by Thorsten Beck, voxeu.org
The Greek-Troika conflict is roiling markets, boardrooms and cabinet offices around the world. Crises are best solved by recognising losses, allocating them and moving on, so the biggest risk, this column argues, is that a compromise kicks the can further down the road. As the can rolls on, the scenery becomes politically and socially less attractive – fuelling the rise of political animosities, nationalism, and fringe parties. Greece is a special case but indicative of the core problem – deficient EZ governance structures that mean societies are stuck with increasing socioeconomic exclusion and political despair. The crisis will continue until the necessary further deepening of EZ institutional structures is completed.
In the movie Groundhog Day, a weatherman finds himself living the same day over and over again. Eurozone policymakers might be forgiven if they also feel like they are stuck in a time loop, forced into a déjà -vu experience with a possible Grexit scenario. After a quiet 2014, the Eurozone is back in crisis mode, though not in a panic.
- The new Greek government is insisting on an international debt conference and a significant cut in its sovereign debt.
Most of the other Eurozone governments and the ECB, together now holders of 80% of this debt and whose taxpayers would thus have to pay for such debt restructuring, won’t have any of it.
- Few weeks remain until the Greek government might run out of cash to pay all its obligations, and Greek banks are losing access to ECB liquidity.
The Eurozone seems again to be heading straight towards the cliff.
While many observers considered the worst of the crisis over and the risk of a break-up of the Eurozone gone in late 2013/early 2014, this re-emergence of the crisis is not surprising. Different strands of economics provide different answers to why the Greek crisis has not only re-emerged, but might stay with us for quite some time, as I will discuss in the following. I will argue that, ultimately, at the core of the crisis is a governance deficiency within the Eurozone. And as long as this is not addressed, there are many more Groundhog Days to come!
Debt sustainability (or the lack thereof)
With a debt-to-GDP ratio of 175%, Greek debt is clearly not sustainable. The debt restructuring of 2012 was supposed to bring this ratio eventually back to 110%, a level considered sustainable by the IMF, and thus take Greece back onto the long-term path of fiscal sustainability. However, fiscal deficits and GDP growth alike have been underestimated, with the result being an unsustainable debt path.
Even if one does not believe in a specific threshold beyond which a debt-to-GDP ratio undermines economic growth, it is not difficult to see that on macroeconomic grounds, further debt restructuring for Greece is needed. The solution envisioned by many Eurozone finance ministers (mainly for political reasons, as I will argue below) to reduce interest rate payments further and lengthen the maturity of loans simply delays the day of reckoning.
- The banking crisis literature has taught us that flow solutions (where banks grow themselves out of insolvency with higher margins) do not work.
- It is hard to believe that a flow solution would work for governments.
Eichengreen and Panizza (2014) have recently made the same point. It is highly unlikely that Greece will be able to accumulate the necessary primary surpluses to grow out of its debt problem.
However, there are also microeconomic arguments for structural impediments that prevent the Greek economy from returning on a long-term growth path. While there have been improvements in tax collection, it is quite telling that tax revenues have dropped in the run-up to elections as many taxpayers hope for tax amnesties or special favours from the winner after the election. Corruption, if not outright theft, in government still seems too widespread. Labour and product market rigidities prevent new firm and employment creation and more efficient and growth-enhancing resource allocation.
There is a certain tension between the macro- and the micro-side of this story. Structural reform rarely brings immediate growth benefits and might create additional frictions and losses. Privatisation during a time of depressed prices is rarely beneficial; fire-sales can further reduce the price, especially in times of general economic uncertainty. On the other hand, purely macroeconomic solutions that leave existing socioeconomic structures and institutions in place are bound to result in déjà -vu experiences. One of the most quoted newspaper headlines in the Argentine crisis of 2001 was that from a similar crisis 100 years earlier (1890 to be exact), which showed very similar characteristics.
