by Jacob Funk Kirkegaard
As the countdown toward a new Greek election
heads toward June 17, most analysts predict an imminent Greek exit from the
euro area. Almost anything can happen, but a few possibilities are worth
considering. Any newly elected Greek government will have trouble implementing
the current austerity program called for by euro leaders and the International
Monetary Fund (IMF). A loss of funding at least from the IMF in 2012 appears
likely. On the other hand, it is also likely that Greece will remain a member
of the euro in the short run, through 2012. Prospects for an outright Greek
Exit—a Grexit—are no more than 5 percent.
Two main scenarios for Greece in the coming
weeks depend on politics and the elections.
The abrupt deterioration of Greece’s economic
situation arose from the unexpected lack of a pro-IMF program majority in the
Greek parliament after the May 6 elections. The voters delivered a stinging
rejection of Greece’s established parties, instead putting on center stage the
populist Syriza Party and its leader Alexis Tsipras, who advocates voiding the
IMF program and the memorandum of understanding (MOU) with the fund, the
European Central Bank (ECB), and the euro leadership, known as the Troika.
But the Syriza victory on June 17 is far from
clear. In May the party got only 1 million votes, or 16.8 percent of the
electorate, which is less than the 1.2 million Greeks voted for parties or
candidates that fell short of the 3 percent of the votes that constitute the
threshold for representation in parliament. In the next balloting, these votes
could consolidate behind others. Moreover, the turnout on May 6 was low, just
65.1 percent. A higher turnout would not necessarily favor Syriza.
Euro area leaders are doing their utmost to turn
the next Greek election into a referendum on whether Greeks wish to remain in
the euro area, and not Greek austerity. As I have argued here before, the European Union will no doubt take a hard
line toward Greek voters, telling them that they would be welcome to stay with
the euro but that the decision is up to them—and the euro area is actively
taking precautionary actions in the event of a Greek decision to exit.
Any acute instability in the Greek economy before the election date resulting from an accelerating bank run will probably strengthen the pro-IMF program parties, because it will demonstrate the potential economic costs of populist policies like Syriza’s and thus likely affect the outcome of the election. These circumstances might make it more difficult for Syriza to sustain its electoral success next month.
Many things can go wrong, but I believe that
Greece will have a pro-IMF program parliamentary vote after June 17, much as
the United States House of Representatives changed its mind in 2008 on the
Troubled Asset Relief Program (TARP), which it backed after the financial
markets reacted violently to the initial rejection. A victorious functioning
pro-IMF program government might very well get minor changes in the IMF
program, particularly related to austerity, provided it remains committed to
implementing the structural reform components.
Are bank runs that might cause voters to change
their mind worth the risk? Unambiguously yes. The euro area cannot negotiate
with Greek populists now, lest such talks inspire copy-cat Tsipras’s to make
demands in Spain, Portugal, or Italy, all of which would stir a backlash in
Northern Europe opposing any fiscal transfers to help them with their troubles.
Running on irresponsible populist platforms in the euro area must be shown to
other countries as dangerous for their economies.
Second, many of the things that euro area
leaders will be forced to contemplate if events in Greece escalate are actually
not bad ideas. If banking troubles spread to Spain, who would oppose Madrid
approaching the European Stability Mechanism (ESM) for capital support? In the
extreme case of bank runs spreading across Europe, who would oppose a pan-euro
area deposit insurance scheme as a remedy? No such actions will help the growth
of ailing countries in this quarter, but the euro area always needs acute
pressure to take the right necessary decisions.
Scenario 2: Syriza Wins and Greece Becomes
Montenegro for a While
If Syriza wins on June 17, and it forms a new
anti-IMF program government, the outlook for the Greek economy grows murkier—though
an actual euro exit in the short run remains unlikely.
It is impossible to know the likely policies of
a Syriza-led government once it comes to power. But even populists listen to
the opinions of the electorate, and Tsipras is a skilled populist. He is
probably sincere in saying that he and Syriza want to stay in the euro. The reason is simple. An overwhelming majority
of Greeks consistently agree
with that view. This choice will of
course dismay a great number of euro-skeptic macroeconomists, who claim that by
staying inside the euro area Greece will forego the export-led riches
associated with the huge competitive devaluation from a reintroduction of the
drachma. Yet that view is only shared by a small minority of Greek voters.
The idea that Greece will somehow prosper from a
competitive devaluation outside the euro area is delusional intellectual snake
oil. But even a populist Syriza-led Greek government is unlikely to go against
the vast majority of Greek voters and immediately take Greece out of the euro
area. This matters profoundly. The European Union has no legal route to kick
Greece out. Even if the euro area wanted to oust Greece, any negotiations would
be lengthy, and they would occur while Greece remained inside the area.
Tsipras has offered Greek voters an appealing
platform of repudiating the IMF program and also ending austerity and reform in
Greece. This position would cost Greece its bailout funding. Since Greece runs
a 1 to 2 percent primary deficit (€2 billion to -€4 billion) it would probably
run out of money by August without outside assistance. Faced with that
likelihood, a Syriza government intent on staying inside the euro area would
face a choice of implementing additional immediate austerity, issuing
€-denominated IOUs as California did in 2009, or seizing private assets to make
ends meet. (The third choice is not impossible, given that Tsipras seems a
pretty doctrinaire communist.) As California did when it sent out IOUs as
personal tax refunds, a leftist regime in Athens would probably force its IOUs
down the throat of public workers or other groups that it could coerce into
receiving them. Seizing private assets in a country of rampant tax evasion and
disguising income and assets from authorities would be very complex. In short,
no options for balancing the budget will be popular among Greeks—which
constitutes a serious problem for a populist government.
A further complication if Syriza repudiates the
IMF program is that Greece’s banks, overwhelmed by bank runs, would lose access
to ECB liquidity and repo transactions and eventually any further support from
Bank of Greece emergency liquidity support, which would probably be vetoed by
the ECB governing council. It is difficult to see how Greek banks could operate
normally after a Syriza victory.
Without access to either bailout funds or the
ECB, a Syriza-led Greece would become like Montenegro—that is, a country that
uses the euro as its currency, but that lacks direct access to any economic
support from euro area institutions.1
Running Greece as Montenegro is likely to be an
extremely unpleasant political experience for Syriza, which campaigned on the
fanciful idea that it could retain access to bailout funds without
adopting austerity and reform. Once it became clear that—contrary to the pre-election assertions of Tsipras—the euro area actually didn’t collapse from the declaration of a Greek
debt moratorium or a bank holiday a Syriza government would not survive long in
office. It would probably be replaced quickly by a new pro-IMF coalition or a
new technocratic government, which would also attempt to reengage with the
Troika and reopen Greece’s access to the ECB and financial support. The rest of
the euro area would not welcome a Montenegro-like status for Greece. But even
Tsipras talks a “suspension” in payments to creditors, rather than an
all-out default and debt repudiation. Fences could thus be mended once Greece
changes its mind.
Scenario 2 might take longer to play out,
perhaps a couple months. But the result would be the same: no Greek exit from
the euro. Thus the issue facing Greece is not whether to stay in the euro, but
how long to prolong its agony before making the inevitable choice.
Note
1. Kosovo is another example of such a country.
See http://ec.europa.eu/economy_finance/euro/world/outside_euro_area/index_en.htm
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