Πέμπτη, 2 Ιουλίου 2015

The Greek crisis: 9 questions you were too embarrassed to ask


http://www.forbes.com/sites/johntharvey/2015/07/07/five-reasons-greeks-were-right/3/



Young Greeks protest on Monday, June 29.Milos Bicanski/Getty Images


Updated by  on June 30, 2015, 9:22 a.m. ET  


Greece is falling apart. The unemployment rate is 25 percent — down from a peak of 28— and four in ten children live in poverty. In the wintertime, Athens is overcome with smog as residents too poor to afford electricity burn everything and anything they can to stay warm. The income of the country's rich, once inflation and taxes are taken into account, is back where it was in 1985. The poor are back where they were in 1980. And this weekend, things hit a new low, as fear of a total financial meltdown grew so widespread that Greeks emptied over a third of the country's ATMs on Saturday in a desperate attempt to pull out as much money as possible before the banks collapse.
The crisis is at a pivotal moment now, but it has been brewing for years. Despite what you may have heard, it's not happening because the Greek government spent beyond its means and now is suffering the consequences. It's happening because Europe isn't sure whether it wants to be one country or many, and has in the meantime adopted policies that have created a humanitarian catastrophe for the Greek people.

1) What, in as few words as possible, is happening in Greece?






Greece Calls For A Vote On Proposed Bailout
Milos Bicanski/Getty Images
Greek Prime Minister Alexis Tsipras, who was elected with his Syriza party in January.

The 2008 financial crisis blew a hole in Greece's budget, which was already not in great shape. The Greek government took billions of euros in bailout money in 2010 from the European Union and International Monetary Fund. The lenders required Greece to implement crushing spending cuts and tax increases, which contributed to skyrocketing unemployment and plummeting living standards.
Since then, Greece has faced a choice: either stick with the bailouts and endure the pain of austerity, or reject the terms of the bailout — likely leading to default and, possibly, leaving the eurozone entirely.
Greeks elected a new government in January that tried for a third option: renegotiating the terms of the bailout to require less severe austerity measures. But this failed, partly because Greek leaders have no leverage, and partly because European politicians fearedthat granting Greece's demands would encourage other countries who've accepted bailout money — like Spain, Portugal, or Ireland — to rise up as well.
This new Greek government has punted the decision to voters: On July 5, Greece will hold a national referendum on whether to accept lenders' latest proposal and keep going with austerity, or reject the proposal and, in all likelihood, abandon the euro.

2) Why has the euro been so bad for Greece?






Drachma notes
Milos Bicanski/Getty Images
Defunt drachma notes, from a time before the euro ruined everything.

When Greece joined the euro in 2001, confidence in the Greek economy grew and a big economic boom followed. But after the 2008 financial crisis, everything changed. Every country in Europe entered a recession, but because Greece was one of the poorest and most indebted countries, it suffered the most.
If Greece didn't use the euro, it could have boosted its economy by printing more of its currency, the drachma. This would have lowered the value of the drachma in international markets, making Greek exports more competitive. It would also lower domestic interest rates, encouraging domestic investment and making it easier for Greek debtors to service their debts.
But Greece shares its monetary policy with the rest of Europe. And the German-dominated European Central Bank has given Europe a monetary policy that's about right for Germany, but so tight that it has thrust Greece into a depression.
So Greece is squeezed between a crushing debt burden — 177 percent of GDP, about twice the level in the United States — and a deep depression that makes it difficult to raise the money it needs to make its debt payments. Any tax hikes or spending cuts enacted to help pay back the debt would just worsen the depression.
So, for the last five years, Greece has been negotiating with the European Commission, the European Central Bank, and the International Monetary Fund ("the Troika") for financial assistance with its debt burden. Since 2010, the Troika has been providing Greece with loans on the condition that the country raise taxes and cut spending. Those policies have contributed to crisis-level unemployment and poverty, causing massive resentment among ordinary Greeks. They've also hurt the country's economy so much that Greece can't raise money to pay off its debts on its own, and will keep needing bailout money.
Without the euro, Greece could handle all this without external help. But the euro means it can't use monetary policy to help itself out, locking Greece into this horrible cycle.

