Cogito Ergo Non Serviam

Greek Banks, Stock Exchange Closed

Greece and the EU have failed miserably to make arrangements for Athens to access funds it needs to pay its creditors. Tomorrow, June 30, Greece must make a payment to the IMF of €1.5 billion. There is €7.2 billion in bail out funds that Greece has available if the creditors agree to release it. Because the two sides have failed to agree on measures Greece must take, the funds will not be released. To protect what remains of the Greek financial system, the banks and stock exchange will be closed this week, and Greeks now must deal with capital controls. All of this is happening over an embarrassingly small amount of money. The amateurs are clearly in control.

There is a surfeit of blame in this whole sorry affair. The Greeks should never have been part of the euro bloc because their economy was never actually in good enough shape. Political considerations and some creative accounting overrode economic and financial facts. The foreign banks (largely French and German) that loaned vast sums to the periphery of Europe should never have engaged in such reckless banking, but lending to Greece was considered as safe as lending to Germany or Austria. That was just not true. When the whole house of cards started to topple in 2009, the creditors bailed out the Greek system with credit in exchange for reforms. This was a mistake. Greece should have defaulted then, the foreign banks should have taken their losses, been declared insolvent and nationalized. The political price for that was something Paris and Berlin wanted to avoid.

More recently, the Greek economy has been in recession for years now, and the creditors are demanding more austerity. Austerity, however, is exactly what has made things in Greece so bad. Government spending cuts by definition reduce GDP and if one is measuring the debt load by the debt-to-GDP ratio, austerity must make things worse arithmetically. Despite the promise of austerity bringing renewal, unemployment is now at 25% and youth unemployment at nearly half, while 40% of children now live below the poverty line.

The Greek electorate has voted in Syriza, a party that seems to think it is engaged in a negotiation among equals. It believes that it has the same power to blow up the European banking system as Greece had six years ago. The banks, however, have managed to build up reserves and diminish the damage Greece can do. The decision to call a referendum on the lasted offer to be held on July 5, while politically prudent, has led to accusations of bad faith. No one comes out of this looking good.

What is especially galling is the fact that the two sides are not really all that far apart. The creditors want to cut pensions more (they are already 40% smaller than before the crisis), and they want the Greeks to expand the base for the value-added tax. Syriza has said it won't do more damage to the pensions, it won't slap the VAT on certain items or raise it on others, but it would make up the financial balance with higher business taxes and more rigorous tax collection. The amount of money in dispute is less than the annual revenue of the National Hockey League. When the hockey players went on strike last time, in 2012-2013, they were arguing with the owners about more money than Greece and the IMF are debating.

For his part, Greek Prime Minister Alexis Tsirpas knows he can't do anything if the Greek people don't back it. What good does a deal do anyone if it causes the Athens government to fall? After new elections, his successor would tear up the deal, leaving everyone worse off than before.

Meanwhile, the IMF, European Central Bank and the European Commission have a big incentive to be as tough on Athens right now as possible. If Syriza successfully resists the demands of the creditors, they fear that such a success will encourage anti-austerity political parties elsewhere, especially in Spain and Portugal. The contagion will not be of financial collapse but of political resistance to their preferred, yet failed, policy of slashed spending.

This whole sorry mess could have been avoided at countless stages along the way. Sixty years of European integration, the European Project that has made Europe richer and more peaceful than at any time in its history, is now endangered.

This journal has never believed that two generations of political policy in Europe would be undone over a few billion euros, dollars or pounds. This morning, one is much less certain.

© Copyright 2015 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



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