The proposed agreement is, indeed, a bad one. Huge tax increases would deepen recession. The weakness of the reform agenda, particularly in areas such as privatisations, the liberalising of markets and restructuring the state sector, dampens any hope for a sustainable economic recovery. The absence of a credible commitment on debt relief reveals the lenders’ hypocrisy concerning the country’s long-term growth prospects.
"The proposed agreement is, indeed, a bad one. Huge tax increases would deepen recession"
However inept – or devious – their negotiating tactics have been, the Greek government must bear a large share of responsibility for this outcome. The lack of serious reform proposals, its systematic reneging on commitments and an excessively aggressive rhetoric undermined confidence and soured the climate of good faith that conditions the conduct of constructive talks. The government, suffering from the illusion that the lenders would ‘blink first’, wasted time undermining its own position.
The economy has deteriorated dramatically during the past five months. Positive growth forecasts, rising to 2.5% for 2015, have turned negative, while an accelerating outflow of bank deposits and fast rising non-performing loans have brought the banking system to the brink of collapse - prevented only by emergency liquidity assistance from the European Central Bank. Primary budget surpluses ceased to be feasible raising the need for the harsh fiscal measures included in the deal. Furthermore, the Greek government’s chaotic approach to the talks, resembling a game-theoretical experiment, damaged the country’s international standing while trust in its intentions has vanished.
The proposed deal highlighted the utter failure of the policies followed to overcome the crisis. The Memoranda agreed with the lenders have been inadequate and self-defeating. Harsh austerity caused a real GDP fall equal to 25% over the last five years instead of 5% as was the IMF’s initial projection – perhaps the biggest forecasting fiasco in the Fund’s history. A combination of factors worked in the wrong direction: planning errors; neglect of policies to compensate for the collapse of domestic demand such as fiscal expansion in the stronger eurozone economies and injection of investment funds from European institutions into Greece; and the absence of productivity-enhancing reforms following accession to the euro area.
The alternative to a deal, though, is Grexit. And the cost of exiting the euro would be immense for Greece, and considerable for Europe’s currency union. A NO vote in the referendum will set the country along a vicious and catastrophic road. EU funding and ECB liquidity assistance have already ceased and will not be resumed without an agreement with the eurozone authorities. The failure to pay back the tranche of the IMF loan due on June 30 initiated the default process. Banks have closed and limitations on capital movements and deposit withdrawals have been introduced.
Lack of cash will eventually, but inevitably, create the need for a new currency and exit from the euro. As confidence would collapse, a sharp devaluation would further reduce living standards deepening the recession and increasing unemployment. Social tensions would rise.
Meanwhile, the benefits in terms of competitiveness would be very limited, on account of the country’s narrow export base, and would be evaporated through continuing devaluations and rising interest rates. Instability would become chronic as the eurozone would no longer offer a backstop for fiscal laxity.
"Lack of cash will eventually, but inevitably, create the need for a new currency and exit from the euro"
Financial anarchy will condemn the country to stagnation and accelerate migration. Geopolitical considerations, touching upon the emerging rift with Russia on borders and security in the European continent as well as the renewed turmoil and instability in the Middle East and Northern Africa, reinforce the dangers from Greece’s transformation into a ‘failed state’.
Only a Yes vote in favour of remaining in the eurozone and negotiating a new bailout framework, can hold out the hope of overcoming the crisis and securing a positive prospect for the country.
Greek membership of Europe’s currency risks becoming an historical episode. Accession in 2001 has been challenged on the grounds of non-fulfillment of the budget deficit criteria. This is nonsense, as has been analysed by many. Greece had made a successful effort to reduce deficits and stabilise its economy while pursuing privatisations and other liberalising reforms. Swelling past budget deficits was a political ploy engineered by an incoming conservative government several years after the entry. Specifically, the method of accounting defence expenditures was arbitrarily changed so as to transfer substantial amounts of spending from the time deliveries of defence equipment were expected in the future to the time when payments were made in the past – thereby technically inflating budget deficits during the accession period.
In retrospect, Greek membership of the eurozone looks like a political gamble that has not succeeded. Greece’s post-accession governments did not observe the discipline implied by the possession of a global hard currency. They reverted to the bad old ways of fiscal laxity, reform inertia and clientelism leading to critical losses of competitiveness and the present crisis. This reflects deeper flaws in the country’s social and political structures. Greece’s history is punctuated by military coups, a bloody civil war as well as major foreign policy-related disasters.
Allegiance to state institutions is fragile undermining continuity in policies while fostering chronic instability. The rationale for acceding to the currency union was to provide an anchor for ensuring steadier progress. Greece’s modernisation can only proceed as part of the European integration process. Left alone, it risks moving backwards and deconnecting with the dynamics of the global economy.
There is a substantial pro-Europe majority in Greece. It is to be hoped that it will confirm its support on July 5, and so avert disaster and restore hope.