3) This sounds like a disaster for Greece. So it's all Europe's fault?






Greece On The Brink Of Financial Collapse As Banks Close For At Least A Week
Milos Bicanski/Getty Images
These Greek protesters are fans of the "throw the Europeans in jail" approach to the crisis.

It's mostly Europe's fault, but Greece isn't blameless. The financial crisis revealed that its government had been, for years, borrowing more than it reported publicly, meaning the country was running bigger deficits and racking up more debt than previously thought. As an EU member, it was required to limit its deficits to 3 percent of GDP and its debt to 60 percent of GDP. But Greece enlisted banks like Goldman Sachs and JPMorgan Chase toevade those rules and borrow money under the radar to enable more spending.
The discrepancy was massive. On November 5, 2009, the newly elected socialist prime minister, George Papandreou, admitted that the year's budget deficit would be 12.7 percent of GDP, almost quadruple the 3.7 percent the outgoing right-wing government had projected. The country's finances were in much, much, rougher shape than anyone — especially anyone financing the Greek government by buying its bonds — had realized.
At the same time, tax evasion by Greek citizens and businesses was, and remains, a huge problem. A 2012 study comparing Greek bank account data with government tax data found that the true income of the average Greek person is about 92 percent higherthan the income they report to the government. Tax evasion accounted for half of Greece's 2008 deficit and a third of its 2009 deficit.
All that being said, the biggest factor in Greece's collapse into crisis was the global recession, which was enough that even countries like Spain that were running budget surpluses before the crash found themselves in debt crises. Greece's budget mismanagement was bad, and its tax evasion is a chronic problem. But don't get distracted: the real root of the crisis is that economies across Europe collapsed, the European Central Bank acted in the interest of rich northern countries like Germany and against the interest of poorer southern countries like Greece, and the Greek people paid the cost.

4) How has Greece's new leadership handled the crisis so far?






Greek Finance Minister Varoufakis Visits Berlin
Carsten Koall/Getty Images
Greek finance minister Yanis Varoufakis (right) at a press conference with his German counterpart, Wolfgang Schaüble, on February 5.

Following their landslide victory in January 2015, Syriza and its leader, now-Prime Minister Alexis Tsipras, made it their top priority to renegotiate the terms of the bailout and ease up on the austerity program. This was what they were elected to do, but it was an impossible task, because Syriza has no leverage.
A few years ago, a Greek exit from the euro would've been a catastrophe. Foreign banks held so much Greek debt that a Greek default would've threatened to sink them. There was also a chance that a default would drive up interest rates for other struggling European countries like Portugal, Spain, and Ireland and force them to default. But now foreign banks aren't holding that much Greek debt, and European lenders are backing up Portugal, Spain, Ireland, and the like, so they have little to worry about. A Greek default would mostly just affect Greece. That denies the Greek government its most powerful tool in negotiations: a threat to just pick up and leave the euro.
The Syriza government tried to renegotiate the terms of the bailout all the same. But, predictably, the negotiations went poorly for the Greeks, and after a February stand-offGreek leaders made a number of concessions — giving up core promises such as a minimum wage increase — to extend the bailout for another four months, austerity and all. It was a huge defeat for Syriza.
It's now time to negotiate another extension, but after Greece made even more major concessions, European lenders still judged them to be insufficient. Eventually, the Greek government gave up trying to reason with its lenders. Tsipras put the lenders' latest proposal — which he calls "unbearable" and German chancellor Angela Merkel calls "extraordinarily generous" — up for a national referendum on Sunday. Voters will decide whether to accept lenders' demands and continue with austerity, or reject them and thus likely default.
In the meantime, Greece has announced it will not make a required payment to the IMF on Tuesday. The big three rating agencies — Fitch, S&P, Moody's — say that failing to make the payment will not constitute a formal default on Greece's debts. But a failed payment will definitely spook investors and cause bond interest rates to spike, which isn't something Greece needs now of all possible times.

Can we get a Greek musical break?

Of course. Here's Vangelis with the "Love Theme" from Blade Runner:
It has recently come to my attention that there are Greek musicians other than Vangelis and Yanni. Here's Diamanda Galás's cover of "I Put a Spell on You":

5) If austerity is so much of the problem, then why is Europe imposing it on Greece? And why are European lenders being so inflexible?






