.</p>
<p>The problem here is that the eurozone is not the main reason for the Greek crisis. Austerity in 2011-13 has made the crisis worse, but the crisis itself has been generated by Greek’s own fiscal profligacy and structural weaknesses. Removing itself from the eurozone will not create a long-term boost, which is ultimately what Greece needs to exit the tunnel.</p>
<p>Greece would have to go back to printing its own currency (drachma) and running its own monetary policy. The drachma will quickly devalue. Greek exports will become cheaper on international makers, but imports will cost more to Greek producers and consumers. The net effect of the devaluation will not necessarily be a boost in net exports, and even if it is, empirical evidence suggest that this would be short-lived and with relatively little effect on long-term growth.</p>
<p>On the other hand, a Greece that is no longer part of the eurozone will find it difficult and costly to borrow on international capital markets while private investors will most likely flee the country (scared by uncertainty and expectations of continued currency devaluation). As a result, Greece would find itself under an even tighter budget constraint than today.</p>
<p>The only way to ensure a minimum of government expenditure would be for the central bank to monetise spending by printing more and more of the new drachmas. This would induce an inflation spiral that can easily get out of control. </p>
<p>At that point, the future of Greece would look very gloomy, to say the least.</p><img src="https://counter.theconversation.com/content/44125/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its macroeconomic applications.</span></em></p>Blaming the troika for the Greek defaut this week isn’t the full story. The problem here is that the eurozone is not the main reason for the Greek crisis.Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/441302015-07-01T01:34:36Z2015-07-01T01:34:36ZEurozone’s shared identity the final tragedy of the Greek crisis<p>Economic policy is not a morality tale. The Greek tragedy is that the Europeans have treated the Greek crisis as a question of national character. In their outrage at the Greeks – in the context of broader view of austerity as the way out of the European crisis – they have not only weakened their collective economies, but also jeopardised the fate of the European experiment itself. </p>
<p>The risk is that the larger goal of the European project – to create a sense of shared identity – may be undermined by an incidental economic means to that end, in the creation of a euro – a mechanism of economic discipline.</p>
<p>The reasons for this tragedy go deep into European history. Coming out of World War II, European leaders decided nationalist excesses should never again be permitted to divide their people. They therefore sought to create a supranational union, one that would unite the continent in a common vision. In 1950, French Foreign Minister Robert Schuman proposed the establishment of the original European Coal and Steel Community – the grandfather to the modern EU – as a way to “make war not only unthinkable but materially impossible”.</p>
<p>Ironically, given what the Euro has become, Schuman’s vision was never based on any commitments to “hard money” or free trade. Quite the opposite. The tragedies of the 1930s were widely attributed to a classical gold standard that had enforced austerity on the European people. As the European economies collapsed in the early 1930s, states were forced to cut spending and raise taxes – contributing to an ever-worsening slump.</p>
<p>In contrast, the point of the European Coal and Steel Community was to raise the prices of its members’ commodity and manufacturing exports. The ECSC would do this by enabling its initial six countries – most importantly, including France and Germany – to collude and fix coal and steel prices. In this sense, the early European ideal was not about free trade or convertible currencies – it was about enhancing the collective welfare as a means to political union.</p>
<p>Over the decades to follow, the economic dog nevertheless came to wag the collective welfare tail. As the German economy grew more important, German influences in European economic institutions would increase – leading to a shift toward more free market, hard money views. There were deep cultural reasons for this: German memories of the 1920s were of hyperinflation, while the German successes of the 1930s in using fiscal stimulus were repressed from collective memory, for obvious reasons. </p>
<p>The result would see European economic institutions – most notably the European Central Bank – evolve and place financial rectitude and monetary stability ahead of growth. This has been the case even when intellectual arguments for austerity – primarily as a means to limit inflation – make little sense, as the high unemployment of recent years has broken any link between fiscal deficits and inflation.</p>
<p>Large deficits absent full employment are not a problem – they are the solution, enabling revived growth. Greek austerity only makes Greek repayment more difficult, whatever one’s view of their pension system.</p>
<p>Over the past five years, the EU has taken what should have been a practical matter of economic policy – to run deficits during a recession – and turned it into a morality tale. </p>
<p>Internal Greek politics have nothing to do with the macroeconomic needs of the European Union – which would benefit from debt forgiveness across the continent to enable rising demand. On top of this economic malpractice, one can superimpose political error, as austerity politics have revived political extremism and nationalist sentiment across the continent. This is the very essence of a tragedy – as the postwar European dream may be undermined by incidental mechanisms established to bring it into being.</p><img src="https://counter.theconversation.com/content/44130/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wesley Widmaier receives funding from the Australian Research Council.</span></em></p>Conflating economic policy with morality is what could ultimately bring the EU unstuck.Wesley Widmaier, Australian Research Council Future Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/435992015-06-21T07:14:32Z2015-06-21T07:14:32ZGreece: why there can be no winners in the Grexit game<figure><img src="https://images.theconversation.com/files/85799/original/image-20150620-3383-1bzhr02.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Flags for sale in Athens.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/jaybergesen/2992247215/in/photolist-5yq3Re-4D1ziz-7WhwBS-eNrCnf-eNrCGA-eNrCKb-eNrCps-eNrCzb-4eT52z-a84zUd-dFhW6t-a84DPh-pXXQ8M-72LECv-m9SY8g-oU2SSu-535ziB-5roWqT-7yPrjb-dFofmw-dFooEy-7yPWCA-a85T4o-4gaFK9-mdSCTF-9frjh8-9TH3fU-eMrnBX-nuvaMX-ELXmt-a5ksAy-rpLsy-ignJ2-84gpX3-4dZXQT-eNff9k-eMEeDd-eMEXqJ-6qVbpV-eMEbKW-eNrCfq-47c2KP-4w9oEr-HPbp4-mTb7p-cK4Wvw-9Rvva4-rpGt3-4bXkBX-9N1qxy">Jay Bergesen</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Greece is on the brink. Even if a last-minute deal is found it is clear that the solutions proposed are little more than a way to delay the crisis. A more comprehensive resolution of the Greek tragedy needs to address the medium-term (non-)sustainability of the Greek debt position.</p>
