The Beat Goes On

The ghost of a GREXIT has been banned. Whatever utterings can be heard from Brussels, Athens, Berlin and other capitals, it seems to me now clear that a deal will be made that keeps Greece in the Eurozone. Frustration sits deep, in particular on the side of those who hoped that Greece would leave, and business as usual would reign again. The best statement came from Dalia Grybauskaite, President of Lithuania: ‘We see a country that wants to feast and expects that others are paying for the party”. There are a good number of narrow-minded politicians and academic advisers out there who are more then willing to make the debate about the adequate VAT for electricity for private households to the criterion for a compromise; and there are more and more who have become so tired about the Greek stand-off that they only want to end the game, independent from the outcome. Is is not true that Greece only represents 2 % or so of the aggregated GDP of the Eurozone? Not to speak about the many new institutional features that had been added since 2010, plus the crisis management of the ECB, that all are seen to make a GREXIT manageable. All those many spins will not end this week. And yet, with high probabibility Greece will stay in the Eurozone. Over the next few weeks, we will witness rather difficult debates in national parliaments where chancellors and head of states will have the challenging task to explain why the compromise is a good one, or at least one that should get support by the majority of parliamentarians. Given the history of the past five years this is difficult enough.

The drama will not end there. Even if Greece is getting an extended lifeline this week, it will be only a line that keeps the patient in the ER. For quite some time, Greece will not be be in an economically sustainable position. A lot depends from the kind of debt restructuring that is in the cards, in particular from the debt relief Greece will get. The ECB will be need ed to help supporting the ailing Greek financial industry. The IMF may have to offer balance of payment support schemes. Greece will have to deliver primary budget surplusses for long periods, and they will only come with small social and economic damages if Greece can record some substantial economic growth. Austerity, even if it comes in small doses, is not of help to generate such economic growth, in particular if the economy is not equipped with a strong export sectors like, for example, Ireland. Nobody knows whether GREXIT would come with lower costs. At least, short-term the adjustment costs of a GREXIT would be high, and it can’t be excluded for sure that the immediate chaos would not end up in even higher costs. The Greek government seems to have acepted that the risks of a GREXIT are not calculable. It is now the job of the creditors to honour such a compromise offer accordingly.