Greece’s Dangerous Gamble

The Greek referendum could be a disaster for the global economy. And might be the right thing to do.


Many of us predicted that investor euphoria over Thursday’s Eurozone deal would soon fade. But few thought it would explode this soon.

Greek premier George Papandreou stunned everyone by calling for a public referendum on whether to accept the bailout and the accompanying straightjacket. The vote will almost surely be No—the measure is wildly unpopular—and his government may well collapse before a vote can be held.

Paul Mason, the economics editor for BBC’s Newsnight, believes that without the bailout and haircut, “Greek debt spirals out of control and the country goes bust.”

Key indexes have already lost the gains made Friday and Angela Merkel and Nicolas Sarkozy are once again scrambling to find a way to save the deal. If they can’t, Mason sees a wild ride:

The euro leaders will be faced with the option of a forced transfer of taxpayers’ money to shore up the entire Greek economy with no surety, and no “local representatives” as currently planned. Or Greece leaves the euro.

Most political economists I speak to believe this has been the logic all along, and brave though it has been for Prime Minister George Papandreou to try and buy time to do a proper structural reform of Greece, the implosion of Spain and Italy has robbed him of that time.

Greeks – even those fiercely opposed to Pasok from the left and right – are resigned to the fact that the country faces years of painful restructuring. The real question at issue is a) under whose control and b) in whose interest?

It is for this reason that, while the Greek CP wants out of the euro, the growingly influential far left parliamentary group SYRIZA does not, and neither does the hard-right religious party LAOS. Everybody can see that an external devaluation will be chaotic, painful and cause its own kind of social unrest, just as the attempted internal devaluation is doing.

Why would Greece take a complete default rather than a half one—and risk bringing down the entire Eurozone if not the entire global economy with it? To save their country.

Another potential reason is capital flight. Anecdotal evidence suggests that the Greek elite are buying up property in London just as fast as they can find berths in Poole for their yachts. They are voting with their spinnakers, on the basis that the game is up. In any future Greece on offer, they will have to start paying taxes and they do not want to.

One banker told me the Greek super-rich have mostly left.

The one thing governments have that investment banks do not is intelligence services with the power to wiretap people. If you ever wonder why serving politicians go grey so quickly, it is in part because they see the intelligence. So Mr Papandreou may have looked at the file and said, I can’t sell this to my party, nor to my voters, and the business elite are emigrating en masse, so throw the dice.

Referendums are, always, basically a coin-toss, an all-chips on the black romantic gesture. Right now, the scale of EU-level mobilisiation to dissuade Mr Papandreou is huge.

But if Greece votes no – and goes for euro-exit – there are several plans in the process of being published that explain what you have to do. Close the banks for days, ration food and energy, institute strict capital controls – with most probably a few fast patrol boats at Glyfada harbour to check every departing yacht for cash and bonds.

Later, you get massive devaluation, with inflation; your non-sovereign debts become instantly doubled so you cannot pay them (i.e., the stock of Greek private debt to external lenders, for example, or, intra-corporate debts).

Finally, you get the chance to become competitive again. (I base this on SOAS professor Costas Lapavitsas‘ upcoming document, which he has verbally outlined to me).

However, despite this very, very unappealing prospect, you are at least in control of your own economy and you do not have foreign civil servants dictating what ministers can do.

Not exactly cheerful stuff but, frankly, understandable. As much as the Germans and French resent having to bail out profligate Greece, the Greeks resent having their core political decisions dictated from Paris and Berlin even more.

Naturally, this will push virtually everything else off the agenda at the Cannes G20 summit, which kicks off Thursday.

On Tuesday, Robert Zoellick, president of the World Bank, summed up the views of many policymakers when he said that the eurozone crisis threatened knock-on effects across the entire global economy, including the emerging markets – the bank’s main clients – and that it was up to European authorities themselves to deal with the problem. “Europeans are going to have to be the principal agents in solving Europe’s problems,” he told reporters.

Mr Zoellick said that a “multi-speed” global economic recovery before the summer, in which the emerging markets if anything were in danger of overheating, was quickly weakened by a combination of renewed tension in the eurozone and the debt ceiling debate in the US. “The events in August in the eurozone, and to a degree the US, showed the effects on financial markets flowed quickly to the developing world,” he said. As for the Greek referendum, which as he noted was a eurozone rather than a G20 issue, “to me it looks like a roll of the dice”.