<p>Economists know that negotiations usually break down when there is uncertainty in bargaining. When the two sides are uncertain as to what gains and losses the other side can make through any deal or by walking away. In this case, part of the uncertainty is political, because the Greek and other EU governments don’t fully know what might be acceptable to their electorates. But a good part of the uncertainty at this bargaining table is economic. Because we are in totally uncharted waters. Monetary unions can be, and have been, <a href="http://www.theguardian.com/world/2001/dec/10/euro.eu">dissolved before in history</a> but, except in the aftermath of wars, not usually in anger. </p>
<h2>Uncharted waters</h2>
<p>There are several sources of uncertainty for both sides in the dispute.</p>
<p>First, if Greece leaves the Eurozone, at one level it will have greater freedom to walk away from at least some its <a href="http://www.statista.com/statistics/270409/national-debt-of-greece/">debt</a>, or to restructure it in a way which suits its short-term economic need. It could plan a moderate primary surplus. The problem for the Greek government is that it will inherit a broken banking system and there will be great uncertainty on whether a devaluing new Drachma could benefit its net trade position, with an impaired financial system, and shut out from world capital markets. Greece is not Iceland, and there is less social consensus on how to share the short-run burden of economic adjustment in a Grexit scenario.</p>
<p>Second, the losses for the EU lenders are truly eye-watering. The two bail-out packages for Greece amount to €215.8 billion. Of these €183.8 billion came from other EU countries and the rest from the IMF. The biggest shares of the support through <a href="http://www.efsf.europa.eu/about/index.htm">the European Financial Stability Facility</a> came from Germany and France. None of this includes the cost of support given to the Greek banking system via the ECB. The <a href="http://www.imf.org/external/index.htm">IMF</a> would suffer considerable losses too (the UK’s main exposure is through this channel). The impact of Grexit and a partial or full debt repudiation on the rest of the EU would be considerable. Paradoxically by triggering a Grexit rather than an orderly debt restructure, the EU lenders may lose more of their current bail-out. So why are they not more accommodating? Because if it stays in, Greece will need a further bail-out, as no-one believes the current plan is sustainable. It’s that uncertainty again. </p>
<p>Third, no-one can really estimate the contagion effect of a seemingly irreversible monetary union breaking up. A major jump in borrowing costs for countries like Italy and Spain would hit these countries hard, and potentially create a domino effect. If Grexit happens, the Eurozone needs rapid reform to ensure a guarantee of greater mutualisation of fiscal policy. Is that likely to be acceptable to northern EU members? Nobody knows for sure, but it seems unlikely.</p>
<h2>The computer gets it</h2>
<p>In the 1980s movie <a href="http://www.imdb.com/title/tt0086567/">War Games</a>, the computer in charge of the US nuclear arsenal realises, by constantly repeating the game of noughts and crosses (which cannot be won if both players play rationally), that nuclear war is unwinnable. The problem with all this uncertainty is that the various players in the Grexit game fail to properly understand the serious consequences of not reaching a rational deal. They still think they can win. That’s not to say that keeping Greece in the Euro is the best option in the long term. But a breakdown in negotiations and a disorderly exit doesn’t appear desirable.</p><img src="https://counter.theconversation.com/content/43599/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anton Muscatelli does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Only one thing is certain in the titanic struggle over Greek debt and the future of the Euro.Anton Muscatelli, Principal and Vice Chancellor, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/430972015-06-12T10:18:00Z2015-06-12T10:18:00ZPuerto Rico’s long fall from ‘shining star’ to the ‘Greece’ of the Caribbean<p>While the world’s attention focuses on the economic crisis in Greece, another financial debacle looms closer to home for the United States. </p>
<p>Puerto Rico is now being called “<a href="http://time.com/20416/the-next-financial-catastrophe-you-havent-heard-about-yet-puerto-rico/">the next financial catastrophe</a>,” and the territory’s <a href="http://www.washingtonpost.com/apps/g/page/business/puerto-ricos-multiple-troubles/622/">outstanding debt</a> is being compared to that of Greece.</p>
<p>Financial pundits are <a href="http://thehill.com/blogs/pundits-blog/economy-budget/243406-is-puerto-rico-americas-greece">rushing to declare</a> that both Greece and Puerto Rico are on the verge of financial collapse. </p>
<p>Perhaps the Puerto Rican government, like the Greek government, bears some responsibility for its financial crisis. </p>
<p>But a closer look shows how the Greek and Puerto Rican cases are very different. Moreover, Puerto Rico’s fiscal woes cannot be resolved independently by its government. </p>
<p>Only changes in US territorial policy toward its Caribbean possession can help fix the problem. </p>
<h2>Why Puerto Rico isn’t Greece</h2>
<p>Some facts are truly alarming. </p>
<p>Puerto Rico’s <a href="http://data.worldbank.org/country/puerto-rico">per capita</a> income is lower than any state in the union; its <a href="http://www.bls.gov/eag/eag.pr.htm">unemployment rate</a> has hovered at 13% for years; since 2006 it has suffered a steep drop in manufacturing; and its revenue base is rapidly eroding since many working-age Puerto Ricans are leaving for the United States. </p>
<p>The territory’s US$73 billion <a href="http://www.wsj.com/articles/in-puerto-rico-debt-talks-things-are-heating-up-1433200977">public debt</a> is a higher per capita debt than any state in the nation. </p>
<p>Keep in mind, however, that Greece is a sovereign nation and Puerto Rico is a territorial possession of the United States – in effect, a colony – with very limited powers to represent the interests of its people. The US Congress can impose federal laws on the island and can veto any legislation enacted by the Puerto Rican government. </p>
<p>Moreover, unlike Detroit and states in the Union, Puerto Rico is barred from declaring bankruptcy and restructuring its debt. </p>
<p>For Puerto Ricans, who in 1917 became US citizens, an undeniable feature of colonialism is that they are not allowed to elect representatives or senators to represent them in the nation’s capital. </p>
<p>Puerto Ricans are <a href="http://www.thewire.com/politics/2014/01/tiny-step-toward-statehood-puerto-rico/357263/">profoundly dissatisfied</a> with their current political status, and in a November 2012 <a href="http://www.nydailynews.com/news/national/gonzalez-puerto-rico-complex-statehood-vote-article-1.1201608">referendum</a> made it very clear they want a change: 54% voted against the current “commonwealth” setup. </p>
<p>But Puerto Ricans are also voting against the current situation with their feet, as scores of thousands <a href="https://news.vice.com/article/why-are-so-many-young-puerto-ricans-leaving-home">emigrate</a> to the United States every year. </p>
<h2>The back story: rapid growth despite its ‘colony’ status</h2>
<p>Despite its colonial status, Puerto Rico <a href="http://www.jstor.org/stable/25613375?origin=JSTOR-pdf&seq=1#page_scan_tab_contents">experienced</a> rapid industrial development and widespread modernization for most of the second half of the 20th century, and it escaped the debilitating poverty of the 1930s and 1940s. </p>
