Moneyweek: Why we need another Greek crisis

29 May 2017
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Everyone knows the drill for Greek bailout talks by now. There is a lot of posturing on both sides. The Germans insist that the Greeks have to pay for their mistakes, there are riots in Athens, and some late-night emergency meetings in Brussels, followed by a spike in bond yields. And then at the last minute the government agrees to another round of austerity, enough money to keep the debt interest ticking over is wired across, and the whole thing is forgotten about.

That certainly seems to be the script for this year. On Monday, the country was on the brink again, as talks broke down, but the chances are a compromise will be cobbled together. The EU keeps insisting on more and more austerity as the condition of any more money, but all that is doing is making the problem worse. This year’s deal includes yet another round of cuts to pensions, even though the current rate is only €664 a month.

It will reduce the tax-free threshold from around €8,000 a year to less than €6,000, which amounts to a hefty tax rise for the lowest earners. Greece is already running a primary surplus (ie, excluding interest payments) of more than 3% of GDP, but the latest package will see that increased even further to 3.5%, and the surpluses run far into the future. One German plan projects surpluses to 2060.

And yet, two-thirds of a decade on from the first bailout, there is absolutely no sign it is working. When the first one was launched, Greece was meant to be well on the road to recovery by now. The pain would be over, and the gains would be coming through. Instead, only this month we learned that Greece has slipped back into recession, with two quarters of negative growth. Total debt is still ratcheting up, and is now close to 200% of GDP – and with GDP shrinking that ratio will rise still further even if it doesn’t borrow any more money.

Some of the figures are terrifying. For example, 40% of retail business closed down between 2014 and 2017. The birth rate has dropped to World War I levels because few couples can afford children. Overall, GDP has dropped by 27% – close to the damage inflicted on the US in the Great Depression (with this important difference – after seven years, the US was recovering).

The issue needs to be brought to a head. There are only two ways forward. One is for Greece to get out of the euro. It could “suspend” its membership, bring back the drachma, and start to devalue its way back to growth, preferably with the support of the European Central Bank, and the rest of its partners in the EU.

The second is for it to be given the money to reflate its economy and start growing again. Its debts could be written off, or postponed until GDP was 20% above its 2008 level, and the government could be given the cash to increase pensions, salaries, and so on. With money flowing, the economy would start moving again very quickly. The Germans may not like it. But the eurozone will never be healthy with Greece the way it is. A currency union with one member locked into permanent catastrophic recession is always going to be precarious.

However, it will take a crisis to break the impasse. It is hard to see what that might be right now. It could be the election of another radical government committed to defying austerity. It might be the IMF, possibly at the behest of the US, refusing to hand over any more money. It might be a general strike, or a banking collapse, or another wobble in the bond markets. But another bailout, with another round of austerity, and yet another year of recession, is the worst of all possible worlds. The markets may not like it in the short-term. Yet in the medium-term, another Greek crisis that forces a rethink will be better for the eurozone.

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