Grexit: is the prescription worth the side effects?

Usually when major events reach the level of media-driven frenzy that they get their own names, we slap together something so silly that it can actually take away from the seriousness of the situation. Here in the US, ever since the Watergate Scandal, we like to slap the suffix “-gate” onto major political scandals for no reason that’s apparent to anybody who doesn’t work in television news, as far as I can tell. This practice is ubiquitous enough that it has its own Wikipedia page, surely a sign of something. Wikipedia tells us that you might remember the “-gate” suffix from such scandals as “Deflategate,” “Billygate,” “Coingate,” two “Gamergates,” two “Spygates,” two “Strippergates,” three separate “Troopergates,” “Closetgate,” “Chinagate,” and many more. The appendage has elevated the trivial (Weinergate) and trivialized the serious (the Iran-Contra Affair has been called “Irangate” and “Contragate,” but thankfully neither ever really caught on). We’ve even used it to refer to purely foreign news, like “Camillagate,” when Britain’s Prince Charles was…well, surely you’ve heard by now. Or take the way we give playful nicknames to terrorists, which serves simply to infantilize horrible people but happens all the time anyway.

All that said, I think the name everybody has applied to the financial crisis in Greece is pretty good. “Grexit,” after “Greek exit” (as in exit from the Eurozone), sounds like some medicine you hear about in those shitty TV ads, promising to maybe clear up your hemorrhoids or whatever with only a mild risk of debilitating rectal aneurism or cancer of the eyeball, and by the way, women who are pregnant or may ever be pregnant or may ever see a child again in public are advised not to touch it, or anyone who has ever been in contact with it, forever. In that sense it clearly conveys the situation it’s describing and any normal person’s interest in learning more about that situation. See, the Greek public is being asked to swallow a financial pill that might clear up the pain in the ass they’ve been getting from German bankers for the past 6 years, but more than likely it’s actually going to give Greece and all its citizens from here to eternity the geopolitical equivalent of a debilitating rectal aneurism. And the rest of the world is going to have to hear about it whether we want to or not.

“Ask your macroeconomist if Grexit is right for you”

Grexit has actually been brewing for some time. Greece has been running huge budget deficits for decades now, mostly because wealthy Greeks see paying taxes as more of a suggestion than a requirement. Big budget deficits add up to big debt, which can get to unsustainable levels, and almost certainly will if, for some reason, your government is stupid enough to voluntarily give up the power to print its own currency. Unfortunately for the Greeks, their government was that stupid, and it applied to join the Eurozone in 1999. The leadership of the Eurozone, which could have looked at Greece’s books and opted to reject its membership bid, instead exhibited its own stupidity and let Greece join the currency in 2001. Other countries in the Eurozone have since claimed that they were bamboozled into letting Greece in by Greece’s fraudulent accounting, but the fishiness of Greek’s national books has been known for some time, even if nobody knew just how fishy they really were, and yet the Eurozone still let them in.

Despite continuing to run big annual deficits, Greece was mostly OK for its first several years in the Euro. This is not to say that Greeks themselves were OK, and forgive me while I slip on the Mustache of Understanding but this is the only Tom Friedman-esque story I have to tell so I’m going to tell it. I was lucky enough to take a Greek vacation back in the mid-oughts, and one day in Athens we (I was with my future wife) asked our cab driver about how things were going under the Euro (even we upper middle class Americans had noticed that shit was expensive); he went off for the rest of the trip about how horrible it was, prices were so high, ordinary Greeks were being squeezed, etc. So things were maybe not so great for the Greek people. But, you know, the big European banks were happy, and isn’t that the important thing?

Well they were happy until the financial crisis hit in late 2008, and suddenly Greece’s economy stopped growing while the deficits remained. It started to look like Greece might not be able to make payments on its debt, which wouldn’t have been so much of an issue if Greece could have printed its own money, but the horse had already left the barn on that score. So Greece entered the geopolitical equivalent of debtor’s prison, in which it was forced to borrow money just to make service payments on the money it had already borrowed. No bank in the world wants to lend money under those conditions, but they also don’t want the country to go bankrupt (or reach a point of serious political instability), because then they might not get paid at all. So the bankers try to extract concessions from the government in exchange for lending it more money, and these usually take the form of austerity (higher taxes or, better yet, drastic cuts in government spending).

In theory this is supposed to alleviate the budget deficit by reducing government outlays and somehow also boosting the private sector via, I don’t know, the power of positive thinking or something, but in reality we have plenty of evidence that austerity just craters the country’s economy, reducing government revenues and making its deficit problem worse, not better. This is particularly true for a country that has (all together now) surrendered the power to print its own currency, and hence Greece, which was hectored by its creditors to keep slashing and burning its public sector without ever seeing any benefit from doing so. Don’t take my word for it, ask Paul Krugman, who ought to know a thing or two about it:

And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.

“Grexit” first became a term after Greece’s May 2012 elections, when the Greek public, clearly pissed about the neverending austerity and the impact it was having on the Greek economy, voted in a parliament that could not agree on forming a government and had to call for snap elections in June. The government that finally emerged agreed to bailout terms set by the so-called “troika” (the European Commission, European Central Bank, and the International Monetary Fund), which continued to insist on austerity in exchange for more new loans to pay back the old loans. The ECB also refused to take any monetary steps that might boost Greece’s economy, mostly because Germany is very happy with current ECB policy and Germany, as Europe’s economic heavyweight, generally dictates ECB policy. And so the cycle went on, and the Greek economy continued to resemble a toilet whose flusher is stuck.