European Leaders Attend EU Summit
Guido Bergmann/Bundesregierung via Getty Images
French president François Hollande (left), German chancellor Angela Merkel, and Greek prime minister Alexis Tsipras meet on Friday, June 26.

Here's how European lenders see it: Some of the money the Europeans are lending to Greece comes from the IMF and the European Central Bank. But a lot of it comes from other European taxpayers, particularly German taxpayers. If you're a German politician, this puts you in a tough spot. You don't want Greece to collapse in upon itself, because you believe in the European project and don't want to see the eurozone break up, because you don't want to spur other countries to leave, and because you're a human being who doesn't like needless human suffering.
But you also don't think it's fair to use your own people's money to subsidize a country that's shown itself to be really bad at basic state functions, like collecting taxes, that has traditionally handed out government jobs as political favors, and that engaged in outright fraud to enable reckless amounts of borrowing during the mid-00s boom years.
It doesn't seem fair, and it also doesn't seem sustainable. What's to stop Greece from running up its debt again in the future and provoking a similar crisis? From European lenders' point of view, the way you do that is by making deep reforms a condition of bailout money. That has the side benefit of making it easier to sell aid to your German voters. Sure, we're giving the Greeks money — but we're making them get their shit together too.
That's what the Europeans say, but it doesn't make a whole lot of sense. Nobody disagrees that Greece needs major reforms. But major reforms don't need to go side by side with destructive, economy-wrecking austerity measures. They also don't need to go alongside a European Central Bank that hasn't been willing to do what it takes to grow the economies of Greece and other struggling European nations.
Basically, what's going on here is that Germans and other northern Europeans are acting in their perceived self-interest. They think the European Central Bank's monetary policy works for them, and don't seem too concerned that it could be causing a depression in Greece. And because Germans control the ECB, and monetary policy is made for Europe as a whole, Greece is helpless. It has to accept the policies the German-dominated ECB adopts. Greece could cope if the Germans agreed to compensate for this destructive policy regime by giving the Greek people cash to boost their economy and get back on their feet. But Germans and their allies won't do that, both because it's domestically unpopular (German voters don't care about suffering abroad any more than voters anywhere do), and because of a strong moralistic streak that insists that the Greeks have sinned and have to atone.

6) Why is Greece imposing these odd bank rules and ATM restrictions?






Greece Calls For A Vote On Proposed Bailout
Milos Bicanski/Getty Images
Greeks line up outside ATMs on Saturday.

The Greek government has officially imposed capital controls to try to contain the economic crisis. That means, for example, that it has shuttered all banks until after the referendum on the bailout deal, and issued strict regulations on other use of financial institutions. ATM withdrawals are limited to €60 per day, per account. Transfers of money outside Greece are banned; exceptions require Finance Ministry approval. Pension and wage payments proceed as normal, as does internet banking and debit card transactions.
The basic reason behind the rules is to prevent bank runs. If people take too much cash out of the country's banks, then they'll cease being able to make loans and the country will fall into a financial crisis.
But if you're an individual Greek citizen, you have strong reasons to want to take your money out. Deposits could be raided to help keep banks solvent, as happened in Cyprus. Or Greece could abandon the euro, convert all deposits into its new currency (probably the drachma, the country's pre-euro currency), and then devalue that currency dramatically.

7) Is it possible that defaulting and leaving the euro is really Greece's least-bad option?






Greece On The Brink Of Financial Collapse As Banks Close For At Least A Week
Milos Bicanski/Getty Images
Protesters urge a "no" vote on the referendum.

