What has the Greek Saga Taught Us?
As protests erupt in Athens ahead of the Parliamentary vote and the latest deal with the European Union, protestor’s continue to riot in the streets with petrol bombs as a backdrop. It appears the only ones rejoicing at the likely passage of the debt and reform deal are likely to be stock investors who are looking for complacency. This process has taught us that fitting a square peg in a round hole is a very difficult endeavor. Greece’s economy which relies heavily on government spending is having a very difficult time with austerity.
When forming the EU, Greece’s strategic importance was a key reason to invite them to the Euro currency group; despite the country’s pretty clear economic problems, which included a ballooning public services sector, and constantly rising debt levels. The last bailout programme came with promises to reform the pension system, but the troika is still waiting for the implementation of some measures. Tsipras is trying to paint creditor’s demands as socially unjust as an enforced austerity programme is creating an economic catastrophe.
As the government sheltered many older workers from the changes to the pension system introduced with the last bailout, the system has been swamped with a wave of early retirements, which once again pushed up pay-outs. Furthermore, while the generous pension system tended to work as an informal social safety net, with parents and grandparents subsidizing their relatives, creditors from the start advocated the introduction of a basic safety net.
So whatever deal officials come up with, if the Greek government continues to drag its heels on the reforms, and any plans to transform the country into a modern economy, we may find ourselves in the same place once again a couple of years down the line.
Amid all the proposals and counter-proposals, agreements and non-agreements, Greece’s time is now well and truly running out. We have learned that Greek’s creditors are not fooling around, and they seem to be willing to pull the plug on emergency liquidity assistance (ELA). Without the ELA Greece cannot fund itself and the capital controls that have been in place for nearly 2-weeks, will continue to sap the economy.
We also know that Greece has one bit of leverage. The ELA is given by the Greek central bank, which also takes the risk. As such it doesn’t appear on the ECB’s balance sheet, but has to be approved by the central bank and in case of Greek default and exit from the European Monetary Unit (EMU); it would be the ECB’s shareholders that will have to foot the bill.
The markets have become used to this back and forth negotiation and volatility has declined as the worst case scenario seems to be a Greek exit. Indeed, this would be a costly exercise, but in terms of the damage the monetary union would face it seems it can hardly be worse than the months of back and forth we have witnessed already.