<p>After World War II, Puerto Rico abandoned its stagnant sugarcane-based economy and embraced US manufacturing firms, primarily low-wage, labor-intensive factories. Puerto Rican policy makers created an investment climate for US manufacturing industries that <a href="http://www.jstor.org/stable/156962">was second to none</a>.</p>
<p>During the Cold War, the US promoted Puerto Rico as the “Shining Star of the Caribbean,” a <a href="http://www.caribbeanbusinesspr.com/news02_free.php?nw_id=6827&ct_id=10">model</a> to be emulated by population-rich, capital-poor nations of the Third World. </p>
<p>Puerto Rico was frequently cited as an alternative to Cuba, which was portrayed as a communist client state of the Soviet Union, and woefully dependent on Mother Russia for its economic survival. </p>
<p>Puerto Rico thus rose from the poorhouse of the Caribbean to an economic powerhouse – only to now fall back again. </p>
<p>Ironically, colonialism explains both the growth and decline of the Puerto Rican economy – even though this colonial relationship has not changed in more than six decades.</p>
<h2>Influx of US capital</h2>
<p>After World War II, Puerto Rico, as a territory, had <a href="http://lcw.lehman.edu/lehman/depts/latinampuertorican/latinoweb/PuertoRico/Bootstrap.htm">access</a> to US capital and financial markets. Its population had unrestricted immigration to the United States. Favorable US fiscal legislation exempted corporations from paying federal taxes on profits earned in the island, and until 1989, the territory was exempt from federal minimum wage requirements. </p>
<p>Funds also came from the American war chest: the US military controlled almost 17% of Puerto Rico’s territory. Military expenditures contributed to the island’s growth, employment, internal security and strategic value.</p>
<p>The Puerto Rican government also attracted investments. </p>
<p>Manufacturing companies willing to migrate to Puerto Rico were provided with lavish subsidies, exempted from insular taxation and virtually guaranteed a low-wage and peaceful labor force. For example, the Puerto Rican Electric Power Authority and the Aqueduct and Water Authority provided subsidized rates to US-owned manufacturing firms. </p>
<p>Puerto Rico’s Government Development Bank and the Highway and Transportation Authority invested billions of dollars modernizing the country’s infrastructure. The capital to finance these enterprises came from US institutional investors who grabbed up Puerto Rican-issued bonds that were triple tax exempt and highly rated by Moody’s and Standard and Poor’s investment services. </p>
<p>Government employment mushroomed during this period, and combined with the massive emigration to the United States, Puerto Rico was able to sustain a manageable unemployment level. </p>
<p>Until the early years of this century, Puerto Rico could draw from internal revenue sources (primarily payroll taxes and taxes on locally owned businesses) to meet its debt obligation.</p>
<p>Colonialism thus seemed to work. At least it proved to be lucrative for US corporations and investors and of value to the military.</p>
<h2>The beginning of the fall</h2>
<p>But starting in 2004, the “Shining Star of the Caribbean” rapidly lost its luster.</p>
<p>Roosevelt Roads Naval Station, the vast military base that housed the US Naval Forces Command, <a href="http://www.peoplesworld.org/navy-closes-last-base-in-puerto-rico/">was relocated</a> to Florida after years of popular protest. In 2006, IRS Code Section 936, which exempted US corporations operating in Puerto Rico from paying federal taxes, expired.</p>
<p>Then came the 2008 financial meltdown – especially the tightening of credit markets – that seriously impaired Puerto Rico’s ability to sustain debt-financed growth. </p>
<p>And now, the <a href="http://latino.foxnews.com/latino/politics/2014/12/17/puerto-rico-us-shift-on-cuba-will-have-impact-on-caribbean-trade-tourism/">normalization</a> of diplomatic relations between the US and Cuba, including its removal from the list of states that sponsor terrorism, has virtually eliminated Puerto Rico’s strategic value and created a competing Caribbean investment site for US firms. </p>
<p>All these changes have resulted in <a href="http://www.laht.com/article.asp?CategoryId=14092&ArticleId=342236">unemployment levels</a> not experienced in generations, a <a href="http://www.huffingtonpost.com/2013/09/11/puerto-rico-population_n_3899109.html">declining population</a> as educated workers left the island and a diminished tax base. </p>
<p>Now the possibility looms of the government defaulting on its debt obligations.</p>
<p>Worried institutional investors who monitor the deteriorating investment climate concluded that the <a href="http://aulablog.net/2015/05/07/puerto-rico-debt-and-budget-crisis/">public debt </a>is unsustainable and <a href="http://www.npr.org/2015/06/05/411710928/broke-and-barred-from-bankruptcy-puerto-rico-seeks-outside-cash">started to offload</a> their bonds at huge discounts to hedge funds. </p>
<p>Hedge funds, for their part, saw the collapse of Puerto Rico’s vaunted bond rating to junk status as a speculative opportunity for healthy profits. And they are proving to be <a href="http://www.npr.org/2015/06/05/411710928/broke-and-barred-from-bankruptcy-puerto-rico-seeks-outside-cash">particularly creative</a> in devising schemes to extract a profit out of the cheaply purchased yet virtually toxic bond holdings. </p>
<h2>The harsh reality now facing Puerto Rico</h2>
<p>The stark reality is that the US is no longer an endless source of risk-free capital for Puerto Rico. </p>
<p>The future of the island’s economy may ultimately rest with the hedge funds that are now monitoring the government’s performance. </p>
<p>Puerto Rico’s future is dim. If the <a href="http://dealbook.nytimes.com/2014/09/12/puerto-rico-finds-it-has-new-friends-in-hedge-funds/?_r=0.">hedge funds</a> have their way, the Puerto Rican government will extract more revenue from its beleaguered citizens and small businesses, slash government services and employment, and enforce the austerity measures dictated by the <a href="http://blogs.wsj.com/moneybeat/2015/04/14/puerto-ricos-creditors-push-for-new-bulletproof-debt/">hedge funds</a>. </p>
<p>Yet a politically unstable, economically devastated Puerto Rico is not good for the US’ image. The <a href="http://www.reuters.com/article/2014/07/31/usa-puertorico-fed-idUSL2N0Q61NE20140731">Federal Reserve</a> is monitoring the situation, eager not to let the situation deteriorate much further.</p>
<p>However, a Band-Aid approach will not fix Puerto Rico’s utter dependency on the US for its survival.</p>
<p>The US must develop a long-term program to redefine Puerto Rico’s territorial relationship. The US has no other option.</p>
<p>Statehood for Puerto Rico is not a realistic option: neither Puerto Ricans nor the US want an independent Puerto Rico. But it is also the case that the long-standing “commonwealth relationship” doesn’t work. </p>
<p>If nothing is done, Puerto Rico may well have to endure an economic and social crisis akin to that of the Great Depression that it managed to escape in the 1930s. </p>
