Everyone is wondering if Greece will exit the Eurozone. If you ask me, in the long run it would be good for Greece to take off the Eurogroup’s fiscal straitjacket and run its economy as it sees fit.
Greece owes over €300 billion to its creditors who are mostly public institutions such as the IMF and central banks. Even if Greece agrees to the austerity terms demanded by its creditors, it will take over 20 years to pay off the debt.
Of course, there is no free lunch in economics. In order to meet the IMF’s debt payment schedule, Greece has to make more cuts to its public spending, including pensions, social services, and public services. And, given that the economy is forecast to plunge back into another recession next year, the current depression-like conditions would only worsen. The unemployment rate is already at 26%.
After six long years of living near poverty for many Greek citizens, I can understand why they decided to rebel by voting for an anti-austerity party, Syriza. And, they gave a clear mandate to the party’s young and idealistic Prime Minister Alexis Tsipras to roll back the austerity program and renegotiate its terms.
In turn, Mr. Tsipras appointed Mr. Yanis Varoufakis, a former university economics professor who specialized in game theory, as the Finance Minister. And immediately, Mr. Varoufakis went to work and created much-publicized clashes, upsetting creditors with an arrogant stance and outrageous declarations.
So, I could not pass on the opportunity to attend a conference at the Brookings Institute recently and listen to Mr. Varoufakis in person. And, unlike most economics professors, it was refreshing to find Mr. Varoufakis articulate and direct to the point of being rude, but still effective.
Mr. Varoufakis declared, “For Greeks to live another 20 years in depression-like conditions makes no sense. And, IMF growth projections are not realistic at all. So, an entire generation of Greeks will suffer withlittle hope of the good life returning.” He observed, “What we had were Ponzi growth and Ponzi austerity. Let’s not pretend.”
I must admit what he said made sense to me. Why enter into an agreement that is politically and economically not feasible? So, why not give a small break to Greece? But, the real issue for the creditors is not Greece, which is too small to be a consequence. The Greek economy is only 2% of the Eurozone, and most of its debt is owed to public institutions such as the IMF and central banks. So, if Greece defaults, the impact can be easily contained and managed.
The critical issue for the Eurogroup is if it gives in to the Greek demand then it opens up for similar demands from other high debt economies in the Eurozone including Italy, Portugal, Spain and others. They would ask why practice fiscal discipline when the Eurozone is willing to write off outstanding debts when they get to be too much? In other words, high savings economies will be standing by to bailout out over-spending economies.
That explains why the creditors are not willing and unable to compromise. But, the Greek Finance Minister made it clear at the end of his talk that “Greece will compromise and compromise but will not be comprised.” So in the end, it is my prediction that Greece will leave the Eurozone. And, in the long run, this would be good for Greece and the Eurozone since it will be no longer be a strained and unsustainable union.