Athens’ road to redemption still rocky
This Greek drama could become a tragedy by the summer
It was political brinkmanship of the highest order, pitting Greeks against Germans in a battle between machine-like Teutonic rationalism and the fiercely independent spirit of Hellenic democracy.
Reams upon reams of newsprint (or the digital equivalent) were spent debating who’s right, who’s wrong, and whether this spelled the end of the European Union. Then, earlier this week, after weeks of tense negotiations, eurozone finance ministers agreed to terms that would extend a €240-billion ($340-billion) bailout program for Greece’s battered economy by another four months. Cue the chorus.
And so the world survives yet another near-crisis. Like bleary-eyed theatre patrons emerging from a Sophocles marathon, we might all be a bit sadder, though none the wiser, yet still relieved that we made it through. (Added bonus: we don’t have to use the word “Grexit” anymore.)
Is the Greek economic drama a tragedy or a comedy? All we can safely say at this point is that it probably could have been worse.
For weeks, the new Greek government of Prime Minister Alexis Tsipras — elected on promises to repeal much-hated austerity measures attached to European funding — was talking tough. Meanwhile, European finance ministers showed no signs of backing off from their position that Greece would have to work harder to get its economic house in order if it wanted to continue borrowing.
At one point, the affair had commentators fretting that if negotiations failed, it could mean the exit of Greece from the European Union, or even the eventual collapse of the EU itself.
The uncertainty spurred volatility in global stock markets, amid fear of a sovereign-debt-fuelled epidemic of ill confidence that could spread to other troubled economies (Italy? Spain? Portugal?) and perhaps the world.
But the EU is still intact. Greece is still in the union. And investors largely responded as if the drama was a case of lots of sound and fury, signifying not very much.
European stock markets recorded marginal gains following the accord, largely on other factors, such as U.S. Federal Reserve chair Janet Yellen’s announced “patience” on interest rate hikes. If you had run for the exits thinking the world was going to end — well, it didn’t.
After all, Greece is a very small part of the European economy. And for Canadian investors, there has been plenty of reason to have some exposure to Europe, from both an opportunistic (valuations are low-ish and European Central Bank quantitative easing has been stimulative) and a long-term perspective (Europe offers diversification into industries under-represented on Canadian equity markets).
But the Greek drama is far from over, and its biggest impact on European and global markets may still be yet to come.
The core problem for Greece is that it is in the midst of what would normally be called a depression. While much of the developed world recovered since the global recession of 2008, Greece’s economy has shrunk by a quarter. Unemployment is running around 25%, but about half of the country’s young workers don’t have jobs.
Any economist can point out the big systemic problems behind Greece’s underperformance: overregulation, a lack of competitiveness in major industries, government overspending, a bloated and overpaid public-sector workforce, a costly and overgenerous pension scheme, an aging population and an “informal” (a.k.a. black) market that comprises perhaps 25% of GDP — one could go on.
Greece’s creditors, in originally extending the helping hand of €240-billion, required the former government to address some of these challenges in a meaningful way, particularly government spending.
Those austerity measures proved hugely unpopular among Greeks, who understandably don’t much appreciate outsiders telling them what to do.
To secure this week’s bailout extension, the new government proposed revised terms, reportedly including a promise to crack down on corruption and tax evasion (the “informal” economy doesn’t pay taxes).
A 2013 survey by Transparency International suggested that 90% of Greeks believe government corruption is a serious problem, and making a public show of tackling it should allow Mr. Tsipras to save face with an angry populace.
But good luck seeing any results. Successive governments have tried (or said they did) and failed, and it’s highly unlikely that anti-corruption and anti-tax avoidance measures will have much economic impact in the short term.
Europe this week bought time, but not a solution. At some point, Greece, its European creditors and global investors might have to own up to the possibility that there isn’t one.
We’ll get to watch this drama play out all over again come the summer — and this time, it could definitely be a tragedy.