Fewer options before Greece, EU

The current bailout has time until the end of the month. After that, Greece is on its own.

It is becoming ever clearer that the election of the left-wing Syriza government in Greece has marked a historical turning point in European politics and economics.

For the first time, there has come a government that, ironically with some help from the International Monetary Fund, has challenged the fiscally prudent neoliberal orthodoxy that had such a stranglehold on European policy.

The Syriza government led by the charismatic Alexis Tsipras (whose trademark is to wear a blazer without a tie) was elected on the promise of ending punitive and counter-productive austerity measures that have led Greece into a full scale Depression, capital D.

Just as the Syriza government was being elected, unemployment had peaked at over a quarter of the labour force, mirroring almost to the percentage point, the levels of crisis during the Great Depression in the United States. And most tellingly, even the IMF admits that much of the crisis – though not all – is due to stringent conditions tied to the bailout package then thrown as a lifeline to a bankrupt Greek state by the European Commission. That lifeline, it turned out, was more like a noose.

Before condemning Greece as a reckless borrower for accepting such a bailout package, a close reading of the events that have unfolded, makes clear that it is, instead, the EU banks that have acted as reckless lenders. Furthermore, as with any loan, there is always the implied risk of default – the possibility that the lender will not get its money back.

It seems that European banks, both when they proffered the loans and now, want to have their cake and eat it too. Ironically, the conditions that have been attached to the bailout package from the EU have shrunk Greek output to such an extent that a full repayment of the loans is now acknowledged to be near impossible.

So, now Europe is on the brink. The monetary union, the Eurozone, which represents in many ways the culmination of the decades-long efforts of the integration of Europe and a European project ostensibly committed to peace and prosperity after the horrors of two world wars fought primarily on its territory, is in peril.

To be clear, to many observers, the Euro was a terrible idea. A plan for a pan-European currency never met the conditions envisaged in what is called in academia as ‘optimal currency area theory.’

Economic sovereignty

The primary problem as it relates to Greece is that having a monetary union without a fiscal union meant surrendering member-nations’ economic sovereignty to a pan-European body while still holding on to political sovereignty, specifically of fiscal policy.

The contradictions that ensue with a plan such as this are plain for people to see. Specifically, Greece does not have the tool of seignorage - the ability to print one’s own currency - to pay back its government debt.

Therefore, in order to pay back its debt, it would have to run budgetary surpluses that get more and more constrictive on its economy as the interest and debt burden increases. In short, in giving up its monetary powers, Greece has also given up its primary tool to fight depressions – fiscal policy.

In effect, what has happened thus is a vicious cycle where the greater the debt the government owes, the bigger the austerity measures that have to be in place to finance that debt. This would not be a problem if government spending did not have an effect on the total GDP. Unfortunately, it does and as government spending drops, and the private sector lacks the confidence to take up the slack, GDP shrinks sending the economy into recession (or depression).

This affects tax receipts and thus reduces government revenue limiting its ability to pay back the very debt that the austerity was intended to allow it to pay back in the first place. The Syriza government was elected on the explicit mandate to end this vicious cycle where the conditions tied to the bailout are causing untold human suffering.

The new government has made it clear that squeezing the Greek citizens more and more in order to alleviate the risk of default on loans that had inherent risk involved at the outset is unacceptable and may even be counterproductive for all parties.

Thus, someone is going to have to blink. Either the EU (meaning primarily Germany) is going to have to acknowledge the possibility of a haircut on the part of the banks, and/or they will have to agree to a bailout with looser conditions, or Greece will simply leave the Euro as it seems in no mood to accept another bailout with stringent conditions attached.
Structural reforms are well and good when they do not inflict untold human suffering.

The current €172-billion bailout expires at the end of February. After that, Greece is on its own unless it secures an extension and, according to estimates by JP Morgan, it will have 14 weeks of cash on hand to use as collateral to secure loans.