The agenda items that France has tried to push during 2011 – notably reform of the international monetary system and trying to reduce volatility in commodity markets – seem likely to result in no more than symbolic announcements or incremental steps, despite claims by the organisers that they will have concrete progress to report.

The G20 may make a vague promise to add the renminbi at some point in the future to the basket of currencies that make up the Special Drawing Right, the International Monetary Fund’s unit of account, or at least to look at the criteria for inclusion. The IMF may also announce tweaks – described by some experts as a “rebranding” rather than a reform – of some of its lending instruments.

But this is a long way from the challenge to the dominance of the dollar envisaged by Nicolas Sarkozy, French president, when he announced the drive to reform the international monetary system last year. And some promises for better information about agricultural production and food stocks will not fundamentally change the nature of the Anglo-Saxon commodity markets.

 

While predicting the twists and turns of international finance is outside my comfort zone, I’m actually quite sympathetic to Henry Farrell‘s view that, on balance, this is all good news for Europe, if not the global economy.

[P]erhaps this is the best news that the European Union has seen in two years. At the very least, it’s the first time that we’ve actually seen citizens actually being asked about what they actually want (elections in which they kick the bastards out to see Tweedledum replaced by Tweedledee implementing pretty well the same austerity agenda, despite pre-election promises, don’t actually count).

To put it differently, I imagine that the strong likelihood is that the Greeks will vote ‘No’ to the proposed austerity measures. But I’m not at all convinced that this will result in disorderly default. Instead, I suspect that it will result in people running around in panic for a few weeks, grave pronouncements from senior European politicians about how horribly the Greeks are betraying their European vocation, and then efforts to stitch together a deal which might actually make sense (e.g. enough aid to prevent the economy from crashing as horribly as it is doing, as a quid-pro-quo for genuinely intrusive reformation of the Greek tax collection system). This might in turn provoke an actual real argument over what EU politics should look like post-crisis (because make no mistake – the system that is being articulated on the fly at the moment is likely to have profound long term consequences for the shape of the EU).

Or, to put it differently again, the European Union is at a point where it actually has to start taking enormous – and explicitly political – decisions about what kind of entity it wants to be.

It’s a long essay, previewing a longer one that he’s about to publish elsewhere, but the upshot is that European integration has been achieved through stealth and technocratic maneuvering on the part of elites, quite frequently bypassing the clear preferences of the ostensibly democratic populations in various countries. The passing of so much authority to the European Central Bank and to appointed officials in Brussels has been inexorable, with little input from the European publics and often against the expressed wishes demonstrated via referenda.

Farrell is perhaps too sanguine about the costs of implementing this vision when he allows, “I don’t know whether there is a European Union that could be affirmed (after long and painful debates) by both the Greek and German publics. I think that there is, but I’ll grant that these are not the most propitious times for finding out. Then, there rarely is a propitious time for finding out – when things seem stable, no-one has an interest in upsetting the balance.”  After all, the expert consensus seems to be another round of global economic calamity if the euro doesn’t hold and a Greek default is followed by others.

On the other hand, there is a strong minority view that the elite demand for austerity is exactly the wrong course of action during a global depression. Given that the people are going to have to live with the consequences, it may well be that they ought to have a stronger voice in choosing their poison.

FILED UNDER: Economics and Business, Europe, World Politics
James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Ben Wolf says:

    On the other hand, there is a strong minority view that the elite demand for austerity is exactly the wrong course of action during a global depression.

    A minority supported by empirical evidence. Austerity has failed in every single country embracing it, not only weakening their economies but reducing their revenues and making deficits worse. Greece has endured cuts to the point of a society falling apart, and its fiscal situation has deteriorated despite assurances from the neo-liberal elites that cuts would reduce market “uncertanties” and spur job creation.

  2. legion says:

    Why would Greece take a complete default rather than a half one—and risk bringing down the entire Eurozone if not the entire global economy with it? To save their country.

    Bingo. Throughout this whole slow-motion train wreck, the ECB has given Europe’s debtors one choice and one choice only – austerity. Screw your middle classes hard enough, and everything will turn out fine. Problem is, anybody with two brain cells left (and that appears to include a lot of Greeks) knows that’s just not going to work. Greece may very well be screwed one way or the other, but they have no incentive whatsoever to cushion the rest of Europe when they fall down the same elevator shaft.

