Greek Drama

 /  April 27, 2015, 7:36 p.m.


For Greece, fixing the nation’s economy is truly a Sisyphean task. Greece has struggled to recover ever since the financial crisis of 2008, when waves of unemployment and crashing property values caused tax revenues to plummet around the world. As falling revenues exacerbated the skyrocketing cost of economic stimulus, countries scrambled to balance their budgets. The narrative is not unfamiliar to us: the United States faced several years of budgetary stand-offs, a government shutdown, and many near-defaults on the government’s debt.

For Greece, the situation has been even more precarious. Unemployment remains persistently high, at 25.8 percent. To put this into perspective, this proportion is comparable to the U.S.’s record high unemployment during the depths of the Great Depression. Without accelerated economic growth, Greece has relied upon international help to balance its budget. For four years, loans monitored by the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission—a group infamously known as the Troika—have kept the Hellenic Republic afloat. By accepting 246 billion euros in funds, Greece agreed to large spending cuts and to crack down on corruption. In return, Greece would be able to repay older loans, provide badly needed liquidity for the nation’s banks, and avoid financial collapse. What the bailout did was shift Greece’s debts from private banks and lenders to lenders of last resort, including the IMF and ECB. Both sides have chafed at the terms. Angry Greeks have repeatedly protested and rioted in the streets against cutbacks in government jobs and the minimum wage, while Germany has been unwilling to relax the prescription of austerity.

The data paint a stark picture of Greece’s finances. The IMF estimates that government expenditures have declined 37% from a high of 124.6 billion euros in 2009, to 90.9 billion last year. At the same time, Greece’s financial reforms have failed to rebuild the tax base. In absolute terms of euros collected, the IMF estimates Greece’s tax revenues actually decreased  from 88.6 billion to 84.3 billion euros during the same time period. From another perspective, tax revenues as a portion of the economy increased from 38% of GDP to 44% of GDP—but this was only because the Greek economy was shrinking faster than the taxes being collected. All in all, the data depict a deeply troubled economy. While the third quarter posted a modest growth rate of 0.7%, Greece hit a bump in the road, with the economy contracting by 0.2% in the fourth quarter.

Whether the bailout and its accompanying fiscal austerity have altered Greece’s economy for better or for worse is fiercely debated. Harald Uhlig, a Professor of Economics at the University of Chicago, believes the bailout actually mitigated the fiscal crisis in Greece. In an interview with the Gate, Uhlig stated: “Greece is free to borrow as much as they want on private markets, but private markets were no longer willing to lend to Greece. If Europe and the ECB had not stepped in and replaced much of that lost lending, if the debt terms would not have been renegotiated, it would have had a much more drastic effect on fiscal resources in Greece.” On the other hand, voters have found the situation on the ground intolerable. Many Greeks are looking for the government to pull the economy out of the slump rather than just balance the books, as evidenced by the rise of Syriza, a far-left political party whose election platform includes hiking the minimum wage by 29%, expanding pensions and subsidies, and adding 300,000 jobs. Given the troubled state of Greece’s economy and finances, reaching both the fiscal and the economic goal seems unlikely. The hard truth is perhaps that only long term reforms can normalize the economy—as Professor Uhlig commented, ”perhaps there is more that can be done regarding structural reforms of labor markets and competition, that can encourage the economy to grow: perhaps not right away, but eventually.”

By last month, voters had run out of patience. The ruling coalition of New Democracy and the Panhellenic Socialist Movement (PASOK), the two establishment parties, had reluctantly acquiesced to austerity. Both were soundly defeated during the January 2015 snap elections for all three hundred seats of the Hellenic Parliament. The Coalition of the Radical Left, a relatively new political bloc also known as Syriza received 149 seats, and would have held an absolute majority had it won two more seats. Promising to renegotiate the regime of austerity, reverse cuts in government services, and request the cancellation of a fraction of Greek debt, party leader Alexei Tsipras successfully persuaded voters to toss both New Democracy and PASOK out of power, a stunning rebuke to the two parties that have alternated control for four decades. Economic analysts feared the clash between the new Parliament and the European loan monitors would lead to the so-called “Grexit,” the Greek exit from the Eurozone. Investor confidence in the euro would plummet if the currency became an arbitrary union, with countries entering and exiting freely, and markets held their breath as Alexei Tsipras took the reins of power.