<p><em>NB The article has been corrected to reflect the fact that while large Puerto Rico’s per capita debt does not exceed that of Greece.</em></p><img src="https://counter.theconversation.com/content/43097/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pedro Caban does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Puerto Rico’s economic woes have led some analysts to compare it to Greece. Paradoxically, Puerto Rico’s colonial status explains both its growth and the impending financial debacle.Pedro Caban, Professor of Latin American, Caribbean and U.S. Latino Studies, University at Albany, State University of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/365572015-01-22T15:58:07Z2015-01-22T15:58:07ZECB injects €1 trillion into eurozone, but members aren’t off the hook yet<figure><img src="https://images.theconversation.com/files/69770/original/image-20150122-12100-1xc6add.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The European Central Bank is set to buy up government bonds.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/jurjen_nl/5271842133/sizes/o/">jurjen_nl/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>By allowing the European Central Bank (ECB) to <a href="http://www.bbc.co.uk/news/business-30933515">start buying debt</a> issued by its member states, the eurozone is copying a strategy now associated with the earlier return to growth in the US and UK. </p>
<p>Quantitative easing (QE) <a href="https://theconversation.com/ecb-is-about-to-implement-the-wrong-type-of-quantitative-easing-36543">may not have worked</a> in the way its architects hoped; reviving private investment by reducing borrowing costs and raising asset values. But QE has set up conditions for such revival by helping governments and households finance their debt at low cost, so that spending picks up and gives an incentive to invest. </p>
<p>There will be a further boost if QE weakens the euro against other currencies, lifting the eurozone’s exports and re-introducing inflation (which further reduces the real costs of debt).</p>
<h2>Back to the future</h2>
<p>QE takes the eurozone back to the future. Until 2008, it suffered from what is now viewed as an excess of internationalism. Newer members that had traditionally borrowed at a premium (Greece, Spain, Portugal and Ireland) could now get credit as cheap as Germany’s. Although they were meant to aspire to German-style rectitude, this was a temptation to fiscal (and sometimes private-sector) recklessness. Their private and government debts built up to levels that were unsustainable, once growth rates slowed and interest rates rose.</p>
<p>After 2008, the zone abruptly “<a href="http://www.bruegel.org/nc/blog/detail/article/1137-blogs-review-the-renationalization-of-european-finance/">renationalised</a>”. Less dynamic countries were again left paying substantially more for their debt, which further drained their dynamism. Capital no longer flowed to them, despite these higher yields. More indebted governments were forced into budget cuts that stalled growth, reduced real income and eroded tax revenue, leaving their finances in deficit and worsening downturns, which began to strain social cohesion. </p>
<p>To break this vicious circle which risks <a href="https://theconversation.com/hard-evidence-can-germany-throw-greece-a-lifeline-and-save-the-euro-35870">forcing Greece’s exit</a> (and a default on euro debts that would hurt the zone’s already fragile banks) the ECB will now attempt to re-internationalise its monetary system. </p>
<p>As in the Anglo-American approach, it won’t directly buy member states’ new government debt. This will reassure the less heavily borrowed member states (especially Germany) that they’re not taking responsibility for debts caused by other countries’ excesses. But by paying banks and other private investors for existing debt, the ECB will give them newly created funds that might then finance more affordable lending and increased production. </p>
<h2>Not a lifeline</h2>
<p>Despite the hopes now invested in it, QE is unlikely to ensure the survival of the eurozone’s peripheral members. <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech560.pdf">Experience suggests</a> that without complementary fiscal policy action, the effects of these measures will be limited. Governments must be able to use their new borrowing opportunity to restore (through fiscal deficits) the aggregate demand that private investment and consumption are currently not generating. </p>
<p>EU rules prevent this, imposing an “excessive deficit procedure” on any government whose deficit exceeds 3% of its national income (GDP). For comparison, the US overcame its post-2008 downturn with a deficit deliberately widened to almost <a href="http://www.politifact.com/wisconsin/statements/2014/sep/05/barack-obama/obama-says-he-has-cut-national-deficit-half/">10% of GDP</a>, and the UK’s recovery still requires a deficit of <a href="http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/december-2014/stb-dec-2014.html">close to 6%</a>.</p>
<h2>Questionable concerns</h2>
<p>The EU deficit limits reflect <a href="http://www.investopedia.com/terms/m/monetarist.asp">monetarist</a> economists’ longstanding beliefs that government borrowing will undermine longer term growth (by substituting public consumption for private investment), and cause longer term inflation (through the increase in money supply due to new borrowing). Neither of these beliefs has fared well in the years since 2008, as the American approach has featured fiscal deficits alongside <a href="http://www.bea.gov/newsreleases/national/gdp/gdphighlights.pdf">reviving private investment</a>, and QE alongside motionless inflation. </p>
<p>Efforts to give the ECB comparable powers to other big central banks such as the US Federal Reserve and Bank of Japan – including authority for QE and zone-wide bank supervision – move Europe further away from the approach that enabled its post-war revival. </p>
<h2>Disowning the past</h2>
<p>The EU took shape in the <a href="http://www.investopedia.com/terms/b/brettonwoodsagreement.asp">Bretton Woods</a> era, when national governments left themselves scope to choose their own economic and social policies, by closing off their <a href="http://economictimes.indiatimes.com/definition/capital-market">capital markets</a>. This enabled them to run fiscal deficits when the domestic economy grew too slowly, without being punished by the bond market when their domestic interest rates moved out of line. </p>
<p>It also preserved the benefits of a stable (though not rigidly fixed) currency, which underpinned the post-war growth of international trade. The European economy was it its most dynamic under this framework, which was effective from around 1950-71. </p>
<p>Bretton Woods is long gone, and its international capital curbs might be impossible to recreate after a half-century of financial deregulation and innovation. But the EU’s success in that era – when it rebuilt shattered nation states and restored war-torn economies to US-style prosperity – stands in informative contrast to its malaise in the decades before and after economic and monetary union. </p>
<p>The EU originally worked – as historian Alan Milward <a href="http://www.eu-historians.eu/uploads/Dateien/milward.pdf">persuasively recounted</a> by giving up selected aspects of national sovereignty in order to reinforce what remained. It was a project to rescue the nation state, not to transcend it. </p>