Then in January, new elections brought a new government led by the left-wing SYRIZA party, under new PM Alexis Tsipras, which ran on a promise that it would fight the troika’s austerity demands and negotiate a better deal for Greece. Only SYRIZA and Greece have no leverage here. The only move they can make that would be in Greece’s long-term benefit would be to withdraw from the Euro and start printing a Greek currency (presumably the drachma) again. In the short-term, however, this would be extremely painful for the Greek people, as the drachma’s value would start low and likely get much, much lower, which means massive inflation. Whatever else SYRIZA is, it’s a political party in a democratic system, which means it’s inclined to let short-term pain outweigh long-term benefit, and so any threat it makes to pull Greece out of the Eurozone is likely a bluff.

However, Greece’s creditors don’t want to be paid back in drachma that are losing value, and they really don’t want a Grexit scenario to spread to the rest of the Eurozone’s weak tier (countries like Spain, Portugal, and Italy), so they’ve been inclined to work with SYRIZA to try to change the terms of Greece’s repayments. With some objections, the troika agreed in February to give Greece a four-month extension of its loans in exchange for Tsipras accepting a package of austerity measures (some of which directly went against SYRIZA’s campaign promises). That extension is up, this week, and (hold on to your hats, this is a shocker) Greece still can’t make its payments. Meanwhile, the troika seems to feel that conditions have changed and a Greek exit from the Euro will no longer start a dash for the exits by other at-risk countries or do much harm to banks holding Greek debt. Tsipras went back to the troika last week asking for another loan extension, but apparently was given an offer that included much harsher austerity demands, and so Tsipras is putting the whole thing to a national referendum and is recommending that Greek voters vote to reject the offer. A rejection probably makes Grexit inevitable. Greek banks are closed today and probably for the foreseeable future, to forestall a run as Greek citizens try to get their money out while it’s still in Euros and therefore worth something.

What’s particularly disturbing about this affair is the degree to which it looks like major European banks, the ECB, and the IMF are deliberately trying to sink Tsipras’s government because they didn’t like the outcome of the January elections and they want Greece to elect a new government. Whatever happens now, Tsipras is probably screwed. If Greece votes in favor of the bailout and austerity, as it probably will (UPDATE: or not), SYRIZA looks weak politically and will inevitably pay the price for the damage that this next round of austerity does to the Greek economy. If Greece rejects the bailout, then SYRIZA (as the party in power) will certainly pay the price for the near-term economic calamity that will follow. Putting the choice to a referendum offers SYRIZA the chance to say that it was just doing the public’s bidding, but in a democracy the voters are never rational and are almost never inclined to agree that they’re to blame, so SYRIZA is a likely loser in both scenarios. Either way, then, the troika beats SYRIZA, and it gets to use the Greek party as a cautionary tale for parties in Spain and other countries about what happens when little countries muck around with big banks. Anybody who is not concerned with the idea of the IMF and large banks meddling like this in national politics, raise your hand (and yes, I know they’ve been arguably doing that in Africa, Latin America, and Asia since forever, but in this case it seems much more brazen — directly trying to overturn the results of a democratic election — than usual). Krugman again:

This is, and presumably was intended to be, an offer Alexis Tsipras, the Greek prime minister, can’t accept, because it would destroy his political reason for being. The purpose must therefore be to drive him from office, which will probably happen if Greek voters fear confrontation with the troika enough to vote yes next week.

But they shouldn’t, for three reasons. First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.

Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence. Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.

There’s also an interesting bit of post-World War II history playing out here on both the Greek and German sides. Large government debt is associated with the darkest chapter in modern German history, the Weimer Republic’s failure and the slide into Nazism, so there’s a pretty good psychological case to be made that Germany’s hostility to debt and insistence on austerity stems from that catastrophic event (even though, again, austerity alone only makes these problems worse). They see Greece’s debt as a sign of moral failure and aren’t interested in doing much to help the Greeks out of their jam. Meanwhile, on the Greek side, Tsipras has been throwing around an estimate that Germany should pay Greece $300 billion in reparations for the Nazi occupation of Greece. Obviously that’s never going to happen, but it’s a clever attempt by Tsipras to shift the terms of the dispute in his favor.

Look, the Euro was always a terrible idea, as currency unions historically are. It was a terrible idea even for the countries that reasonably expected to be at the top of the Euro ladder (i.e., France and Germany), but it was absolutely suicidal for countries at the bottom like Greece, who instead of being in a currency partnership with their stronger neighbors have simply surrendered their sovereignty to them. Greece is now stuck in a cycle of austerity on top of austerity, where bank and IMF loans come in only to go right back out again to foreign creditors, that probably can’t be broken unless Grexit really does happen. The EU and IMF refuse to talk about debt relief and/or a pause in service payments, but right now demanding more money out of Greece is akin to drawing blood from a stone. Further austerity will only cement Greece’s status as the EU’s (i.e., Germany’s) economic hinterland, governed not by its own elected representatives but by a group of foreign central bankers and IMF lenders. In the long-run, the best thing for Greece (and Europe) would be to get out of the Euro and don’t look bank, but the Greek people will have to be willing to endure some short-term pain to make that happen.

Author: DWD

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