Friday, 17 February 2012

Can Greece really default and stay in the euro?

I’ve become convinced recently that Greece’s best option regarding the economic crisis its enduring is to default and to do so while retaining the euro. This is, essentially, the argument Yanis Varoufakis has been making.

All along he’s been saying that providing loans to a country that is insolvent and imposing stringent austerity on an economy in chronic recession is absurd and will result in an economic death spiral. So far, Varoufakis has been proved right. Austerity has not turned Greece’s economy into a lean, mean fighting machine, but killed it stone dead. It has also contributed to the social fabric of the country being torn asunder and engendered dangerous levels of internal strife. But what of Varoufakis’ remedy, of defaulting and staying in the euro?

In the debate I published previously from Bloomberg TV, former IMF board member Miranda Xafa repudiates the idea of a default within the euro, suggesting that the European Central Bank would simply stop financing Greek banks, which would immediately collapse, only for Varoufakis to state that if the ECB did do such a thing to Greece, then it would prove that ‘there is something fundamentally wrong with the eurozone’.

Varoufakis goes on to argue that if an economic disaster similar to the one befalling Greece were to befall California or New York, for example, then there would be no question of expelling these two states from the dollar zone; rather, the other 48 states and the federal government would rally round and make sure California or New York pulled through. If the euro represents a unified currency worth its salt, Varoufakis’ argument seems to go, then the ECB would act in relation to Greece in the same way as the federal reserve would act in relation to California or New York.

Except haven’t we learned from this crisis that, indeed, there is ‘something fundamentally wrong with the eurozone’ and that what binds the dollar zone – a shared sense among its 50 constituent parts of national identity and national solidarity – is absent in Europe, which still operates on the dog-eat-dog level of 27 different and competing nation-states?

And then there’s this piece by Joshua Chaffin in today’s Financial Times, examining the consequences of Greece defaulting and dwelling on this point of dispute between Miranda Xafa and Yanis Varoufakis, over whether it’s possible for Greece to renege on its loan commitments and stay in the euro.

This is what Chaffin writes regarding the crucial point on what the reaction of the European Central Bank would be to a Greek default:

‘It might be possible to keep Greece in the eurozone and contain the damage if the ECB were to provide a lifeline to the country’s banks, some analysts believe.

‘But it is also possible Frankfurt would decide it could no longer accept Greek government bonds as collateral. Without ECB liquidity – cut-off from financial markets – Athens would have to print drachmas to pay its bills.

‘The new currency would plunge in value against the euro. That would trigger another wave of defaults for businesses and citizens, unable to pay outstanding debts in euros. Litigation, and even deeper recession, would probably ensue.’

Conclusion: Varoufakis’ proposed course of action, of default within the euro, seems to be predicated on a belief that the ECB will act politically, in accord with the ideals of European solidarity, and not economically, in accord with the interests of the stronger eurozone countries, which would rather not have to be burdened with Greece and its wrecked economy; it is a belief this crisis has shown has little basis in reality.

*ADDENDUM: If, as I suggest there is no political imperative for the ECB to save Greece, there may be an economic imperative for the ECB to do this, as Varoufakis explains here.


Hermes said...

John, as we have discussed before, Varoufakis fails to mention that the Troika expected Greece to unwind or even destroy the monstrous system that PASOK largely built. Varoufakis was an advisor to PASOK and ideologically sits somewhere between SYRIZA, Kouvelis and pink PASOK. The Troika was forced to impose further austerity because they saw that Papandreou and co. were unwilling to do what they were suppose to do. Further austerity will do nothing at the moment but Varoufakis should say the truth rather than peddling lies.

John Akritas said...

To be fair to Varoufakis, H; he does talk about Greece's 'malignancies' and he did quit as adviser to Pasok; but I don't find convincing his argument that a country can't reform in a period of deep recession and he is quiet about what Greece should be doing to help itself and why it's not able to do this.