Far from maintaining his initially confrontational rhetoric, Tsipras was quickly forced to back down. On February 20, Greece and the European bailout monitors reached a tenuous understanding, under which Europe would continue loaning money to Greece for four months. Tsipras received several concessions: instead of being dictated a set of reforms, Greece gets to pick its poison, and for 2015 at least, even harsher budget cuts that creditors wanted are off the table. Tsipras’s plan is to crack down on corruption and tax evasion while diverting some of the savings to provide economic relief. Just how tenuous this understanding is quickly became apparent: while the European Commission initially responded favorably to Greece’s plan, by early March loan monitors were wavering on whether to go forward with the extended bailout—they are now requiring Greece to implement definitive reforms first.

So why did Prime Minister Tsipras concede so quickly? His unrealistic election pledge to cancel a fraction of the Greek debt was unsurprisingly rejected by Europe, and the pledge to raise the minimum wage is now also in doubt. In the end, Greece gave in because leaving the Eurozone would hurt the country far more than swallowing the bailout regimen. Returning to the drachma would put the country on a new, unstable currency, likely to be worth much less than the current euro. As Harald Uhlig points out, “Why would people receiving pensions from the government think they will stay stable, in terms of Euros?  Why would government employees think their salaries would stay stable, in terms of Euros?” It is possible that switching from a strong euro to a weaker, less valuable drachma would reduce the cost of tourism and exports for foreigners, luring outside business. But this small advantage is outweighed by the turmoil that would follow. Furthermore, the Grexit does not solve Greece’s fundamental problem: Greece is required to pay back its debt in euros. The economic shock of leaving the Eurozone would erode the tax base even further, and Greece would also lose the low interest bailout loans it depends on for financing the debt. Printing drachmas en masse would devalue the domestic currency, and make repaying euro-denominated debt even more expensive. The government would owe debts no smaller than before, but would have fewer means of paying it off. Greece just doesn’t have the leverage to demand immediate debt relief. Uhlig does note that Germany, one of Greece’s most influential creditors, does fear that a Greek exit would damage the political goal of “further integration and harmony in Europe.” Nevertheless, Alexei Tsipras would face immediate political repercussions if Grexit destroyed the Greek economy; Angela Merkel would lose out on her goal of uniting Europe, a long-term problem. Thus Greek political leaders face more pressure than their European counterparts, and any deal will inevitably contain terms less favorable to Greece.

But can Tsipras secure political support back in Greece to implement these reforms? A critical choice Tsipras made after the election may come back to haunt him. To form a majority government, Syriza chose to combine forces with a political party on the opposite side of the political spectrum. Even though the Independent Greeks hold right-wing positions on social issues that clash with those of Syriza’s, Tsipras chose that party over To Potami, a moderate party that would have been more ideologically compatible. The one thing the two parties do share is their repudiation of the bailout—analysts consider the Independent Greeks to be more virulent than Syriza in their opposition to the bailout authorities. By choosing the Independent Greeks, Tsipras risks internal dissension if his coalition becomes unhappy with the bailout negotiations. Tsipras could even be vulnerable to confidence votes, which almost brought down two consecutive predecessors, Antonis Samaras and Georges Papandreou.

As this article went to press, fears that Greece will default on the debt are rising. Greece and the loan monitors have still failed to reach a final agreement; they are still disputing the exact details of the country’s proposed economic reforms. Quite clearly, Syriza has come under heavy domestic pressure, as top cabinet officials are resisting EU demands that Greece auction off government property and cut pension benefits. Time is running out. Financial analysts predict that a massive cache of debt securities due in June and July of this year will be the last straw, unless Greece either obtains more aid or forgiveness on the debt.

In a crisis of such magnitude, finger-pointing between the players of the unhappy drama is inevitable. Some analysts have blasted Greece as a state ruled by corruption and “deepening social decay,” responsible for bringing the debt bubble upon itself. Others have portrayed Germany as a foreign aggressor, stifling economic growth in the name of responsible budgeting. The real story is not so simple. Greece is suffering a human tragedy. Both sides are trying, albeit with a measure of mistrust, to resolve the situation, but there are no easy solutions amidst a depression of such magnitude—steering between the Scylla of austerity and the Charybdis of Grexit will prove no easy task. Greek voters chose Syriza out of desperation—so radical a movement could only have gained power under extraordinary circumstances. If Tsipras and the Europeans cooperate, working together without inflamed rhetoric, negotiations pushed to the last minute, or backtracking on deals, at least they may provide the small measure of hope Greece so badly needs.

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James Gao