The conference organized by the weekly The Economist on the relations between Greece and its creditors set the stage for a very sharp debate on the possibility of an exit of Greece from the Euro. This idea, if it still raises fears among part of the public (and the latter represented what is commonly called the « economic elites ») is beginning to be much better accepted. So that one of the hypotheses which was discussed at the occasion of this conference was the one of a “velvet exit.” We will note the reference to the process of separation between the Czech Republic and Slovakia, which had in its own time been called the « velvet scission.» The very fact that this hypothesis could be discussed, and that it was considered by numerous participants in this conference, Greeks as well as foreigners, is an incontrovertible sign of the progress being made by the idea of an exit from the Euro. It corresponds to what the former French President, M. Valery Giscard d’Estaing called, a few weeks ago, the « friendly GREXIT ».
This conference, under the enlightened chairmanship of Mrs Joan Hoey, who manages the local editions ofThe Economist and who is also a confirmed analyst of the local situation, gathered around the Deputy-Minister of Foreign Affairs M. Euclid Tsakalatos and of Nikos Vettas, director of the Foundation for Economic and Industrial Research, and professor of economy at the University of Athens, several university professors:
- Andreas Nölke, professor of economy and international relations at the Goethe University in Frankfurt.
- Henk Overbeek, professor of international relations at the University of Amsterdam.
- Giovanni Dosi, professor of economy and director of economic studies at the University of Pisa.
- as well as your servant.
The official position of SYRIZA
This position was presented by M. Tsakalatos. He recognized upfront that there existed a contradiction between the principles of democracy and those of the Economic and Monetary Union (EMU, better known as the Eurozone).The architecture of EMU has been faulty from its beginnings (1999) and is unable to cope, within the present conditions and structures, with the problems facing it. After having stressed the provisory nature of the agreement concluded between Greece and its creditors (the Eurogroup but also the IMF), he emphasized the present difficulties of Greece, which is faced with a flight of capitals out of its banking system (12 billion euros over the month of February) as well as with the financial uncertainty concerning its capacity to cover the repayments on its debt. M. Tsakalatos also stressed the problem of unemployment which affects presently over 26% of the active population, as well as the brain drain, which risks depriving Greece of its most brilliant and promising elements. And it is under such conditions that the Eurogroup took the responsibility to exert ever greater political and economic pressures on the Greek government. But it is clear for everybody in Greece, and it was confirmed by various reactions, that it is forthwith impossible to step back, and to revert to the statu-quo ante such as it was before January 25.
European authorities are making a big mistake by describing SYRIZA as a populist party. It is a party which has a program and which will apply it. The political alliances it entered with the AN.EL. party (the « Independent Greeks ») and which infuriates so much some segments of the European liberal left (as well as Mrs Merkel…) are from this point of view perfectly logical. In reality, the same problem arises for social-democratic parties in the rest of Europe. By adopting policies ever more remote from the concerns of their voters, it is these very parties which are making the bed of populist, even nationalist movements, be it in France, in Italy or even in Great Britain. If the election of a new Parliament did not imply important changes in the policies of a country, this would mean that democracy no longer exists. The question of national sovereignty is therefore crucial.
Debt or competitiveness?
One of the questions which was immediately tackled was the one of knowing if the main question was the one of the debt, or if the latter was only an expression of a far more important problem of productiveness, for Greece as well as for a number of countries of the Eurozone. In the presentation which I made (and which can be consulted on my blog ici here) I indicated that the debt had sharply increased beginning in 2008, not only as a percentage of GDP (chart 1) but also in billion euros. This showed at once the sharp rise in interest rates which had started to penalize Greece, as well as the deleterious effects of the austerity policies.
Public debt of Greece in % of GDP
Public debt of Greece in volume
Source : Charts 1 and 2, IMF data.
Yet, if some strive to present Greece’s problem as a problem of debt, it is indeed, in reality, a problem of productivity and competitiveness. On this point, the interventions of Dosi, of Nölke and my own converged. From the moment that countries find themselves in a monetary union with a country which is much farther advanced (Germany), it is imperative that a sizable federal budget be constituted in order to transfer resources towards these countries. In its absence, the economic distortions between the most advanced country and the other countries can only go on worsening, as the “natural” mechanism of adjustment, namely devaluation in relation to the most advanced country, no longer exists. The comparison of the evolution of the unitary costs of labor? in relation to Germany’s is in this regard extremely informative.