Having said that, it's also fair to note that his whole theory of the crisis is that it's not really got much to do with Greece and is really a crisis of the eurozone and the European banking system, so even if Greece were to reform like crazy, the crisis would still persist.

I have thought, also, that even if he's wrong that there exists a political imperative for the ECB to accept Greek government bonds in case of a Greek default – i.e. there is no such thing as European solidarity – is he saying that there is an economic imperative for the ECB to keep Greece in the euro? I'll ask him.

John Akritas said...

In fact I don't need to ask Varoufakis what the economic imperative for the ECB would be to keep accepting Greek government bonds, because his latest post answers precisely this point:

Hermes said...

John, for Varoufakis to vaguely describe Greece's problems by using the term 'malignancies' is really not credible. He is very specific about the EU and the Eurozone's problems but when it comes to describing Greece's problems he is suddenly vague. This is a typical tactic.

Also, if this was not a Greek crisis, then why are other countries not going through a similar crisis? Why are Greece's problems so deep and intractable that Draghi has said many times that Greece is a special case?

I had written on his blog a while ago that there was a reason for growing global celebrity, populist economics, book releases, blogs, TV appearances, tours around the US etc. And he recently confirmed it in the New York Times when he was quoted as seeking employment in the United States.

John Akritas said...

But H. isn't the solution you articulated the other day of Greece using its impending primary surplus to avoid paying creditors similar to the one Varoufakis outlines in his piece today?

And Varoufakis wouldn't be the first Greek who sought employment in the US, or Canada or Australia.

But you know I agree with you that Varoufakis comes from a class of intellectuals in Greece who are more responsible for Greece's decline than they are prepared to admit, who argued for full-steam ahead with 'europeanisation' of the country and mocked and derided traditional expressions of Greekness in the process. Indeed, I noticed on his blog that someone put this very point to him and he gave this unsatisfactory answer:

'On a personal note, the better a citizen of the world I become the more Greek I can be. The less jingoistic and nationalist the more in tune with my Greekness. I insist on seeing every place I am at (either in Greece or wherever) as a XENOS, a foreigner. Then I can know it better and can appreciate it more. Perhaps this is why my daughter is called XENIA.'

Of course, as diasporan Greeks ourselves we know what he means when he says that wherever we go we experience the country as a xenos; but you can't have a nation of xenoi, of everyone feeling a xenos; though maybe this is what too many Greeks in Greece feel at the moment.

Hermes said...

Yes, John. However, I think I said Greece should be in primary surplus based on Venizelos's announcements last November. If it is not, and it defaults, there will be further cuts to pensions, wages etc. Also, the primary surplus, if it exists, is reliant on supposedly one off tax hikes like the land tax. These will probably have to become semi-permanent to remain in surplus. Lastly, we are assuming the economy does not contract even further.

Furthermore, even if it is in primary surplus, I am not sure the Europeans will provide the 30bn or so to keep the Greek (and Cypriot) banking sector afloat.

Frankly, I am not sure of the consequences of default.

Varoufaki's class of intellectuals have not only failed as patriots but also as economic managers. His comments on being a xenos show just what sort of an idiot he really is.

By the way, the Greek Fest of Sydney program has just been released and there are some interesting cinema related events. One on the release of A History of Greek Cinema by Sydney academic Karalis and another on Cassavetes.

John Akritas said...

I'm quite envious that you're able in Sydney to put on such a good event. We have nothing similar in London; though we're only three and half hours from Athens, so we can get our fix a little easier if we really needed it. We're got (apparently) good productions of the Oresteia and Antigone coming up. I saw somewhere else that Karalis has a book coming out on Greek Cinema, which will be interesting, and I noticed that it's him giving the talk on Cassavetes. I knew Karalis to be an expert on Kazantzakis and a translator of Psellos into modern Greek, but didn't know him as a film scholar. And what happened to the book he was writing on Castoriadis? Good to see that Ithaka is doing its bit for the Sydney festival.