In the wake of the Greek vote (an inevitable no) the situation has gotten more polarised. The Greeks seem to angling for some sort of debt relief, which the ECB and Germans are reluctant to grant. In part because of the moral hazard it would create, but perhaps more because of domestic politics.
Of course one of the issues often raised is, well Ireland (and Portugal) recovered and paid off its bailout, why can’t the Greeks? Well because the crisis effecting Ireland was very different from that affecting Greece. Ireland had been running budget surpluses for a decade prior to the crash, at times when Britain and Germany had been running up deficits. There was never any doubt as to Ireland’s ability to pay back its debts. The problem was that with the aftershocks from a massive property bubble and a collapse of tax revenue, the Irish government had some temporary cash flow problems. The major debt issue was (and still is) not the few billion the Irish state owes but the 1.7 trillion euro’s Irish citizens owe on their mortgages, credit cards, business loans, etc.
So the situation in Ireland was therefore very different, as all the country needed was some respite while things recovered. Indeed there is good reason to question whether the Irish bailout and the austerity that came with it actually helped or hindered the recovery. But either way its wrong to assume the same medicine will work with Greece.
Let us for example imagine we’ve a quack German doctor. He gives the Irish and Portuguese patients his patented snake oil cure. It seems to work and help them get better. Of course in truth, it might well be having no effect whatsoever. A bit of bed rest is doing all the work, which our quack wrongly ascribes to his formula.
Then in comes the Greek patient. He is also given the snake oil. But as his condition was much worse to start with, he does not recover. So the quack up’s his dosage, but the patient gets worse and worse. This may or may not be the fault of the snake oil, but it certainly looks that way to any outside observer, including the patient. Who in the end fights off the doctor and runs away without paying. The quack doctor then goes off in a huff claiming he was only trying to help.
In a nutshell that’s the crisis facing us. However the problem is people see it as a crisis of economics when I would argue, as I have been saying for the last few years, that in truth its a crisis of politics. There’s been too much kicking the can down the road by politicians, in Brussels, Berlin or Athens and what we see is the end result. Unfortunately, this also explains why the solutions coming out of both Athens and Berlin aren’t going to work.
The Germans seem to think the answer is regime change, get rid of that annoying tie-less finance minister in a tee-shirt on a Harley. Or better yet, get rid of Syriza and everything will be fine. Well no! Syriza are the inevitable consequences of 5 years of austerity and the dire poverty it has created. It was literally either Syriza, the communists or the fascists. And if Syriza falls, that’s what they’ll get. And no doubt the fascists will try to solve Greek’s problems by invading Macedonia or start a war with Turkey over North Cyprus or something.
Similarly, if the Greek’s plan is to go bankrupt and go back to the Drachma, I don’t think they entirely understand what that means….nor perhaps do the Germans understand how costly it would be to them. In short, if you think the current austerity is bad, wait a few years. The consequences of this are likely to be that anyone with any sort of savings or a pension, kiss it goodbye.
Put it this way, if you were a taxi driver in Brussels and the Greek PM got into the back of your taxi I suspect you’d be insisting he pay cash in advance ;D. Same with any hotel or restaurant. Greece will be the butt of economic jokes for the next decade or two. With the state unable to borrow, rampant inflation and collapsing tax revenue’s it will become impossible to service social welfare, meaning massive cuts in the public sector and probably a reneging on welfare, pensions and healthcare spending.
Of course Greeks point to Iceland as an example. But much like how the ECB pointing to Ireland is flawed, so too are the Greeks. Iceland’s woes were very different from those of Greece. Iceland (prior to the crisis) was a state with relatively low levels of public debt, high taxes and a high GDP. The issue was never about the Icelandic’s government’s ability to service its debts but the large debt’s run up by the country’s banks who had been playing the Wall Street casino.
And should anyone think, oh I’m alright Georgios, all my money is in an account abroad. Ya, and how long do you think it will take for the cash strapped Greek state to work that one out and slap a 25-50% asset transfer tax on all cash transfers into the country? Or indeed, how long before the Germans impose some sort of financial recovery charge on all Greek bank accounts held outside Greece?
Until there is some realism from both sides, its impossible to see how this crisis can be solved.