Greece’s Anti-Austerity Platform Reimagined
What happens if Greece exits the eurozone? We’ll have to wait until the end of June to find out. Or at least be subject to four more months of pundits explaining what could happen.
That’s because Greece’s creditors, the “Troika” (the European Central Bank, the European Commission, and the International Monetary Fund), agreed to a four-month extension on Friday, February 20. With an extension until the end of June in place, Greece has some much-needed breathing room.
Now it just needs to hand over a list of reforms it plans to tackle over the ensuing months. The list was supposed to be handed over on Monday, but its delivery was postponed until Tuesday (February 17).
Some of the Greek proposals included
- Combatting tax evasion;
- Tackling corruption;
- Introducing collective bargaining, but stopping short of raising the minimum wage;
- Reforming public sector wages to avoid further wage cuts;
- Achieving pension savings by consolidating funds and eliminating incentives for early retirement; and
- Reducing the number of ministries from 16 to 10, while cutting special advisers and fringe benefits for officials. (Source: Financial Times, February 24, 2015.)
Regardless, the concessions ran counter to what newly elected Prime Minister Alexis Tsipras promised in the lead-up to his ascension to power in January. His anti-austerity platform included raising the minimum wage, paying a pension bonus, and rehiring public workers. This is in addition to his initial line-must-not-be-crossed declaration that Greece’s debt be reduced and the terms of its original agreement renegotiated.
Naturally, he had to temper his demands. He has also had to rethink the list of economic reforms, because if it’s not accepted, the deal to extend Greece’s loan will probably collapse.
But I don’t believe that will happen. There will be some negotiating and in the end, the Troika will be happy, and Greece will get its short-term extension. This despite Greece’s Finance Minister Yanis Varoufakis saying the bailout agreement will be “dead” if the list of reforms is not approved.
A push and a pull.
The “Grexit” Imagined
What would happen though if Greece were forced to exit the eurozone? That depends on whom you ask. Admittedly, most think a Greek exit, or “Grexit,” would be pretty dire for both the country and the region.
But not everyone thinks so…
Christian Schulz, a senior economist at Berenberg Bank, maintains with pragmatic enthusiasm that Greece, which is responsible for just two percent of the entire EU’s gross domestic product (GDP), is too small to be of any serious economic consequence: “For no country in the European [sic] is Greece a major export partner,” he said. (Source: Financial Post, February 19, 2015.)
That doesn’t actually take into consideration what would happen to Greece itself. After all, unemployment in Greece stands at an eye-watering 25%, with youth unemployment at roughly 50%. The corresponding average eurozone rates are 11.4% and 23%.
Greece’s economy has shrunk by 25% since the eurozone crisis began. The country’s debt is 175% of its GDP, and it has borrowed 240 billion euros (US$272 billion) from the Troika. Greece’s total debt stands at 323 billion euros (US$366 billion).
Antonis Samaras, Greece’s most recent former prime minister from 2012 to 2015, cautioned that living standards could fall by 80% within a few weeks of an exit. Most economists believe the currency devaluation would be more “mild”—in the 20%–30% range. Regardless, the Greek government would be unable to borrow from anyone, and the country would eventually run out of euros. (Source: BBC, February 18, 2015.)
Until a new currency could be introduced, the country would have to pay government employees and social benefits with something akin to an “IOU.” And we all know how often those get paid back.
An exit from the eurozone would lead to a run on bank withdrawals before the money could be converted from safe-haven euros to a new devalued currency. The Greek government, sensing a lack of faith from its people, would likely impose a freeze on withdrawals and people sending money out of the country.
Greece would introduce a new currency. The old drachma might take on a new name, but it’s the same thing. The new currency would tumble in value as soon as it was issued. Greece, seeing how successful quantitative easing (QE) has been in Japan and the U.S., would kick-start the economy with a similar program. With bailout rules in the dust, the country could start running deficits again.
Aside from being a boon for forex (foreign exchange) traders, Greece’s economy would probably benefit from having a much more competitive exchange rate. That doesn’t solve the country’s underlying economic troubles.
In the short run, Greece’s exit from the eurozone would be painful. Inflation could kick in, meaning imports would be more expensive. But with unemployment rampant, the country does have an available workforce to produce more of everything.
Agreement Leads to Stock Market Highs
Fortunately, Mario Draghi, the president of the European Central Bank (ECB), warmed to the proposals and called them “sufficiently comprehensive to be a valid starting point.” Eurozone finance ministers also approved the Greek proposals, extending the program by four more months. (Source: European Commission, February 24, 2015.)
The International Monetary Fund’s (IMF) response was more reserved, saying the measures were “generally not very specific” and suffered a lack of “clear assurances.” That said, the IMF seemed to give the country the benefit of the doubt and now looks “forward to learn[ing] more about their plans.” (Source: International Monetary Fund, February 23, 2015.)
That was enough to bolster the stock market. Greek stocks soared to new 2015 highs, broaching the 900-point level to reach 937.96, for a one-day increase of 9.81%. Year-to-date, the Athens Stock Exchange is up 13.53%.
Britain’s FTSE 100 index of blue-chip stocks hit an all-time high of 6,958.89. The previous high of 6,950 was hit in the dying days of the dot-com frenzy in late 1999. The S&P 500 hit fresh highs, closing at 2,115.49. The Dow Jones Industrial Average celebrated a new all-time high as well, closing at 18,213.18.
With the bailout plan approved, Greece still faces a tough road ahead. Four months isn’t a long period of time. It may be long enough to show its creditors it’s serious about making reforms while still addressing humanitarian and social issues, though.
We’ll know the closer we get to the end of June.