It really bears repeating what a humanitarian catastrophe Greece is enduring. 25 percent of people are unemployed. Youth unemployment is near 50 percent. Hunger among Greek children has risen. And the economy is set to grow a paltry 0.8 percent this year. People will continue to endure immense suffering for years if austerity does not end.
Greek leaders need to do something; anything to make austerity less severe is desirable. If Greece were allowed to run a budget deficit and spend on programs to create jobs and offer relief to the most desperate citizens, then its social crisis would lift. Fiscal stimulus works and if a country has ever needed it, it's Greece right now. But the terms of Greece's bailout forbid it.
If the Europeans don't relent, leaving the euro may just be the best option left. In the short-term, this would be a rough path. Very, very stringent capital controls would be needed to keep banks solvent, and if they weren't enough, an all-out financial crisis would ensue. A lot of wealth would be wiped out as the value of drachma-denominated assets plummeted. There's a chance of dangerous inflation.
But leaving the euro at least provides a path toward an actually growing economy for the country sometime in the next decade. The Greek people would finally have control over their monetary policy, letting them devalue their currency, boost exports, and get back on track.

8) So what happens now?






Greece Calls For A Vote On Proposed Bailout
Milos Bicanski/Getty Images
Finance minister Yanis Varoufakis speaks to fellow lawmakers on Sunday.

If the referendum passes, then, assuming European lenders stick by their old offer, Greece goes back to austerity and muddles along the way it has been. But that may not be a safe assumption. It's not at all clear that the Europeans' last offer remains on the table. The Financial Times' Wolfgang Münchau predicts that a "yes" vote wouldn't lead to a bailout extension, but instead to Greece trying to maintain capital controls and introduce a parallel currency to the euro. Greece isn't allowed to print euros, but it could declare that the country has two official currencies, and start printing the other one and using it to shore up banks, pay bills, etc. That way, they wouldn't technically leave the euro. Euros would still be legal tender. But they could get most of the benefits of leaving the euro.
If the referendum fails — or if non-payment of the IMF loan or some other catastrophe happens before the referendum and forces dramatic, immediate action — things are even less clear.
The European Central Bank currently provides emergency loans to Greek banks to keep them from failing. It will likely stop doing that if Greece stops cooperating. That means Greece has to do something to stop Greek banks from running out of money and collapsing. At best, that'll look something like the capital controls that have already been implemented. Those could theoretically be enough to keep money in Greece and the banks humming along, even without European support. A "bail-in" in which money is taken from depositors is also possible.
The other, more dramatic option would be to reintroduce the drachma, either as a parallel currency to the euro or as a full replacement (Münchau predicts full replacement). It'd be a painful adjustment, but it lets Greece get out of its depression the same way the US, Canada, the UK, SwedenIsrael, and other countries with their own currencies got out of the 2008 financial crisis: through big, aggressive monetary policy.
Greece would be the first ever country to leave the euro, a disastrous result for theproject of European integration as a whole, not least because it could embolden voters in other struggling countries like Spain to elect left-wing or populist right-wing governments and try to leave the euro themselves.

9) Isn't there another option here? Maybe something that is at the moment politically untenable but theoretically could really work?






North Carolina v South Carolina
Streeter Lecka/Getty Images
An American flag in South Carolina, America's premier leach of a state.

There is another option, yes. It's not one that European policymakers are really considering, but perhaps they could: become more like the United States. Here in the US, as in Europe, we have states with weaker economies that require endless financial assistance. Only, in the US we don't call them bailouts, and we don't treat it as a crisis.
Every year in the US, richer states pay more in federal taxes than they get back in federal spending, and poorer states get more in federal spending than they paid in federal taxes. South Carolina, for example, gets $5.38 back in federal spending for every dollar it gets in taxes, according to a WalletHub analysis. Last year, it was $7.87. But we don't consider that money a bailout and we don't demand that South Carolina impose crushing austerity measures. The arrangement is quite stable; it's been well over 150 years since South Carolina last formally considered an exit from the union.
Now, the US is a political union as well as economic union, and the EU is only the latter. But the goal of European integration is to get it there, and one thing that entails is real fiscal union, including huge, unlimited, never-ending transfers from rich areas of the union to poor ones. It's politically tough to stomach, but that's the deal.
If European lenders really cared about the European project, they'd be trying to persuade their countrymen to move closer to European super-statehood, big transfer to Greece and all, rather than punishing Greece. And the more spending and tax policy Europe takes on as a whole, the less it has to rely on the Greek government's poor tax collectors and corrupt bureaucrats. The reforms the lenders want so desperately would come naturally. They just need to lend Greece a hand.
Timothy B. Lee contributed to this article.

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