Leave It or Take It?

It is getting tricky, in economic as well as in political terms. Thanks to the most leaky negotiations I can recall we have immediate access to the most recent bailout plan sent by the creditors to the finance ministers, and this document makes clear that Greece will not get any sweeteners. This holds in particular for the sticky pension topic, where creditors ask for a quicker increase of the retirement age of 67; even though they offer to end the pension top-up for poor pensioners by 2019 rather then originally demanded by 2018, they still ask to end this system immediately for the top 20% pension earners. Politically difficult is the dead to immediately end the VAT privilege for Greek Islands, a gift that Syria’s coalition partner wants to defend ion any price. An on it goes.

Bottom line is that Greece must make cuts in order to achieve the primary budget surplus of 1% in 2015 that will rise over the next two years to 3.5% in 2018. This is a maneouvre of externally guided austerity that comes with additional costs in loss of economic growth and thus a further increase of the public debt ratio. It will come with political costs as it is now obvious that Greece can’t deviate from the creditor policy path, and this asks for austerity and strict market-oriented reforms in exchange for access to funds. Political purists in the creditor camp were much more successful then the political purists in Greece in setting the agenda and making decisions. This was to be expected as creditors usually have advantages over debtors in setting settlement terms. This may be different in case of really large debtors as they may have the chance to leverage on the fear of losses by creditors. Since the haircut in 2012 this is no longer the case. Greek creditors are public or international institutions that have ample opportunities to deal with losses. Sure, losses would be difficult tho explain and justify but in economic terms they would be absorbable.

It is a Catch-22 for Greece. Accepting the take-or-leave offer creates additional and political pain, and it may lead to new elections. Losers would be probably Syria hardliners. This does not mean that this group of politicians is wrong in their repudiation of the creditor demands. The more of the same dictate will not solve Greek troubles. If a deal would not, for a minimum, make a firm promise to deal with Greece’s debt overhang in a solid way that includes debt cuts and growth-oriented restructuring, the future would be bleak.

Why not marching off? One answer is that still all polls indicate that a majority of Greek citizens would prefer to stay in the Eurozone. This may reflect as much fear about the implications of an GREXIT as it may hint to the belief that staying in the Eurozone and thus in the EU has its advantages. Marching away still is a option, at least if this would be a exit that is orderly prepared and enjoys the political as well as financial support of the EU and the Eurozone. Such a process would not be cheap, and still would not avoid strict austerity measures of any incoming Greek government. It may be well the case that austerity within the Eurozone is preferable to austerity outside the Eurozone. The idea that a simple strong devaluation of a newly introduced Greek currency would quickly improve the price competitiveness of Greece and creation export-led boom defies all structural features of the Greek economy. Any deprecation of a new currency would simultaneously increase the value of Euro- and USD -denominated debts, and thus require additional efforts to make debt service transfers happening. In other words, earning foreign currency and solving the problem to achieve a budget surplus become even more critical. Now, we only need to go back to 1929 and we can read the controversy between Keynes and Ohlin in order to understand the relevance of the problem. Historically, we also know that Keynes was absolutely correct in his verdict of the dealings with German war reparations. This history is a strong argument against austerity in one-country. Sure, Greece could always default on all debts and take an Argentine path. This would imply a few years of harsh austerity, also the loss of its EU membership, and also some political turbulences but as history also shows private markets trend to forgive, and Greece may be able to re-enter the international financial system.

Those are the options, and I still trust that the Greek government may will go for austerity inside the Eurozone. Let’s see.