Gap of the unitary cost in relation to Germany
Sources : OCDE data
So that the question of the debt is only the indicator of far deeper structural unbalances and of the absence of any corrective mechanism. MM. Dosi and Vettas have stressed the fact that in the United States there exist sizeable gaps in productivity and competitiveness between the States. This is only tolerable because there exists an enormous Federal budget (amounting to between 63% and 65% of expenses). As a matter of fact, we are verifying today the prediction made in the 1970s by Georges Brown, then the UK Chancellor of the Exchequer, at a conference which was held at the European Institute in Florence. A European currency would indeed constitute an advantage, but in order for it to work, each country would have to accept to surrender 10% of its GDP to a federal budget. As we know, today it is barely reaching 1.23%.
In reality, an answer to the crisis of the Eurozone demanding an increase in federalism collides with the following fact: Germany would have to accept to transfer from 8% (calculation of J. Sapir) to 12% (calculation of P. Arthus) of its GDP every year over a period of some 10 years for a true convergence to be established. But the problem then becomes not that the Germans don’t want to make such a contribution, but that theycan’t consent to it without causing their own economy to fall apart. Any discourse which does not take into account this cold reality condemns itself to remaining a mere preaching in the world of Pollyannas.
Was austerity necessary?
The various speakers, G. Dosi, Nölke or Overbeek all insisted on the destructive effects of the austerity policies, not only in the case of Greece but also in the case of Portugal, Spain and Italy. Giovanni Dosi for instance brought back to memory the fact that the fiscal expense multiplier had been grossly underestimated by the authorities of the European Union, and this even after the publication of the famous study by Blanchard dating back to January 2013 . Very clearly, concerning the policies implemented under the name « Memorandum, » not only are they not working, but moreover they have very sizeable destructive effects on the economy. These policies, and there was a broad consensus on this point among the four foreign speakers, have not been set up in order to « help » Greece but indeed only to make it possible for the creditor countries to be reimbursed. This has been conceded lately in a note of the IMF. But even in this regard, the measures reveal themselves to be counterproductive. Indeed, it is clear that Greece, in the wake of the diverse Memoranda, will not be able to reimburse its debt. The policies implemented in order to rescue the country out of insolvency have, in the contrary, plunged it into insolvency.
The question then comes up of knowing if these policies were not in fact following other aims. Professor Nölke as well as professor Overbeek voiced the hypothesis that these policies were aimed at making out of Greece an example for the benefit of the countries of Southern as well as of Northern Europe, in order to figure out up to which point it was possible to impoverish a population and to destroy its middle class. The effect of exemplarity being sought aiming at convincing union organizations in other countries and political parties that it is better to accept a relatively orderly dismantling of social legislation (as is happening in France for instance with the « Loi Macron, » but as is also happening in Italy) rather than finding oneself in the situation of Greece or of Spain. This explanation would then go far in explaining the utter rigidity of the Eurogroup in the negotiations now taking place.
But another explanation is possible, which by the way is not contradictory with the one formulated by Nölke and Overbeek. Germany would be exerting pressure on Greece in order to obtain the guarantee that austerity will be maintained – and this at any price – and to avoid that a process be initiated, leading to what is truly terrifying Germany: the transformation of the « Eurozone » into a « transfer union » in which the German contribution would go increasing year after year. It is perfectly possible to think that this hypothesis, which I formulated and to which Professor Nölke gave his assent, could be conjugated with the idea of making an example of Greece (and to a lesser extend of Spain and Portugal) destined to be heard by the other European countries.
What room left for manoeuver ?