<p>The monetary union has worked less well because it weakened some aspects of national sovereignty – fiscal policy discretion, and the accompanying leeway over taxation and welfare arrangements – without which economic growth and social cohesion can be lastingly compromised. Further monetary integration, under present fiscal rules, could be another step away from what succeeded in the past.</p><img src="https://counter.theconversation.com/content/36557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>By allowing the European Central Bank (ECB) to start buying debt issued by its member states, the eurozone is copying a strategy now associated with the earlier return to growth in the US and UK. Quantitative…Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/365532015-01-22T12:04:02Z2015-01-22T12:04:02ZWhy a Syriza win is unlikely to cause a Grexit<figure><img src="https://images.theconversation.com/files/69722/original/image-20150122-27517-2ojsjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Storm in a teacup?</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/theo_reth/4644831425">Theophilos Papadopoulos</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The <a href="http://www.reuters.com/article/2015/01/21/us-greece-election-poll-idUSKBN0KU0YW20150121">polls</a> are pointing to an election victory for the <a href="https://theconversation.com/uk/topics/syriza">Syriza</a> party in Greece’s election on January 25. The radical left party’s popularity comes from its <a href="http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_20/01/2015_546356">opposition to the austerity policies</a> that have been implemented by the governments of Greece’s two mainstream parties, Pasok and New Democracy in obedience to their eurozone financiers. </p>
<p>It is important to note, however, that Greek elections are taking place increasingly often. In theory, elections should only happen every four years. Yet, after the 2009 elections (which the mainstream, centre-left Pasok party won with a clear majority), there were two successive elections (in May 2012 and in July 2012) and now another. Some political parties speculate that, if a stable government fails to emerge, a second round of elections <a href="http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_08/01/2015_546049">might happen again within a month</a>.</p>
<p>This constant changing of government is not good for a country’s economy, disrupting the implementation of economic policies and undermining any meaningful investment in the country. It does mean, however, that whatever the result is on January 26, it is not set in stone and Syriza may not have all the power that is hoped or feared (depending who you support). And though Syriza are popular, they are unlikely to win a majority and will have to form a coalition, unless they want to provoke a second round of elections. This may influence their policy options.</p>
<h2>Dealing with debt and the eurozone</h2>
<p>The prospect of a Syriza win has led to rumours that Greece might leave the eurozone if, for instance, the eurozone’s core (<a href="https://theconversation.com/hard-evidence-can-germany-throw-greece-a-lifeline-and-save-the-euro-35870">Germany</a> in particular) refuse to negotiate with them over repaying the country’s debt.</p>
<p>It is so far unclear how Syriza will proceed – even if they win the election by a majority. Though they have repeatedly said they will negotiate a further cut in Greece’s debt, they have not explained how they will make this happen. Their desire to stay in the eurozone is clear, but they have threatened that, if negotiations with the eurozone fail, they may not pay back part of Greece’s debt obligations.</p>
<p>But can Greece actually pay back its debt obligations? To answer this, we note that Greece’s debt, <a href="http://www.tradingeconomics.com/greece/government-debt-to-gdp">currently at 175% of its GDP</a>, is substantially bigger than the debt burden in other peripheral countries. Indeed, in 2014, Italy’s debt stood at <a href="http://ieconomics.com/italy-debt-to-gdp">133% of its GDP</a>. Portugal’s debt stood at <a href="http://ieconomics.com/portugal-debt-to-gdp">129% of its GDP</a>. Spain’s debt stood at <a href="http://ieconomics.com/spain-debt-to-gdp">92% of its GDP</a>. Compare all these figures with Germany’s debt which stood at “only” <a href="http://ieconomics.com/germany-debt-to-gdp">77% of its GDP</a> (UK public debt is at 80.9%). </p>
<iframe width="100%" height="325" frameborder="0" scrolling="no" marginwidth="0" marginheight="0" src="https://www.google.co.uk/publicdata/embed?ds=ds22a34krhq5p_&ctype=l&strail=false&bcs=d&nselm=h&met_y=gd_pc_gdp&scale_y=lin&ind_y=false&rdim=country_group&idim=country:el:it:es:uk:de:pt&ifdim=country_group&tstart=948499200000&tend=1358812800000&hl=en_US&dl=en&ind=false"></iframe>
<p>More importantly, Greece needs to pay back <a href="http://www.kathimerini.gr/796774/article/oikonomia/ellhnikh-oikonomia/hmeromhnies-oroshmo-gia-tis-daneiakes-ypoxrewseis-ths-elladas-kata-to-2015?utm_medium=twitter&utm_source=twitterfeed">€22.37 billion (around 11.9% of its GDP) in 2015</a>. This is a huge obligation. Greece urgently needs financial support coming from an agreement with the so-called Troika (that is, the European Commission, European Central Bank and the International Monetary Fund). </p>
<p>The alternatives are:</p>
<ul>
<li><p>Greece rolls-over its debt obligations by borrowing directly from the financial markets. This is almost impossible because Greece can currently borrow at around 9% (at a ten-year horizon) or, even worse, at around 12% (at a three-year horizon).</p></li>
<li><p>Greece refuses to pay the €22.37 billion it owes in 2015 (or part of this money) and therefore defaults.</p></li>
<li><p>Greece borrows domestically, that is from Greek residents by raising taxes. This option will definitely be very unpopular as Greek residents will be unwilling to lend to the government especially if they believe that the country will default and return to the drachma.</p></li>
</ul>
<p>With all of the above in mind, the risk of a Grexit is unlikely. At this stage, it is more likely than not that the eurozone’s core and a Syriza government will come together to find a new financial agreement, which would not deviate substantially from what the current government has agreed to. </p>
<p>Should a Grexit take place, it will affect Greece more negatively than anyone else. This is especially the case now the European Central Bank has <a href="http://www.bbc.co.uk/news/business-30915210">implemented a program of quantitative easing</a>.</p>
<p>All this, with an important caveat: in her visit to The London School of Economics shortly after the 2008 financial crisis, Queen Elizabeth famously <a href="http://www.telegraph.co.uk/news/uknews/theroyalfamily/3386353/The-Queen-asks-why-no-one-saw-the-credit-crunch-coming.html">wondered why economists failed to predict it</a>. Seven years on, it is not clear to me whether our economic predictions have actually become much more accurate. In other words, claiming that a possible Grexit will leave the eurozone immune, is definitely bold.</p><img src="https://counter.theconversation.com/content/36553/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Costas Milas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The polls are pointing to an election victory for the Syriza party in Greece’s election on January 25. The radical left party’s popularity comes from its opposition to the austerity policies that have…Costas Milas, Professor of Economics, Finance and Accounting, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/360342015-01-14T06:10:52Z2015-01-14T06:10:52ZMarkets threaten Greek democracy ahead of election<p>Greece faces a decisive moment on January 25 in a snap election that could see major gains for the extreme left and right. But anyone worried about how Syriza on one side, or Golden Dawn on the other, might handle power, should consider a far more sinister force that has conspired to keep Greece away from recovery for years – the international markets.</p>
