“It’s all been said before, but not yet by everyone“ (Karl Valentin)
The financial situation in Greece is muddied and nothing definite is known. Specific figures are not available, at least not publicly. Speculation flourishes. But an end to Tsipras’ government’s poker game with the Troika seems to be in sight. Greece will run out of funds by the end of June at the latest. Then a decision must be made, one way or another, unless the Troika helps out once more with new money. The financial coup in which the IMF loans are paid via special drawing rights created for emergencies cannot be repeated. Gambling on further multi-billion Euro emergency liquidity assistance (ELA) from the ECB, however, hasn’t been ruled out. Additionally, the hope that if necessary the creditor countries of the European Stability Mechanism (ESM) deliver once more without real reforms is not unfounded.
Continuously Breaking the Rules
Why did the Greek experiment get so out of hand? The core problem of the EMU is the multiple violation of the agreed upon Maastricht rules. The Stability and Growth Pact was unable to guarantee the fiscal rules, and German politicians were actively involved in the breach of contract. Even the agreed fiscal pact is just a paper tiger. Breach of the rules is programmed into it when sinners sit in judgement on sinners. The worst is the breach of the no bail-out clause. At the height of the Euro Crisis in 2010, politicians unceremoniously overrode the no bail-out rule, undermining the fundamental principle of action and liability. In doing this, however, they have opened the door to the moral hazard.
With establishment of the ESM came the installation of a transfer union. Via the enormous rescue package all are liable for the debts of the others. In the EMU organized irresponsibility prevails and a life at the expense of others has become lucrative. The development of budget crisis states here in Germany shows where that leads. Beneficiary countries remain so, Bavaria being the exception. Meanwhile, more and more countries are holding out their hands for money. By contrast, the number of donor countries is constantly shrinking. Since the ECB began operating monetary state financing on a large scale, it has been breaking the agreed upon rule. OMT programs, the trillion-Euro buy up program and the misuse of the PA emergency loans are equivalent to the fall of man. The budget constraints of the members have been softened, and life on another’s dime is becoming as sure as the day is long. The economists’ most recent, polemical attack on Germany’s harping on about principles is nonsense. In the EMU it is clear what greater pragmatism leads to.
Living Beyond One’s Means
What makes economic sense given the current situation? Regarding the Greek crisis, there are only two alternatives: Helping Greece to help itself or Greece’s exit from the EMU. Both scenarios have one thing in common, which is that Greece has to end the practice of living beyond its means once and for all. It must no longer spend more than it earns. In terms of helping Greece to help itself, the simple formula of lenders is as follows: Money in exchange for reforms. More competitive goods and factor markets, consolidated government budgets and reformed welfare states are needed. However, up until now Tsipras“˜ government has had an allergic reaction to these ingredients. A policy of austerity is vilified as anti-social. The demand for neoliberal (structural) reforms is demonized as a diktat of foreign (German) powers.
The other alternative is a Grexit, and economists are divided regarding what the resulting economic effects of such an action would be. Some are of the opinion that the international competitiveness of the Greek economy is increasing as a result of the devaluation of the drachma. Others point to previous negative experiences with devaluations. If a currency devalues in nominal terms, the domestic price level rises. When higher prices drive nominal wages, the drachma doesn’t devaluate in real terms, and positive effects fail to materialize. Accordingly, if Greece wants to get anywhere, it must tighten its belt, even in the case of its departure from the EMU. There is no way around the hated policy of neoliberal reforms. However, a diktat by external, foreign powers does not exist.
Short-term Dominates Long-term Thinking
What will actually happen politically? In politics, short-term thinking dominates. Long-term returns are weighted less than short-term costs. This applies to Tsipras’ government and the Troika. The direct costs of a Grexit for the Greek government are considerable. Greece would be cut off from the international capital market, and would have to bear the burden of the still necessary (neoliberal) reforms on its own. It would not receive help in the form of foreign capital. But if Tsipras’ government fulfills the (neo-Marxist) election promises and blocks the necessary reforms, unemployment will continue to rise, inflation will explode, and poverty will reach new heights. Being voted out of office is unavoidable in this case. They will therefore try to remain at the fleshpots of the EMU.
The Troika is unlikely to prefer a Grexit. Fears of a “Lehman effect“ remain. The constant reference to the low risk of infection of such a move is like whistling in the dark. Â If Greece does exit, the true costs of the fiscal (ESM) and monetary rescue operation (i.e. adjustments on government securities, Target II) will no longer be able to be hidden. They would have a financial impact in the countries and the ECB. Politicians in particular might fear the reactions of the voters. Meanwhile the ECB is likely to be preoccupied with another fear. With the Grexit it would ultimately become clear that the EMU is scheduled for revocation. Greece’s exit could mean the beginning of the end for the EMU. This would be a nightmare for the highly paid bureaucrats of the ECB.
The negotiations will end in horse-trading. Greece will not drop out of the EMU, the Troika will pay the remaining installment of the aid program, and a third aid program will be negotiated in autumn. The Greek side will engage in a few cosmetic reforms of the labor market and the welfare state. They will hold out the prospect of allowing further privatization, reforming the tax system and improving public administration. What they will actually do is, like their predecessors, very little. The Troika will accommodate Greece’s wishes and significantly reduce the required primary surplus. Then Tsipras’ government will have the necessary “pocket money“ for their (socialist) election promises. Dealing with the problems will once more be postponed to a future date, but at that time another group of politicians will govern. Such is politics.
Hinweis: Das ist die englische Version des Blog-Beitrags „Eine unendliche Geschichte. Griechenland, die letzte? Wohl kaum!“. Michael Labate hat den Beitrag übersetzt. Herzlichen Dank!
Blog-Beiträge zum Griechenland-Poker:
Hartmut Kliemt: Was wir über den “Grexit“ jetzt schon wissen
Henning Klodt: Nach dem Grexit
Dieter Smeets: Das Tauziehen um Griechenlands Schulden
Wolf Schäfer: Wenn der Euro zur Staatsräson überhöht wird
Norbert Berthold: Eine unendliche Geschichte. Griechenland, Klappe die letzte? Wohl kaum!
Norbert Berthold: Die EWU verwahrlost ordnungspolitisch. Ein Drama in fünf Akten
Norbert Berthold: Allein gegen Alle. Griechenland spielt weiter Vabanque.
Norbert Berthold: Die EWU am Scheideweg. Permanente Transfers oder temporärer Grexit?
Juergen B. Donges: Griechische Manöver in der Eurozone. Droht aus Spanien ähnliches Ungemach?
Norbert Berthold: Immer Ärger mit Griechenland. Ein Pyrrhus-Sieg der “Institutionen“?
Roland Vaubel: Schäubles Scherbenhaufen
Norbert Berthold: Trojanisches Pferd. Der Brief des Giannis Varoufakis
Norbert Berthold: Was erlauben Griechenland? Schwach wie Flasche leer
Dieter Smeets: Poker um Griechenland