  3. BigFire says:

    At this point, he has nothing politically left to loose. Technically, the government already falls with the last couple of rounds of parliament defections. He can’t ratified the latest ‘bailout’ with what he has. He’ll just pass the bucks to the people and wash his hand on its consequence.

  4. Ben Wolf says:

    @legion: The “half-default” claim is sleight-of-hand; neither ECB nor IMF loans would be reduced, meaning less than half of Greece’s debt would be reduced by half. The kicker is that by 2020 Greece’s debt to GDP ratio would still be greater than when the crisis broke in 2010. There is no way out but total default.

  5. Ron Beasley says:

    @legion: This whole effort has less to do with bailing out Greece than bailing out TBF banks and the world economy. The Greeks are screwed one way or another.

  6. Ben Wolf says:

    @Ron Beasley: You’ve nailed it exactly: the new “plan” delivered from the hallowed halls of euroboss palaces is yet another round of Extend and Pretend to keep the looting going for as long as possible.

  7. legion says:

    Sounds very much like some folks are desperately trying to stave off a new recession (and possible depression) by sacrificing Greece to the Demons of Fiscal Doom. But just like any horror movie, the Demons won’t be satisfied with just one country… next it’ll be Spain on the altar, then Italy, or maybe Ireland. They think “if we just cut off enough of that non-productive chaff of the lower classes, maybe they’ll see we’re serious about this and let us be.” But it won’t happen. The budget-cutting hawks of Europe may have already doomed the lot of them.

    Apparently, I’m still in a Halloween frame of mind…

  8. sam says:

    Anecdotal evidence suggests that the Greek elite are buying up property in London just as fast as they can find berths in Poole for their yachts. They are voting with their spinnakers, on the basis that the game is up. In any future Greece on offer, they will have to start paying taxes and they do not want to.

    At least that law of nature is still in effect.

  9. Ron Beasley says:

    @sam: I saw that too. One of the reasons. perhaps the main reason, that Greece is in the trouble it is – the elite have not been paying their taxes for decades. I wonder if GB will let them get away with that.

  10. MBunge says:

    “On the other hand, there is a strong minority view that the elite demand for austerity is exactly the wrong course of action during a global depression.”

    I think it’s important to recognize that the elite demand for austerity doesn’t come from nowhere. It comes from rich folks terrified of inflation destroying their accumulated wealth. Not that runaway inflation is good for anyone, but the relentless fixation on elminating even the threat of slightly higher inflation levels is at the core of a lot of today’s misguided economic policy.

    Mike

  11. jan says:

    @Ron Beasley:

    the elite have not been paying their taxes for decades.

    Whether it’s in Greece or this country, the answer from some is always the same — not enough taxes from the rich and elite.

    Why is it then that high pensions, early retirement, over-the-top entitlement programs, frequently are floated as to reasons certain economies tend to be non-sustainable? In this country, for instance, cities, counties, states are out of money because of underfunded benefits and pension plans. RI is a prime example of this, along with cities struggling in CA to keep fiscally afloat.

  12. Ben Wolf says:

    @jan:

    Whether it’s in Greece or this country, the answer from some is always the same — not enough taxes from the rich and elite.

    A) Because taxes must follow the wealth, and it hasn’t been going to the middle class or the poor.

    B). Because the Greek wealthy have literally not been paying their taxes owed for more than a decade. Tax evasion there isn’t a nuisance, it’s endemic and pernicious.

  13. john personna says:

    @jan:

    Whether it’s in Greece or this country, the answer from some is always the same — not enough taxes from the rich and elite.

    Never miss an opportunity to suggest that a 2 or 3 percent tax increase is “class warfare.”

  14. Tsar Nicholas says:

    Hell, Greece merely is the appetizer. Check out the recent spikes in rates for Italy’s and Spain’s gov’t bonds, along with their respective debt-to-GDP ratios. When Italy and Spain go belly up it’ll make Greece look tame by comparison.

  15. ponce says:

    Well, Europe won’t need that $100 billion handout they asked China for then.

  16. Rick Almeida says:

    @jan:

    In this country, for instance, cities, counties, states are out of money because of underfunded benefits and pension plans.

    Well said. I trust we both agree that underfunding pensions and benefit plans should not be allowed?

  17. Liberty60 says:

    Hey wait a minute- if for decades Greece has been following the dreaded Keynsian system, how did they get so many rich people?

    How could anyone possibly become rich in a society that wasn’t ruled by Free Market Capitalism?

