The plot thickens in the Eurozone crisis. Basically this last weekend, a bailout which included a 50 % cut on Greece’s government debt (or, the part of the debt that they owe to private investors). Now, Prime minister of Greece George Papandreou has announced a referendum on this deal. You see, this is not a case of simple debt forgiveness: In return for giving Greece a haircut on the debt, the EU demands that they go through with extreme austerity measures which, to put it mildly, are not that popular.
This referendum, to be held sometime early next year, took everyone by surprise. It is most likely not Papandreou’s own initiative, rather he is facing pressure from his own party (the Greek socialist party) and he figured a referendum would be a way to wash his hands of the matter. From his point of view, it’s a win-win: If the Greeks vote for the bailout deal, he has a mandate to make just about whatever cuts he wants. If they vote against it, he can resign and become a political martyr, a man who tried to save his country from bankruptcy but fell victim to the uneducated masses.
Stock markets fell yesterday as well as today (just like I predicted in my last post), and the initial rally caused by the deal has been completely erased in most markets.
It’s not hard to see why: In a recent opinion poll, 60 % of the greeks opposed the deal. Papandreou will have to rely on a “silent majority” (people who are not protesting in the streets), that may or may not exist. On the outside, he and everyone else says they’re confident that the people of Greece will get their act together and realize that if they don’t accept this deal, they have to default, and that that will be worst than the austerity measures.
I am not so confident.
What you need to understand is that the welfare state creates entitlement syndrome. That’s not news to anyone, conservatives in the US claim it all the time, but in Greece, we really see it in action: Despite state bankruptcy just months away unless they receive a bailout, no-one sees the need for entitlement and public sector pay cuts. Neither do the greeks seem to understand that they themselves are guilty of causing the mess that they are in: Tax evasion is more common in Greece than in pretty much any other country. Remember, this is not something the banks are doing, this is something the average Greek is guilty of. That you have to pay your doctor black if you want a prescription is common knowledge – tax evasion is a way of life, and it’s costing the Greek government 15 billion euro (approx. 20 billion dollars) in revenue each year.
Yet, when you talk to Greek people, they blame everyone except themselves. The whole crisis is a conspiracy by Germany and France, who wants to occupy Europe and turn them into slaves – the average greek is more conspiratorical than even the average Ron Paul supporter. While I don’t doubt that Germany and France are acting in their own self-interest – all the talk about “European unity” has always been just talk after all – this is still something that Greece brought on itself. Not the ECB, not the EU, not Germany, not even the french is to blame this time.
A big part of the problem is in the culture. I hear people saying this time and time again, people who have lived or are currently living in Greece: The “macho” culture is simply too strong. For the greeks to admit that they screwed up would be humiliating and un-manly. Of course culture can change over time, but most likely not in time for a referendum early next year. They can’t really postpone is very much either as Greece needs the debt reduction not to default, and time is running out quickly.
Is there anything the government can do? We have to remember the concept of “sticky wages” (first invented by Keynes – one of the things he was more or less right about). Wages are sticky downwards – easy to increase, but hard to cut. One of the main reasons for this is that workers have fixed costs – mortgage payments, rent, utility bills etc and they figure that these costs are not going to fall, even if their salaries fall. This is not entirely true as falling wages are associated with falling prices (deflation), but few workers can wrap that around their heads, and they figure the risk is not worth it. What if they take a pay cut, and it turns out no-one else took one and so prices didn’t drop? Not a huge risk perhaps, but it’s there and it’s enough to make people resistant to wage cuts.
What the government has to do, is to somehow reassure the greeks that mortgage payments and other fixed costs will fall if they accept the bailout. Or, even better, make them understand that if Greece defaults, every bank will go bust and every house be repossessed (not that far from the truth). “Vote Yes – or be homeless next week” is a slogan that just might work with these lazy, incompetent never-do-wells. Let’s see how macho you feel when you’re sleeping in the garbage dump! As a matter of fact, I think this will be the strategy of the government: Let’s say Greece is going to default on january 21 unless they get a debt reduction. What the government will do is to hold a referendum on let’s say january 19. With default, and all it’s terrible consequences just 48 hours away, that might make some people think long and hard before voting No.
There is also a chance that this referendum thing is just a scam, and that, if it looks like the yes side is going to lose, the government just might call it off. People are already just as angry as they can be, so what difference would it make? The government is after all not obligated to hold this referendum, they’ve chosen to do it to get a mandate from the people. But if they realize that mandate won’t come, could they then just call it off? Very unlikely, yet not impossible by any means.
This being said, I don’t think the bailout solves the eurozone crisis. I wrote about that last week, and I stand by that. Yet, for Greece to reject a deal that would reduce its national debt so massively is still insane. They will have to go through with the austerity measures anyway, one way or the other, so why don’t they take this chance and make it a little bit easier for themselves?
Now I hear Irish people talking about how Ireland should get a debt reduction as well. Just what I warned you about last week: There is an extreme moral hazard when you do these kinds of things. Who wouldn’t want their debt reduced by 50 %? Who wouldn’t spend more and take on more debt, if they knew they could have it reduced by 50 % if ever need be?
My conclusion is simple: The Euro must go. We need to concede that the Euro is doomed and work towards a controlled demolition, rather than a collapse. We need to start negotiations with bondholders about how bonds issued in euros may be converted into bonds issued in national currencies. Hopefully, we can cut deals which we can all be happy with. If we wait too long, the euro might collapse overnight and there will be no time for such negotiations. This would be disastrous, in particular for countries like Ireland which would face a massive capital flight as investors would try and take their money out of Irish banks and transfer them to safer countries before their euros were converted to punts (the Irish currency which they used before the euro), as the exchange rate probably wouldn’t be favourable. For example, 10,000 euros might be converted into 10,000 punts, but the new punt would only be worth half what the euro was, so you’ve effectively lost half your money overnight. We need to avoid that, which we can only do if we acknowledge that the euro is doomed and instead of focusing on how to save it, we focus on how we can get rid of it with as little pain as possible.
That will do for now. I will certainly follow up at a later point, but this should give you a good idea of the problem(s) with Greece. Thank you for reading.