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Greece has a long and difficult journey ahead

14-02-2012 06:35

A decision is in the process of being made on a second major rescue package for Greece. The political parties have reached agreement on cuts, parliament has said yes and we are now awaiting the approval of the Euro countries and write-offs by the private lenders.

In the meantime, many Greeks have been out protesting in the streets and squares. Some have even resorted to violence. Both the people and the country feel a sense of despair. Employees who have worked and paid tax find it difficult to understand how the politicians could have governed the country so badly. Politicians feel that they have now made huge sacrifices, and that they have been wrongly judged by the Euro countries. They can do without the German boot. The split in the Euro zone is widening.

The emergency loans will soon exceed Greece's annual GDP, i.e. Euro 240 billion in total. And even this might not be enough. For Greece is not in a recession, the country is in a depression. For the fifth year in a row, falling GDP means it is becoming ever more difficult to square the savings and growth equation. Unemployment is rising even though it is already catastrophically high.

Lower wages, pensions and remuneration levels are painful and increasing competitiveness by this route takes time. One alternative is a weaker currency, however this would mean Greece leaving the Euro and three quarters of the population want to keep the common currency. The need for austerity measures would still remain, at a time when the debt burden in companies and households is increasing, were the country to choose to leave the Euro zone. This would hardly be preferable in the circumstances, bearing in mind Greece's woeful export sector, the weak growth elsewhere in the world and the risk of creating further political and social unrest.

Emergency bailouts, write-offs and keeping one foot in the Euro project along with austerity measures to put the public sector and government apparatus on a healthier footing, are surely a better option than quitting the Euro and defaulting on debt payments.

That has proved a costly move for other countries and regions that have cancelled repayments. Sometimes perhaps, there had been no alternative, but it still made recovery and regaining the confidence of credit providers more difficult. It is clear, however, that when payment cancellations are combined with either a banking crisis or a currency crisis or even both, the effects are far greater. Orange County in California with a population of around 3 million defaulted in1994 when the electorate voted against tax increases. The absence of banking and currency crises meant that the county was able to return to better conditions a few years later, but only after a period of political chaos and higher financing costs. In the case of Argentina, the fact that the credit providers have still not accepted the write-offs means it is more difficult for the country to obtain loans. However, the sky rocketing of raw materials prices has saved the country, and you often hear Argentina described as a successful illustration of debt default. The situation became so exacerbated that the country had no alternative, but the debt default could probably had been done in a more organised way. But for higher soya bean prices in the following years, few people would have thought this a successful example.

In the case of Greece – with the help the country has received to date and has the opportunity to get – it would probably be better to swallow the bitter pill and implement cuts. These need to be made in any case, albeit perhaps not quite on the same scale. Cancelling payments in an unstructured way is usually followed by a banking crisis for the country, and if Greece does decide to leave the Euro, a currency crisis would surely follow. The social and political unrest that would follow any widening of the split, also has associated costs, not least for the majority of people.

The Euro politicians and Euro zone populations also need to continue to support Greece, even if patience is wearing thin. Greece has a long and difficult journey ahead. An entire culture of corruption and mismanagement must change. This will take time and many people will suffer. If the Greeks do what they have said they will do, it is important that they feel they have the support of the other club members – something that ought to apply in both good times and bad.

Cecilia Hermansson


Cecilia Hermansson
Cecilia Hermansson
Group Chief Economist, Economic Research Department, Sweden


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