<p>If <a href="http://www.reuters.com/article/2015/01/07/us-greece-election-polls-idUSKBN0KG1OP20150107">recent polls are accurate</a> Syriza, an alliance of left-wing parties firmly opposed to the country’s harsh bailout terms, will take office. To do that, it has to first overcome the relentless, and staunchly anti-democratic, warnings being issued by some upholders of capitalism’s vested interests. </p>
<p>The coalition that currently mis-governs Greece has done its best for two years to implement dutifully draconian austerity packages. With support now flagging, it hopes to receive a renewed mandate for this at the ballot box. Its austerity packages are designed by pseudo-technocrats at the European Commission in Brussels and enthusiastically backed by the German Bundesbank. </p>
<p>The proclaimed purpose of Greece’s austerity measures does not even end at deficit elimination. The Greek government has been tasked not merely with balancing the books, but with generating a surplus too. The surplus would go to reduce the country’s public debt, which currently stands at almost <a href="https://www.google.co.uk/publicdata/explore?ds=ds22a34krhq5p_&met_y=gd_pc_gdp&idim=country:el:it:es&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=gd_pc_gdp&scale_y=lin&ind_y=false&rdim=country_group&idim=country:el&ifdim=country_group&hl=en_US&dl=en&ind=false">130% of GDP</a>.</p>
<h2>Ravaging of Greece</h2>
<p>The global financial crisis of 2008 resulted in fiscal deficits throughout the world, with EU member states hit particularly hard. In 2009, the Greek fiscal deficit stood at <a href="http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2013/9/cjv33n3-13.pdf">-15.6%</a> – the largest relative to GDP for any eurozone country. In absolute terms this 15.6 per cent represented about than €36 billion.</p>
<p>The deficit had dropped by a third by the end of 2010 to just under €24 billion. But this substantial decline failed to satisfy the austerity appetites of the European Commission, the German government or Bundesbank. By the end of 2014 the Greek fiscal balance was projected to drop to about -3% of GDP or €6.5 billion, as the chart below shows. The chart also shows one indicator of the enormous cost of that reduction in the public deficit; a drop in national income of 18% (26% lower than in 2008). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=434&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=434&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=434&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68484/original/image-20150108-23807-145560m.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Preliminary estimates for 2014.</span>
<span class="attribution"><span class="source">http://www.oecd.org & http://www.statista.com/statistics/270398/budget-balance-in-greece/</span></span>
</figcaption>
</figure>
<p>These policies brought a reduction of the fiscal deficit by €17.4 billion, at a cost in national income of more than double that figure. No western European country has suffered such a collapse of GDP since the end of World War II. We cannot find one example of a developed capitalist country with a lower national income than it had four years previously in any year between 1945 and 2010.</p>
<p>There have been no signs of respite, though, from Greece’s austerity enforcers. The ideologues in the European Commission and the Bundesbank apparently remain committed to destroying the Greek economy in order to save it.</p>
<p>This ravaging of the economy is evidenced by almost every measure of human welfare in Greece, to the extent that some now refer to a <a href="http://www.theguardian.com/commentisfree/2013/feb/11/greece-humanitarian-crisis-eu">“humanitarian crisis”</a> in the country.</p>
<p>Total household consumption adjusted for inflation is now 20% lower than it was in 2010. And that measure includes rich households whose wealth could <a href="http://www.spiegel.de/international/europe/capital-flight-southern-european-money-migrating-north-to-safety-a-818436.html">protect them</a> from the brunt of austerity. The decline for households below the average income was certainly in excess of 25% and perhaps over 30%. Four in ten children are being <a href="http://www.theguardian.com/society/2014/oct/28/child-poverty-developed-world-unicef-report-global-recession">brought up in poverty</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68485/original/image-20150108-23812-abmt0d.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Preliminary estimates for 2014.</span>
<span class="attribution"><span class="source">www.oecd.org</span></span>
</figcaption>
</figure>
<p>Greece’s level of unemployment challenges the imagination. It has stood at 25% or more for two years – the same as the rate in the US in the 1930s during the great depression. Since the end of World War II <a href="http://www.piie.com/publications/chapters_preview/353/2iie3438.pdf">no European market economy</a> suffered unemployment of half the current Greek rate. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68487/original/image-20150108-23810-1182lgx.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">www.oecd.org</span></span>
</figcaption>
</figure>
<p>Things are even worse for young people. Less than <a href="https://ycharts.com/indicators/sources/eurostat">50%</a> were in employment in 2014, and that statistic excludes those in education. These employment figures are but the tip of a human disaster iceberg; health and education are both steadily worsening below the waterline of publicity.</p>
<h2>Speculators vote with their money</h2>
<p>It is little wonder that the only major party opposed to austerity, Syriza, enjoys a lead in the opinion polls. The only surprise is that this anti-austerity party did not win the election in 2012, though it did have the second largest number of seats. </p>
<p>The primary reason for the failure of anti-austerity parties to win the election was the systematic scare campaign carried out by the European media, enthusiastically aided and abetted by the European Commission and every major EU government without exception.</p>
<p>The source of this putative reign of terror would be none other than the infamous “financial markets”, and the warning is <a href="http://time.com/3648338/greece-financial-crisis-election/">again pouring forth</a> at full volume, alongside more <a href="http://www.nytimes.com/2015/01/06/world/europe/greeces-relationship-with-eurozone-is-tested-by-election.html?_r=0">threats from politicians</a> of the eurozone.</p>
<p>These warnings have a real basis. The blue bars in the chart below show the index of the Athens stock market and the red bars the interest rate on Greek government bonds. From the beginning of 2012 interest rates rose and the stock market plunged, as the lords and ladies of finance quivered with anxiety that a democratic election might bring an end to austerity in Greece.</p>