On this point, the debate was more open between the group of the four foreign economists and the two Greek representatives. With some nuances (Professor Overbeek showing more optimism than Dosi, Nölke and myself) we consider that the attitude of the authorities of Brussels and of the Eurogroup come down to demanding of Greece a surrender without conditions. This is clearly the position of Germany and, considering the facts, one must note the rallying of France and Italy to the position held by Berlin. The “united front” against Greece which is manifesting itself at present is, in reality, an alliance of convenience. One can well see the interest for Germany of breaking the hope represented by the Syriza government. As for the Spanish government, it is motivated by the fear of seeing Podemos emerging as a major political force, besides the links (and there has been talk of de facto corruption) existing between the Spanish and German conservative leaders. France, on its side, hopes to (or deludes itself that it will) obtain from Brussels and Germany a treatment of favor in the reduction of its deficit in exchange for supporting Berlin. The same goes for Italy. But this means that, in one sense, the fear of change has unified positions around those of the most reactionary element, that is, Germany’s. The treason of the national elites in France, in Italy and in Spain is then reaching new heights. But it is also clear that Syriza has underestimated this phenomenon. Greece has nothing to expect from failed governments which have abdicated all vision for the future of their own countries and seem only forthwith motivated by derisory manoeuvres destined to maintain them in power a little longer.
And yet, Germany too lacks room for manoeuvring. If it pushes Greece to the limit, and it seems that Germany is under-estimating the patriotic and anti-German consensus presently reigning in Athens, Greece will get out of the Euro. However, the consequences of such an act are absolutely unpredictable. But if Germany accepts to compromise at the last moment, it will only prove that it is possible to have important breaches in austerity. In reality, Greece as well as Germany are both set on trajectories from which they cannot deviate, except at an absolutely exorbitant political price. This is what makes probable and credible the hypothesis of an exit of Greece from the Eurozone, what is called the « GREXIT ».
Is a « velvet exit » possible?
Part of the discussion, and of the « off » discussions which are quite often the most interesting moments in conferences of this type, addressed the hypothesis of this famous « velvet exit ».
On a purely technical plane, such a solution would present many advantages. For Greece, it would come with compromises on all or part of its debt, and with a monetary policy finding back to some degrees of freedom, with a control of capitals and the possibility on the part of the Central Bank to provide the banks and the economy with liquidities. In exchange for a compromise on the debt, which would spare the countries of the EMU from having to face up to the losses implied by a default, these countries could consent a loan of 20 billion to the Central Bank of Greece for the duration of the transition period, until the Drachma stabilizes itself.
But, politically, one struggles to see how the present positions could be compatible with a negotiated exit. The risk, for the Eurogroup, is to see the intangibility of the Euro put into question and, one step leading to the next, a mechanism of dissolution of the Eurozone would be putting itself into place. It is clear that, in the same time as Greece, or immediately afterwards, it would be the turn of Cyprus. How then would investors react, and shouldn’t one expect them to figure that Portugal and Spain would be next on the list? And once these countries are de facto pushed to the exit, it would be the turn of Italy and France. All this, alas! makes a non-negotiated exit, a “conflictual GREXIT,” a much more probable hypothesis. Greece would then default on its debt (as Russia defaulted in 1998). The countries of the Eurozone would block the circulation of Greek « euros » on their territory and Greece would then be compelled to rename them “drachmas.” The problem of the stabilization of the drachma would then arise, and Greece would most probably have to resort to one of the big countries of the BRICS (China or Russia) in order to constitute a stabilization fund. The impact on the Eurozone of a conflictual exit of Greece would be even greater than in the case of a “velvet exit.” This conflictual exit would be an immense and flagrant admission of the failure of the European institutions.
One can think therefore that the countries of the Eurozone will do anything to avoid reaching that point. But on the other hand they cannot – and for some – they do not want to compromise on austerity. And this is where the utterly perverse nature of the Euro is coming to the fore. Politically conceived as being the crowning achievement of European construction, it turns out to be in reality the worst of poisons within the fold of the Eurozone. It is in the process, first by small increments, but now in an ever faster and more evident way, to kill the EU. The policies put into place in order to save the Euro reveal themselves to be both inefficient and to be a profound and constant denial of democracy. They are provoking an ever more violent polarization of countries one against the others.
A conclusion imposes itself
The case of Greece is obviously emblematic. What is playing itself out in this unfortunate country concerns us all and, I dare say, it will influence our own fate. Freedom and democracy are gaming their skins in Athens. As at Marathon, as at Salamina, yes, for once history is dishing up a second serving, even if this time the barbarian is hailing from Septentrion. If we do not rapidly put an end to the doomed experiment of the “single currency,” we must fear that it will drive us towards unheard of catastrophes.
 Blanchard O. and D. Leigh, « Growth Forecast Errors and Fiscal Multipliers », IMF Working Paper, n°13/1, January 2013.