What Greece Wants Vs. What They Need

July 3, 2015 0 Comments

Greece joined the European Union in 1981, and officially adopted the Euro in 2001. Was allowing Greece to join a mistake? Most likely. That is probably the largest sentiment German Chancellor Angela Merkel has on Greece, has she bashes her predecessor Gerhard Schroeder for allowing such a pact to happen.

This is probably because ever since Greece was allowed to join, their debt-to-GDP levels have been on no other trajectory course, other than upwards.

The July 5th referendum is drawing closer. A ‘Yes’ vote is effectively a vote for a bailout, but attached with a greater cost on the standard of living of all Greeks, in the form of pension cuts and increased VAT rates. However, whether the Greeks know it or not, a vote for ‘No’ is effectively a vote for a Grexit.

If Greece rejects the bailout, the ECB will continue to suspend Emergency Liquidity Assistance, which initially started due to an inability to repay the IMF on July 2nd. This economic crushing restrictions will no doubt continue for the foreseeable future, along with capital controls and international transfers. Money is only allowed into the country. It isn’t allowed to leave.

Is a ‘Yes’ vote what the people of Greece need? 13 prominent economists (Including One Noble Laureate) from around the world seem to be highly critical of Syria’s approach on these deals.

An excerpt here:

A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate. The new weak currency will make imports very expensive, cutting the purchasing power of Greeks by half or one third. Irresponsible politicians would print too many new drachmas, feeding additional inflation and eliminating any international competitiveness gains resulting from the weaker currency. Shortages of even necessities such as medicines and fuel would become the norm.

Some may argue that a bankruptcy within the euro avoids all these issues. This is very misleading. The Greek government would not be able to manage a bankruptcy within the euro. It would also require tremendous support from the European Central Bank, which would be unlikely in the circumstances leading to a Greek bankruptcy, such as not paying Greece’s obligations to the International Monetary Fund or the ECB itself. Within a short time, bankruptcy within the euro would become a Grexit. Thus, both types of bankruptcy (within and outside of the euro) lead to the total disaster of the new drachma. It is also highly doubtful that Greece can actually remain in the EU itself, following a Grexit.

What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The “closed sectors” of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.

Finally, an agreement must restructure the Greek sovereign debt to European countries and the European Stability Mechanism. Keeping the nominal value constant, the best way to restructure the debt is to elongate its maturities. If maturities are moved to 75 years and the presently variable interest rates are converted to fixed ones and slightly reduced, the net present value of the debt will be reduced by 50 percent. A 10-year grace period (during which interest is not paid but recapitalized) with the money saved invested would promote growth.

Growth is, in fact, the only guarantee that Greece will pay its debts.

Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business

Greece does need a deal more than ever. They also need structural and economic reforms if they ever hope to make their debt ‘sustainable.’ On Sunday, it would be wise for Greece to vote for the bailout and reject the Syriza party that has put them in this predicament. I don’t see that happening, then again, anything is possible.

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