<p>To the relief of speculators throughout Europe, Greek voters returned the right-of-centre government to carry on the lowering of living standards. The relief of speculators at escaping democratic accountability is shown in falling interest rates and a recovering Athens stock market over the next two years. But now the spectre of a citizen’s revolt again stirs anxiety. Interest rates have crept up over the past three months and <a href="http://uk.businessinsider.com/snap-election-fears-are-tanking-the-greek-stock-market-2014-12">stock prices declined</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68488/original/image-20150108-23792-kz0unw.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">www.bankofgreece.gr & www.investing.com</span></span>
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</figure>
<h2>Democracy or dictatorship?</h2>
<p>In the same election that anti-austerity Syriza won 71 seats, the overtly fascist <a href="http://en.wikipedia.org/wiki/Golden_Dawn_%28political_party%29">Golden Dawn party</a> won 18. Among the far-right parties that have thrived on a diet of austerity-depressed countries, Golden Dawn is perhaps the most dangerous. In October of last year the Greek public prosecutor ordered all Golden Dawn members of parliament to <a href="http://www.theguardian.com/world/2014/oct/16/greece-golden-dawn-mps-tried-criminal-offences">stand trial</a> for inciting, supporting and carrying out acts of political violence.</p>
<p>Without doubt Golden Dawn and all parties like it, such as the <a href="http://www.bbc.co.uk/news/blogs-eu-27571116">Jobbik party</a> in Hungary, are clear and immediate threats to democracy. But they do not present the biggest threat to the democratic process. Considerably more dangerous and infinitely more powerful are the eponymous financial markets. Always alert to any democratic revolt against their privilege to loot and plunder, speculators and the more superficially respectable international bankers have the power to bring down governments and pervert election results. </p>
<p>Europe and most countries of the world need radical measures to restrict – or better still eliminate – the power of finance. The choice is democracy, however flawed it might be, or the dictatorship of finance. It really is that simple.</p><img src="https://counter.theconversation.com/content/36034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Greece faces a decisive moment on January 25 in a snap election that could see major gains for the extreme left and right. But anyone worried about how Syriza on one side, or Golden Dawn on the other…John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/359652015-01-09T11:44:47Z2015-01-09T11:44:47ZWhy are European leaders so afraid of Greece’s Syriza party?<figure><img src="https://images.theconversation.com/files/68354/original/image-20150107-1985-1sd48vw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Alexis Tsipras is on track to win the Greek election.</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/home_of_chaos/14274791564/in/photolist-nKq3cW-nsY83t-oZix82-4fw4C9-aBA6JJ-5BvCxF-5BzSJb-5BvBkM-5BvAjn-bWGoiy-dCYY8Y-dCYYbh">thierry ehrmann</a></span></figcaption></figure><p>The calling of a snap election in Greece for January 25 has been met with great <a href="http://www.bbc.co.uk/news/world-europe-30623421">concern in political circles</a>, prompted direct interventions by <a href="http://www.theguardian.com/world/2014/dec/14/greece-election-eu-finance-chief-athens-grexit-fears">top European officials</a> and alarmed markets and <a href="http://www.reuters.com/article/2014/12/30/fitch-snap-greek-elections-add-to-credit-idUSFit88538020141230">credit rating agencies</a>.</p>
<p>This is all because Syriza, the Greek Coalition of the Radical Left, is being tipped to win the election. It is currently the largest opposition party in the Greek parliament and consistently leads the polls as the vote approaches. </p>
<p>According to the <a href="http://www.ft.com/fastft/257212/syriza-set-decisive-victory-report">latest polls</a> Syriza’s vote share could stretch anywhere between 36% to 40%, with the centre-right New Democracy trailing by at least three percentage points. Anything above 36% gives Syriza not only an electoral victory but an outright governing majority in the Greek parliament because the winning party is automatically handed a <a href="http://metapolls.net/country-facts-2/greece/greek-electoral-system/">50-seat bonus</a> in the 300-seat parliament.</p>
<p>Opponents claim that Syriza would renege on Greece’s international obligations if it came to power and that efforts to reform the country would be halted. <a href="https://theconversation.com/january-poll-puts-syriza-in-driving-seat-and-greece-on-course-for-economic-turmoil-35824">Political instability</a> would ensue and the eurozone would again be plunged into crisis. Talk of Greece leaving the euro has been particularly prominent of late.</p>
<h2>Syriza’s roots</h2>
<p>Syriza emerged as a unified party just before the elections of June 2012 but it brings together political groups with long histories. It can be seen as the accomplished product of an effort to unite the Greek left that spans nearly 50 years. </p>
<p>Syriza’s political strategy draws heavily on the principles of the Euro-communist <a href="http://www.transform-network.net/cs/casopis/vytisk-132013/news/detail/Journal/what-syriza-will-propose-to-europe.html">“democratic road to socialism”</a>. Its values, organisation and mobilisation are influenced by the global justice movement. </p>
<p>The party advocates an eclectic egalitarian economic programme that draws on Marxism, Keynesianism and more recent Latin American economic experiments. It goes hand-in-hand with claims for the expansion of social and political rights, pacifism and environmentalism, as articulated by European and global social movements since the 1960s. This also ties in with a staunch, albeit critical, Europeanism that aims to build alliances with other progressive political and social forces in Europe in order to achieve radical root-and-branch reform of <a href="http://www.tandfonline.com/doi/citedby/10.1080/13608746.2012.757455#.VKvxkiusXTo">European integration</a>.</p>
<h2>The manifesto</h2>
<p>According to the <a href="http://www.businessinsider.sg/what-syriza-stands-for-2014-12/">Thessaloniki programme</a> that lies at the heart of Syriza’s election pledges, the party is committed to renegotiating Greece’s colossal debt. Despite five years of extreme austerity, this still exceeds 170% of GDP. Syriza wants a 50% debt write-off as part of a wider European Debt Conference along the lines of the German debt <a href="http://www.dw.de/german-economic-miracle-thanks-to-debt-relief/a-16630511/">write-off of 1953</a>. </p>
<p>The programme also includes a promise to replace the <a href="http://ec.europa.eu/economy_finance/eu_borrower/mou/2012-03-01-greece-mou_en.pdf">2010 bail-out agreement</a> signed with the Europe with a long-term national plan aimed at the reconstruction of the Greek economy.</p>
<p>Syriza will also put in place a set of emergency measures meant to alleviate what it calls the <a href="http://www.bloomberg.com/news/2014-12-18/what-syriza-says-about-greece-s-economy-its-debt-and-the-euro.html">“humanitarian crisis”</a> caused by austerity. Minimum wages and public investments will be increased to trigger consumer demand, create jobs and kickstart growth. Only then, Syriza argues, will the country be able to repay its debt. Exhaustive negotiations will be conducted with creditors and European partners but Greece will remain in the eurozone.</p>
<p>The reforms envisaged involve the democratic refoundation of the Greek state. This means unsettling decades of collusion between big business, media groups and political parties. Syriza may indeed be well placed to make such a radical change work since it has not been a party of government and has not been involved in such practices.</p>
