The Greek epic continues. It will not end well if the people involved do not recognise they are clinging on to myths. Here are six, each of which poses intellectual and emotional obstacles to reaching a solution.
A Greek exit would help the euro zone
“Will no one rid me of this turbulent priest?” This is the question Henry II is supposed to have asked about Archbishop Thomas Becket. Wolfgang Schäuble, Germany’s finance minister, must think much the same of his Greek partners.
For the English king, the gratification of his wish was a disaster. A similar thing is likely to be true if Greece leaves. Yes, if Greece suffered a calamitous aftermath, populist campaigns elsewhere would be less effective. But euro membership would cease to be irrevocable. Each crisis could trigger destabilising speculation.
A Greek exit would help Greece
Many believe a weak new drachma offers a painless path to prosperity. But this is only likely to be true if the economy can easily expand its production of internationally competitive goods and services. Greece cannot. And the immediate consequences are likely to include exchange controls, defaults, a halt to foreign credit and more political turbulence.
Stable money counts for something, particularly in a mismanaged country. Ditching it carries a cost.
It is Greece’s fault
Nobody was forced to lend to Greece. Initially, private lenders were happy to lend to the Greek government on much the same terms as to the German government. Yet the nature of Greek politics, tellingly described in
The 13th Labour of Hercules
, was no secret.
Then, in 2010, it became clear the money would not be repaid. Rather than agree to the write-off that was needed, governments (and the International Monetary Fund) bailed out the private creditors by refinancing Greece. Thus, began the game of “extend and pretend”. Stupid lenders lose money. That has always been the case. It is still the case today. Greece has done nothing
Greece has undergone a huge adjustment of its fiscal and external positions.
Between 2009 and 2014, the primary fiscal balance (before interest) tightened by 12 per cent of gross domestic product, the structural fiscal deficit by 20 per cent of GDP and the current account balance by 12 per cent of GDP.
Between the first quarter of 2008 and the last of 2013, real spending in the Greek economy fell by 35 per cent and GDP by 27 per cent, while unemployment peaked at 28 per cent of the labour force. These are huge adjustments.
Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources.
The Greeks will repay
This myth derives partly from the refusal to recognise sunk costs. The bad lending and the adjustment to the cessation of that lending both lie in the past. What is open is whether the Greeks will devote the next few decades to repaying a mountain of loans that should never have been made. What makes this far worse is that the debt burden has doubled, relative to GDP, despite a restructuring, since the crisis. Forgiveness is inevitable. Indeed, a report from the Centre for Economic Policy Research notes that excessive debt hangs over the entire euro zone, not just Greece.
Default entails a Greek exit
A sixth myth is that if Greece defaults, it would have to create a new currency and so leave the eurozone. It is possible that if the Greek government defaulted, Greek banks would no longer be deemed eligible for emergency lending assistance from the Greek central bank.
If so, banks would almost certainly have to impose a halt on withdrawals. There might even be a stop on payments.
Some argue that the ECB would have no more right to cease to act as a lender of last resort in relation to Greek banks than the Federal Reserve would have had to stop lending to banks in Detroit after its city government defaulted.
But there is a difference. No US bank was likely to be so exposed to Detroit as to be made insolvent by its default. But in the euro zone, which has 19 separate banking markets, one for each member, with the sovereign looming large in each, a default by a national government could bankrupt national banks. The ECB should not lend to clearly insolvent banks.
The question then would be how to respond. It might be possible to run the Greek economy with restricted functioning of its banks. The cash-starved Greek government might make payment with IOUs that it would accept in payment of obligations due to itself. While undesirable, this would be possible.
Such myth-busting will not give a satisfactory solution. But it would be a start. A deal containing a permanent reduction in the debt burden after completion of reforms in the Greek economy and polity would be the best outcome. Indeed, Palaiologos shows Greece has a development problem more than just one of economic reform. Such a deal would work only if Greeks were committed.
A seventh myth – possibly most dangerous of all – is that reforms agreed under duress work. They rarely do. If such an agreement could not be reached, the least bad outcome might be to accept the reality of default and leave Greece to decide what to do. That would surely be a bad outcome. But who is now confident of a better one? – Copyright Financial Times Limited 2015