By John Quiggin Wednesday 1 July 2015
Photo: At this point, there is no obvious reason for Greek voters to accept any further pain from the Troika. (Reuters: Alkis Konstantinidis)
If Greece successfully resists austerity measures imposed by the Troika, it will bring about a crisis that must end either in a radical restructuring of the institutions of the European Union, or in the end of the Union itself, writes John Quiggin.
It now appears highly likely the long-running Greek debt crisis will be resolved in the way that all parties have sought, at least until very recently, to avoid: with Greece abandoning the common European currency and to repudiate its debt.
This outcome presents Greece with both dangers and opportunities. For the European Union, and the idea of Europe that emerged in the second half of the 20th century, it represents an unmitigated failure, with the potential of worse to come.
The crisis was, in a sense, unexpected. As recently as two weeks ago, both parties appeared to be giving ground, paving the way for the kind of messy compromise that has long typified the politics of the European Union. The Greek government had announced a package of measures, heavily reliant on tax increases, that promised a growing primary surplus (the difference between revenue and expenditure, excluding interest on debt). For their part, the "Troika" institutions (the European Central Bank, International Monetary Fund and the European Commission) seemed to have accepted that the policies of austerity pursued over the last five years have been a disastrous failure.
Quite suddenly, however, the Troika position hardened. Rather than merely demanding policies to restore budget balance, they demanded that these policies should focus on expenditure cuts rather than tax increases. Amusingly, having seen Greek GDP decline by 25 per cent as a result of their austerity policies, their rationale for the demand was that higher taxes might inhibit economic growth.
The Greek prime minister, Alexis Tsipras, requested a delay of a few days to allow a referendum to be held on July 5 to decide whether the creditor demands should be accepted. This request was rejected, leading to a run on Greek banks that has forced their closure for a week.
It is important to observe that the banking crisis is entirely the result of the fact that Greece is tied to a currency over which it has no control. Under normal circumstances, the current crisis would have been resolved long ago by a devaluation and unilateral restructuring or repudiation of debt. The Greek central bank could have provided the necessary liquidity to keep banks open.
But, because Greece is in the Eurozone, it is subject to the control of the European Central Bank controlled by its creditors. Any action they disapproved of risked a run on banks, requiring bank closures and capital controls. That is, of course, precisely what the Troika has just imposed. So, Greece now bears all the costs of an exit from the euro, with none of the benefits.
At this point, there is no obvious reason for Greek voters to accept any further pain from the Troika. As Paul Krugman has argued, they should vote to reject the Troika terms and maintain their government's original offer. When that offer is rejected, as it presumably will be, Greece should leave the euro and repudiate its debt.
The disastrous policies of austerity imposed by the ECB and European Commission have seen the European idea, already rejected by a large body of "Eurosceptic" opinion on the right, lose much of its appeal on the left.
What would be the outcome of such a policy? The closest analogy is that of Argentina ... Although not part of a currency union, Argentina had introduced a "currency board" with a mandate of tying the Argentine peso to the US dollar. As with Greece and the euro, this policy produced an unsustainable growth in debt.
When the populist government of Nestor Kirchner abandoned the dollar-peso link and renegotiated its debt, there was a banking crisis similar to that seen in Greece today. However, the economy recovered strongly, and the great majority of creditors accepted a renegotiation. Argentina is still struggling with "vulture" investors who bought up some of this debt for a few cents in the dollar and are still demanding repayment. Overall, however, it is clear that its response has been a success.
With unemployment at about 27 per cent, Greece has plenty of capacity to grow following a depreciation and debt restructuring. Since the only alternative is to pursue the failed policies of austerity indefinitely into the future, the case for standing up to the Troika is strong.
What about the European institutions? Their hard line reflects a calculation that the broader European financial system can survive the repudiation of Greek debt. But this prudential calculation does not take any account of politics.
If Greece rejects the Troika and does not suffer economic collapse, the governments (in Ireland, Spain and Portugal for example) that have gone along with demands for austerity will be discredited. The most directly vulnerable is the Spanish government, which has already lost ground to the anti-austerity movement Podemos, and faces a general election in December.
More generally, the disastrous policies of austerity imposed by the ECB and European Commission have seen the European idea, already rejected by a large body of "Eurosceptic" opinion on the right, lose much of its appeal on the left. It is holding on largely because of the feeling that, in Margaret Thatcher's words, "there is no alternative".
Successful resistance by Greece will bring about a crisis that must end either in a radical restructuring of the institutions of the EU, or in the end of the Union itself.
Professor John Quiggin is an ARC Laureate Fellow in economics at the University of Queensland.