  18. WR says:

    Funny how we aren’t allowed to talk about Iceland anymore. They told the banks to piss off, they defaulted, and by all accounts they’re doing a lot better than the countries that have played the austerity game.

  19. steve says:

    “Why is it then that high pensions, early retirement, over-the-top entitlement programs, frequently are floated as to reasons certain economies tend to be non-sustainable?”

    My co-blogger is Greek. We have gone over the stats. Greeks do not have pensions and retirements different than other OECD countries. They actually work longer hours, per the OECD, than most European countries. What is unique about Greece is its extremely high level of tax evasion. It is not a matter of tax rates, but out and out evasion.

    Steve

  20. Robert C. says:

    @Ben Wolf:
    Provide examples please.

    RC

  21. A voice from another precinct says:

    @Ron Beasley: That can’t possibly be the problem! If it is, what does that say about the current American refrain of “taxes on the rich are too high?”

    Even Jan knows that you’re wrong.

  22. michael reynolds says:

    So if Greece bails out of the Euro will I be able to afford a house on Mykonos?

  23. sam says:

    @Robert C.:

    @Ben Wolf:
    Provide examples please.

    If Greek tax evasion is what you’re asking for,

    google, ‘greece rich tax evasion’

    Tax evasion is not the whole story of Greece’s problems, of course (it does seem to have ridiculous pensions, public services, and such), but it is a very big part of the story. For an eye-opening discussion, see The Big Fat Greek Gravy Train: A special investigation into the EU-funded culture of greed, tax evasion and scandalous waste.

    Did you know that Greece has, officially, very, very few rich people, all evidence of your eyes to the contrary? The Greek tax system is a libertarian wet dream: You get to tell the government what your income is (no W-2s or anything like that). And the figures are rarely checked. Oh, and if you’re a pauper per your income tax form, you don’t pay any tax:

    With its streets paved with marble, and dotted with charming parks and cafes, this suburb is home to shipping tycoons such as Spiros Latsis, a billionaire and friend of Prince Charles, as well as countless other wealthy industrialists and politicians.

    One of the reasons they are so rich is that rather than paying millions in tax to the Greek state, as they rightfully should, many of these residents are living entirely tax-free.

    Along street after street of opulent mansions and villas, surrounded by high walls and with their own pools, most of the millionaires living here are, officially, virtually paupers.

    How so? Simple: they are allowed to state their own earnings for tax purposes, figures which are rarely challenged. And rich Greeks take full advantage.

    Astonishingly, only 5,000 people in a country of 12 million admit to earning more than £90,000 a year — a salary that would not be enough to buy a garden shed in Kifissia.

    Yet studies have shown that more than 60,000 Greek homes each have investments worth more than £1m, let alone unknown quantities in overseas banks, prompting one economist to describe Greece as a ‘poor country full of rich people’.

  24. Rob in CT says:

    Lazy poor person cheats to get on the dole = threat to civilization.
    Rich people cheating on their taxes = asserting their natural rights.

    Get with the program, guys.

  25. JohnSF says:

    I think a lot of the comments here are missing a very big point:
    it is NOT (or at least not just) the European rich elites, bankers, financiers and pro-business politicians etc etc getting at the Greeks.

    Whether it is money for a bail-out, monetary policy for the ECB, eurobonds, fiscal transfers etc the Germans have a veto because the Germans have the money (and the agreement to a “sound money” ECB) ,
    And the Germans say NEIN!
    NOT the German bankers or what have you. The Germans as a polity.

    Maybe the Germans are being pig headed about all this, and certainly they are failing to recognise their culpability in maintaining a euro valuation that effectively props up their exports and undermines Club Med competitiveness, but they have the money.
    They may well decide that if they have to fund bail-outs on the order of trillions of euros, why not bail out German creditors directly rather than Greek debtors.

    Sure, the Greek tax evaders have a lot to answer for, and should have been made to pay their dues.
    But would it not have been sensible for the Greeks to sort out that issue before borrowing on a Homeric scale?

  26. Ben Wolf says:

    @JohnSF:

    But would it not have been sensible for the Greeks to sort out that issue before borrowing on a Homeric scale?

    For one to save another must spend. Germany’s economy wouldn’t have done nearly as well over the last decade if it hadn’t been covertly subsidizing its exports so that countries like Greece and Italy couldn’t compete and became net importers of German goods.

    Germany is as much to blame for the debt crisis as anyone.