July 8, 2015    4 minute read

Did the Referendum Give Greeks a Choice?

   July 8, 2015    4 minute read

Did the Referendum Give Greeks a Choice?

The economy is like a human being: its born, stumbles, and learns to stay on its feet … It has basic needs … It feels trust, anger, despair and it doesn’t the wrongs done … Sometimes, it is obligated to make life changing decisions.

When an individual gets depressed they take antidepressants, seek counselling and ultimately, takes an individual decision for its future. Every medical practitioner will tell you that the best cure for a patient is positive expectations. Every economist will tell you that self-fulfilling expectations shape the economy.  In an economy, what the individual expects, is bound to happen. Why not expect the best?

Greece got accepted into the European Union in 2001, a time in which the Greek economy demonstrated higher GDP growth than the European average but faced rising unemployment levels, tax evasion, corruption and low global competitiveness.

The gravity of inter-European asymmetry in competitiveness and balance of payments disequilibria meant Greece began to struggle. As the Greeks began to import more, the country pursued to finance its current account deficit through foreign investments instead of redefining its infrastructure in compliance with a sustainable economy.

In the meantime, the US-originated credit crunch spread to the entire world via the stoppage of interbank operations, causing the global economy’s need for liquidity to soar. Although Greek inflows were falling, it continued to hoard vast amounts of foreign reserves financed by raising new debt or selling assets. At some point, however, raising new debt and/or selling assets became infeasible, resulting in default risk.

The European individual got cognisant of the grand asymmetry within the euro territory and speculation that Greece will have to abandon Euro and go back to drachma at a depreciated value got faddish, inserting the exchange rate risk back into Europe. Mistakes were made by Greece. Nevertheless, mistakes were also made by the governments of Europe, the economic theorists, the architects of the Eurozone in structuring, running and funding of Europe.

Perhaps, the decision to admit Greece into the Eurozone was a mistake by Western Europeans. Greece failed to meet the second criteria of Maastricht Treaty – a member country should have national budget deficit at or below 3% of GDP. Greeks would agree with the judgment that they would be much better off being denominated in drachma, free to devalue and restore foregone competitiveness.

Furthermore, after its admittance, Greece was able to borrow as easy as Germany. Blame here is not that of Greece, but of international investors who underestimated the risk of the variety of assets, rating agencies that hadn’t been reflecting the true troubles of the economy and that of the ECB which accepted Greek debt as collateral on a par with that of German debt.

Did the referendum present a genuine choice for Greeks ?

As of July 1st, the help that Brussels has offered to Greece is €7.2 billion, which wouldn’t even cover the government’s debt repayments until the end of August, and promise a mere two months’ liquidity. Notwithstanding , 90% of the aggregate Eurozone and IMF lending to the Greek government since 2010 has gone to the banks and other lenders – not to Greece to assist their recovery.

According to columnist Martin Sandbu:

“Further austerity isn’t even in the creditors’ interests […] it would demand even more cuts and depress the economy another 5% and raise the ratio of debt GDP by another 9%, eventually depressing the economy by 12.5 percent, and increasing the ratio of debt to GDP by around 22.5 percentage points. ”

In light of the referendum and the current Greek position, perhaps the following can summarise the sentiment of Greece:

A young Greek man visits the Australian consulate in Athens and asks for a work visa. “Why do you want to leave Greece?” asks the official. 

“For two reasons,” replies the Greek. “First, I am worried that Greece will leave the EU, which will lead to new poverty and chaos in the country . . .” 

But,” interrupts the official, “this is pure nonsense: Greece will remain in the EU and submit to financial discipline!” “Well,” responds the Greek calmly, this is my second reason.”

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