It’s been a bruising few months for the Eurozone, and for one Member State in particular. It’s been also, depending on your point of view, an object lesson in Economics, in Realpolitik, in how the Strong can bully the Weak, on the impracticalities of instant solutions to complex problems, and above all on the inadequacies of the Eurozone.

The Greek saga still has some way to run. As I write negotiations on a third bailout are to begin, the Greek Parliament having passed legislation agreeing austerity measures harsher than those rejected in a referendum less than two weeks before. The measures were very much the stick part of the offer/ultimatum from the other Eurozone countries. The carrot the prospect of securing that third bailout of an estimated $90 billion.

Where that money if agreed will come from remains to be seen. Will all Eurozone countries pay, including the four poorer than Greece (the Baltics and Slovakia) and the three with roughly the same income? And what guarantees will be sought to ensure that Greece implements the measures passed – a problem with earlier austerity packages?

Moreover the issue of existing debt write down is still not resolved, lending an air of unreality to the sticking plaster solution currently proposed. Quite simply Greece cannot – ever –repay what it owes – roughly $350 billion. It may hope to repay, or make some gesture by having portion of any third bailout loan earmarked for “debt repayment” – as is being proposed – but that is only to deny the political and economic reality. Adding an extra $90 billion to the amount owing, bringing it to more than twice annual GDP, merely compounds the issue.

One solution would be to write off permanently a large proportion of the debt. This would involve Greece’s partners writing off monies already lent ( in Ireland’s case around $400 million). Whether that will prove palatable remains to be seen. A write-off has been tried once before, in 2012 . There is talk of finessing somehow the terms of “repayment” by lengthening the period allowed or giving extended holidays from interest – “Extend and pretend.”. ( Ireland got some finessing of its bailout terms but our case was simple compared to that of Greece.) This has also been tried before. And the sum owing would remain. A malign scenario would be a Greek exit from the Eurozone, possibly temporarily, with a devalued Drachma and more short term grief for the Greek people. That would presumably also involve some debt restructuring and write off. Some choice!

The fundamental flaw in the Eurozone from the start was its political nature – a monetary union not underpinned by a fiscal union and with insufficient fiscal controls and sanctions. Eurozone members were theoretically limited to annual national budget deficits of 3% of GDP. When Germany and France became first to break this limit in 2005 and were not punished it became clear that political considerations were paramount and that a softly softly approach would apply.

All was fine as long as economies were expanding. The lower interest rates which Germany enjoyed were suddenly available to other countries. Cheap credit led to a surge in government and private borrowing and spending in countries like Ireland and Greece. Germany benefitted from the Euro’s exchange rate, more favourable than the old Deutschmark. Then came the international financial crisis and recession , which began in the USA and spread rapidly to the EU in 2008.

The peripheral PIGS, which had benefitted greatly from cheap money, were hit hardest (and with them the Baltics, particularly Latvia). All four eventually required bailouts, though for different reasons. In Ireland a property bubble collapsed in 2008, ending a boom period during which the revenues the bubble generated had paid for tax cuts and generous increases in welfare benefits. The banks which had financed the boom collapsed and required state recapitalisation. The consequential yawning budget deficit precipitated a downward fiscal and economic spiral which ended when Ireland could no longer borrow money internationally. In November 2010 Ireland secured an €85 billion rescue package from the EU, the ECB and the IMF (the Troika).

The package required spending cuts and tax increases to restore the tax base, but, once adhered to, the harsh medicine worked and Ireland exited the Troika programme after three years. While a legacy of austerity remains, and the recovery is far from complete, the Irish economy has picked up dramatically over the past eighteen months, with all indicators positive. Another PIG, Portugal, has also exited its Troika programme.

Greece was different. Its economy, which grew strongly before 2007, was heavily dependent on tourism and shipping – industries sensitive to economic downturn. Economic growth and the cheap credit available from Europe saw government expenditure grow sharply during the decade, outstripping tax revenue, the money financing public sector jobs, welfare benefits, pensions and military expenditure,. Tax evasion, traditionally a scourge – put simply the well-off didn’t pay tax, and much of the economy was cash based – remained chronic. The National Debt, historically high, mounted, pushing, then exceeding 100% of GDP. Official statistics, always doubtful, were massaged to cover. Government revenue actually fell by 15% in 2009. Borrowing costs rose.

Revelations that the previous government had falsified the figures, disguising the true extent of annual borrowing, proved the final straw for international lenders. The vital factor of investor confidence was lost. The Greek government , like Ireland’s later, proved unable to borrow internationally and, in April 2010, was forced to seek EU and IMF assistance. A loan of €110 billion was agreed, contingent on the introduction of severe austerity measures. These were greeted with widespread street protests throughout Greece, including several fatalities, with banners and slogans proclaiming the Greeks were not like the Irish.

A year later delays in implementing reforms, together with a worsening recession, saw the Troika agree to an easing of the bailout terms. Nothing worked and in March 2012, a second bailout, this time of €130 billion, was agreed, contingent on further austerity measures. The bailout was accompanied by the largest sovereign debt restructuring in history with Greece’s debts reduced by €100 billion. Private bondholders were “burned” – losing over 50% of their holdings. More street protests followed.

Since then there has been political and social turmoil over the further austerity measures needed to ensure tranches of the second bailout were paid. This culminated in the government’s overthrow last January and its replacement by the far left Syriza government with a mandate to reject austerity and the second bailout. Ironically, Syriza’s success came just as the Greek economy seemed to be turning the corner. Since January Syriza has postured and refused to engage in serious negotiations even as Greece’s economy worsened. Its intransigence has exasperated and alienated its Eurozone partners. Trust and sympathy has been lost. Eventually as the money ran out, Syriza ran out of wiggle room and, at the last moment, folded when its bluff was called.

Some may feel schadenfreude at Syriza’s come-uppance. A cynic might observe that only a party as left wing as Syriza can now deliver Greece. But without sorting out or side-lining somehow the debt mess there will be no definitive solution. Hard pounding, Gentlemen.



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