<p>Syriza also believes that Europe as a whole must be reformed. German-inspired austerity politics, the party argues, are leading the whole enterprise to ruin. The party wants a new deal for the EU involving public investment, financed by the European Investment Bank. It supports a shift towards quantitative easing by the European Central Bank that involves direct purchases of sovereign bonds. This is, in many ways, Syriza’s most ambitious goal and probably the hardest to achieve.</p>
<p>How far Syriza gets will depend on the magnitude of political support it can muster at home but also on the alliances it builds beyond the limited forces of Europe’s radical left, even counting <a href="https://theconversation.com/meet-podemos-the-party-revolutionising-spanish-politics-33802">an emergent Podemos</a> in Spain and the German <a href="http://www.bbc.co.uk/news/world-europe-30342441">Die Linke</a>.</p>
<p>The party’s success in the forthcoming election may mark a turning point in Europe. It would be a step away from austerity and towards a resurgence of the left. But this is not the social democratic left. It is a radical new experiment. It is perhaps this, and not the potential for economic turmoil under a Syriza government that scares European leaders the most.</p><img src="https://counter.theconversation.com/content/35965/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Myrto Tsakatika is a member of Syriza</span></em></p>The calling of a snap election in Greece for January 25 has been met with great concern in political circles, prompted direct interventions by top European officials and alarmed markets and credit rating…Myrto Tsakatika, Senior Lecturer in Politics, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/355762014-12-16T19:26:42Z2014-12-16T19:26:42ZA Syriza election win would be a serious setback for Greece<figure><img src="https://images.theconversation.com/files/67370/original/image-20141216-14154-8ju7sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Rebuilding Greece's economy – a Sisyphean task?</span> <span class="attribution"><span class="source">Mopic via shutterstock</span></span></figcaption></figure><p>The Greek economy, after five years of recession, has nearly reached the top of the hill it has been climbing. But there is a real threat that in just a few months it will roll back down again. </p>
<p>Like Sisyphus, the ill-fated king in Greek mythology, Greece’s achievements are at risk with the looming parliamentary election of a new president, which the official opposition (the Coalition of the Radical Left, better known as Syriza) is <a href="https://theconversation.com/snap-election-and-market-collapse-show-greece-is-still-crippled-by-crisis-35347">intent on blocking</a> in order to call for early general elections. The group is <a href="http://www.bbc.co.uk/news/world-europe-30481307">tipped to win</a> and there is no doubt that this would roll Greece back down to where it started in 2010, if not even deeper into the abyss. It is more probable now than ever before.</p>
<p>This need not be the case even if early elections are called. The problem is that <a href="http://www.wsj.com/articles/greek-leftist-party-syriza-spooks-some-investors-1418310035">Syriza is scaring investors away</a> with its polyphony on important economic matters such as foreign direct investments and badly needed structural reforms, whether or not the austerity measures are continued. Syriza is also scaring the governments of other eurozone countries because its erratic policy on Greece’s debt could destabilise the euro and eventually force Greece out of the eurozone. Most importantly, though, it is scaring Greek consumers away by shaking their confidence on the future course of the Greek economy, which might possibly result in a bank run.</p>
<h2>Dealing with the debt</h2>
<p>The most important problem which faces the Greek economy is its excessive sovereign debt, and early elections would not reduce this. Unfortunately, the Greek political parties are heavily divided on how to tackle the country’s deficit. But most importantly Syriza believes that a huge rewrite, at the cost of the taxpayers of the other eurozone countries, could be acceptable. </p>
<p>The alternative is to unilaterally default. But the moment that happens, they would have to go to the international capital markets to borrow more than €10 billion to finance their programme of bringing salaries back to pre-2010 levels, hire hundreds of thousands of new public employees and even re-nationalise private enterprises such as Olympic Airways and the Telecommunications Company.</p>
<p>All this makes international capital markets very nervous. Some Greeks believe that Syriza, which is currently leading the polls, would never implement these policies either because they would not be able to find the money or because they would probably give up their rhetoric and collaborate with the European Commission, the European Central Bank and the IMF to continue with the implementation of the austerity programme. This, however, is a very dangerous gamble. It would see Greece entering into a long and unknown labyrinth, with the Minotaur waiting at every turn to tear the country apart. </p>
<h2>A simple solution</h2>
<p>Of course there is a solution, but no political party in Greece wants to implement it. The Greek debt would have been wiped out if Greece’s tax authorities were able or, more accurately, were willing to collect the due taxes. Tax evasion and tax avoidance is as old as Greek history itself.</p>
<p>Greece is a rich country with high per capita income and even higher per capita wealth. The current crisis did not change this. The lowest per capita income of the 21st century is <a href="http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm">higher than the highest per capita income</a> of the 20th century. More than a quarter of the actual output produced in the country <a href="http://www.tandfonline.com/doi/pdf/10.1080/00036846.2014.896984">goes unreported</a>. This year, with an unprecedented flow of international tourists, especially on the popular islands, <a href="http://greece.greekreporter.com/2014/11/26/tax-evasion-from-greek-tourism-to-reach-e1-5-billion-in-2014/">tax evasion was rife</a> and at its peak. Very few businesses were issuing receipts and even fewer tourists were asking for them.</p>
<p>The solution is to tax wealth, and not income and consumption. A Greek proverb states that you cannot hide two things: your cough and your wealth. A tax on wealth which includes a tax on property and bank deposits, is the solution to the notorious Greek tax evasion. This will generate sufficient revenue to cope with the excessive debt. But political will is needed and, despite all the party posturing, it is currently lacking in Greece.</p><img src="https://counter.theconversation.com/content/35576/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory T. Papanikos is affiliated with the Athens Institute for Education and Research (ATINER), a world association of academics based in Athens.</span></em></p>The Greek economy, after five years of recession, has nearly reached the top of the hill it has been climbing. But there is a real threat that in just a few months it will roll back down again. Like Sisyphus…Gregory T. Papanikos, Honorary Professor, Department of Economics, University of StirlingLicensed as Creative Commons – attribution, no derivatives.