Starv­ing the Greeks out

Financial Mirror (Cyprus) - - FRONT PAGE -

Ya­nis Varo­ufakis seems to be­lieve, as ex­plained by our own Nick An­drews on Thurs­day, that Europe’s fear of a cur­rency breakup gives Greece enough ne­go­ti­at­ing lever­age to off­set its lack of eco­nomic and po­lit­i­cal power.

But this cal­cu­la­tion is based on a false premise. It as­sumes that a Greek de­fault would force Europe to choose be­tween two al­ter­na­tives: kick Greece out of the euro or of­fer un­con­di­tional help. In re­al­ity there is a third op­tion that other Euro­pean Union gov­ern­ments would find much more at­trac­tive in the event of a de­fault. In­stead of forc­ing Greece out of the euro or even al­low­ing it to exit, the EU au­thor­i­ties could sim­ply starve the coun­try of money and wait for po­lit­i­cal sup­port for the Syriza gov­ern­ment to col­lapse.

This siege strat­egy has been emerg­ing in the past few weeks as the Plan B for deal­ing with Greek in­tran­si­gence. Dead­lines for a deal with Greece have come and gone with­out the EU show­ing any sign of blink­ing—in fact EU and In­ter­na­tional Mon­e­tary Fund of­fi­cials have pub­licly stated that try­ing to im­pose dead­lines on th­ese ne­go­ti­a­tions has be­come coun­ter­pro­duc­tive.

In­stead of rush­ing to­wards a deal with Greece, other EU gov­ern­ments now seem con­tent to sit back and wait while the Greek gov­ern­ment re­sorts to in­creas­ingly des­per­ate mea­sures to scrape up the money it needs for wages and pen­sion pay­ments.

Th­ese monthly pay­ment crises sug­gest that tax col­lec­tion is de­te­ri­o­rat­ing so fast that Greece now needs EU sup­port not only to keep up for­eign debt pay­ments but also to main­tain the nor­mal func­tion­ing of gov­ern­ment.

In other words, the pri­mary sur­plus of 4% of GDP, whose re­duc­tion to around 1% had been the main ob­jec­tive of the Greek de­mands and whose forced di­ver­sion to do­mes­tic spend­ing through de­fault had al­ways been the trump card in Varo­ufakis’ ne­go­ti­at­ing strat­egy, has prob­a­bly van­ished. (No­body can be sure, since Greece has failed to pro­vide de­tailed bud­get fig­ures ei­ther to its cred­i­tors or to the mar­kets since the new gov­ern­ment’s elec­tion in Jan­uary.) This means that the Syriza gov­ern­ment, un­less it gets more money from Europe, can have no hope of de­liv­er­ing on its elec­tion prom­ises of higher wages, pen­sions and public spend­ing, whether it de­faults or not.

Now that the Greek pri­mary sur­plus has more or less dis­ap­peared, Europe would not need to “pun­ish” a de­fault on for­eign debt by forc­ing Greece out of the euro.

The de­fault it­self would im­pose suf­fi­cient pun­ish­ment on the Greek peo­ple, as de­fault did in Cyprus—by slash­ing their bank de­posits, ru­in­ing their busi­nesses and ex­pos­ing for­eign as­sets to law­suits.

Un­der th­ese cir­cum­stances, what would the EU do about Greek membership of the euro?

The near-uni­ver­sal as­sump­tion is that Greece would be ex­pelled. But a more ra­tio­nal plan from the EU’s stand­point would be to do the op­po­site. In­stead of forc­ing Grexit, the EU could in­sist that Greece must re­main in­side the euro. The EU treaties clearly state that join­ing the euro is ir­re­versible—and that is the mar­ket mes­sage that pe­riph­eral gov­ern­ments and the ECB want to con­vey.

The EU could there­fore in­sist that the euro was the only legal ten­der recog­nised by EU law, even if the Greek gov­ern­ment de­cided to print do­mes­tic IOUs to pay wages and pen­sions.

Greece could be banned from re­plac­ing euro debts or do­mes­tic bank de­posits with a newly is­sued cur­rency. That legal pro­vi­sion, in turn, would mean an ex­plo­sion of the gov­ern­ment’s li­a­bil­i­ties not only to for­eign debtors but also to its own cit­i­zens since the gov­ern­ment would be re­spon­si­ble for the in­sured de­posits in banks that were ren­dered in­sol­vent by the de­fault.

In­stead of be­ing forced out of the euro, Greece could be treated sim­ply like a mu­nic­i­pal or lo­cal author­ity in bank­ruptcy. With­out any ac­cess to bor­row­ing, the gov­ern­ment would have to keep spend­ing strictly in line with tax rev­enues. With the pri­mary sur­plus ap­par­ently van­ish­ing, de­fault would force Syriza to in­flict even more aus­ter­ity than the Troika, in­stead of the spend­ing bo­nanza it had promised—and the gov­ern­ment’s col­lapse would be just a mat­ter of time.

In short, the main ef­fect of a Greek de­fault would prob­a­bly be ex­pul­sion of Syriza from the Greek gov­ern­ment, rather than ex­pul­sion of Greece from the euro.

That, of course, would Europe just fine.

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