Crossroads (Toward Philippine economic and social progress)
Philippine Star, 8 July 2015


The Greek electorate went to the polls in a referendum on how to deal with their debt crisis. The referendum required a “yes/no” vote on the terms of the program offered to them by creditors.

A resounding “No” vote was the result, following the recommendation of the Greek government. Politically, this outcome has strengthened the mandate to negotiate for better terms from its creditors.

The cure in the morning after. Can this outcome help to restore Greece to economic health? Democratic solidarity does not make the solutions for the problems any less painful. The “next morning” will be a prolonged period of adjustment and distress.

The long and painful road of reforms continues. The recent events – banks closed, industries and livelihoods upset, uncertainties multiplying, basic supplies of goods and materials dwindling – are reminders of what failed negotiations or wrong solutions can lead to.

The difficult negotiation with creditors has to proceed. And if the preferred outcomes cannot get realized, there is still that other option: leaving the currency union and returning to its own national currency, or “Grexit.”

Even if new funds /loans might come to help it along, the IMF (International Monetary Fund) has said in its sustainability analysis of the Greek debt program the country would need another $50 billion of new borrowings to make it work. That was before the Greek default of its IMF debt.

This suggests only debt relief could work. Who bears the burden of providing that debt relief is a major policy question for the creditor community.

How adjustment is possible within the euro currency system. In a currency union, a country in economic trouble like excessive debts has no monetary option. It has ceded monetary policy to the monetary authority, the ECB (European Central Bank) as a member.

Any economic adjustment can come only through the control of the level of aggregate expenditure or income. These can be undertaken by cutting public expenditure, by reducing payrolls and current expense, by selling state enterprises, and by more taxation.

To pay its debt obligations, it has to sacrifice some domestic spending or incomes to favor debt payments. This is a program of expenditure cutting or income reduction – austerity.

In budgetary terms, a country needs to generate a surplus of taxes over expenditure to pay its debt obligations. Without that surplus (known as “primary surplus”), it is impossible to reduce the stock of debt over time.

In the Greek programs of debt reduction with its creditors, the required surplus could not be generated by efforts to reduce domestic spending and the increase of tax resources. Over time, the stock of Greek debt just rose because additional borrowings were incurred to pay for debt falling due. This is unsustainable.

The capacity of the economy to pay even suffered since austerity induced a severe decline of output. In the five years since 2010 when Greece entered its adjustment program, total output (or GDP) fell 25 percent. The ratio of debt to GDP rose even as foreign debt rose while the GDP fell!

This state of affairs could be held in check only if severe sacrifice in domestic expenditures can still be borne. The Greeks have refused to cut wages and pensions any further or to sell (privatize) any more state assets. On the other hand, the creditors continue to demand further sacrifice.

The view from the creditor side: the euro bloc countries. The impasse between Greece and its creditors is aggravated by the economic conditions of the individual creditor countries and the euro bloc itself.

At this point, Greek debts are held principally by the big institutions (IMF, ECB) and the European countries. Initially, the European banks were highly exposed to Greek debts. Through quantitative easing operations, ECB bailed out the banks by buying their loan assets, including those to Greece. As a result, the threat of banking contagion involving the European banks is much less.

Europe for its part was tough on Greece for bringing itself into its debt problems. The sins of economic management included fiscal profligacy; generous social programs that it could not finance, the inadequacy of its fiscal system in raising proper funding sources for these programs; and its resistance to the reform measures.

But Europe itself has serious difficulties. The economic bloc has been hit by its own inability to restore economic growth in a timely way after the recession of 2008, unlike for instance, the US.

Weak growth and continued stagnation has slowed down Europe. The big exception is Germany, which has made the greatest gain from the euro zone. Its competitiveness, frugal fiscal practices, and efficient tax collection is a model of economic performance.

Any debt relief, specifically to Greece, therefore to some extent depends squarely on Germany’s attitude. This is the reason why Germany is almost the front interlocutor in the debt negotiations. One could almost say the least common negotiating stance on the easing of Greek debts depends on how Germany decides to bear the burden of those debts falling on its taxpayers.

Grexit and its advantages for Greece. Despite the “No” vote, according to a survey, 81 percent of Greeks favor staying in the euro zone. The Greek prime minister also said Greece wants to remain in the euro zone.

Yet, the “No” vote suggests Greece can still exercise a sovereign right if it fails to get its debt bargain. “Grexit”, as this is called, provides Greece with the best option by restoring its monetary independence.

Exit and return to the drachma provides many possibilities. Devaluation and inflation could alter domestic incomes. Foreign assets and all debts then could fall in value. Export industries could boom and imports reduced. Tourism, which is Greece’s main charm to foreigners, could boom further.

There are painful costs. Inflation brings about loss of income and savings for some, including pensioners. The difficult measures that could not be taken by direct government decrees get solved by the market. The pain for the many just naturally comes. But the remedy for the economy gets facilitated.

As most economists will say, full control of economic policy when done properly would be the best enabler of growth.