Article published by José Alberto León Alonso in Diario de Avisos on 01/25/15.
The elections taking place today in Greece have become a matter of European importance. There is a lot at stake. In fact, their outcome could determine whether or not the country remains within the euro zone, which would have important consequences for the rest of the monetary union. There is talk and non-stop about the possible exit of Greece from the euro (Grexit in its English contraction). The market is not convinced about the future of Greece, inside or outside the euro. The proof of this concern is that the Greek sovereign debt curve is inverted, that is, the yields on its short-term bonds are higher than those in the long term, a circumstance that occurs when uncertainty is total, and is that the market considers the immediate bankruptcy of Greece more likely than in the long term, and that is why it demands higher interest rates for Greek debt in a few months' time.
Syriza, a radical left party whose popularity has been buoyed by the country's economic crisis, is the big favorite in the election, and has promised to launch a new large-scale public spending program that would cost 7% of GDP, and to renegotiate Greece's unpayable debt with lenders, in the hope that they will forgive (allow it to write off) most of it. Naturally Syriza proposes that this increased spending will be covered by higher taxes on the rich and control of tax evasion. No moderately developed country in the world has achieved an income increase of that amount in such a short term. The distortions that an increase in fiscal pressure of that magnitude would produce are difficult to estimate but necessarily very high. Furthermore, the expected reaction of economic agents, both in terms of relocation of companies and disincentives to work associated with extremely high marginal tax rates, or an increase in tax fraud and the underground economy, would probably make it impossible to collect these amounts. And controlling tax evasion is easier said than done. Fraud control is usually the excuse used to balance budgets when one does not know where to get the money from. The reality is that, in a country where corruption is rampant, where to access any public service the “bite” (the payment of small bribes) is the best means and where tax evasion is a way of life, this large public spending program does not seem financeable with greater income, but with new debt. And who is going to lend money to a country that has restructured its debt three times in four years?
Three years ago the threat that the fall of Greece would destabilize the euro forced European countries to bail it out and write off their debt. The problem is that Greece entered the euro zone by falsifying its economic data and that is an original sin that Germany does not forget, which is why this time it does not seem willing to compromise with any agreement, so the troika will insist that Greece comply with its previous commitments. If negotiations stall or fail, Greece could be forced to leave the euro due to the impossibility of financing itself at sustainable interest rates. In the absence of a manual on what would happen in the event of a disorderly bankruptcy (without a deal) in Greece, the closest thing would be the Argentine corralito of 2001. Greek banks would be unable to cope with deposit withdrawals from savers and restrictions would be imposed on the withdrawal of funds. Greece would leave the euro and, probably, the European Union. The new drachma would be devalued by more than 60%. And from there would follow the bankruptcy of Greek banks and Greek companies with debts (in euros) abroad; ostracism, since no one would lend them money again for decades; hyperinflation; loss of purchasing power; etc As the only positive point, Greek exports would gain competitiveness, but Greece only exports tourist services, maritime transport and… olives. For Greece it would be shooting itself in the head.
And for Europe? The effects would be much less important than just three years ago. Greece has never been a relevant economy for the euro (only 2% of its GDP), but the fear then focused on the contagion effect on other European economies and, in particular, on Spain and Italy. Currently, we would not be spared from the turbulence in the markets for a few months but, unlike what happened in 2011, the European Central Bank has already decided to act as a lender of last resort, intervening in the sovereign and even private debt markets by purchasing debt. It has more than a trillion euros to prevent a repeat of the debt crisis, and can even print currency to "do whatever is necessary" to save the euro, as the president of the ECB promised in 2012, calming the instability. If the ECB printed currency to massively buy bonds from peripheral countries, the domino effect would stop. In these last three years, the Greek debt has also been communitized and is no longer owed to the banks, but to the states, so European financial entities would not suffer from the Greek collapse, and, fortunately, some of the weakest economies at the time, such as Spain (the fourth economy in the euro, let us not forget), have resumed a more vigorous growth path than expected when in 2011 it was in a clear recession with no way out in sight, which reduces fears that our country will not meet its commitments. It would be a tragedy for Greece, but it would probably not become a systemic crisis for the country. eurozone as a whole. Of course, the exit of Greece would break the taboo of exiting the euro, which may give rise in the future to speculative attacks on eurozone countries whose economic fundamentals are weak.
Syriza knows that its plan takes Greece out of the euro and is bluffing: if I fall, so do you. But Europe feels stronger to resist the challenge. In the short term it is likely that the troika and the new government will agree on a line of credit to buy a few months of time, but in a horizon of between 3 and 6 months the panorama could become significantly complicated, since Syriza will have to stage before its voters that it is facing the troika. The most likely scenario remains some kind of agreement. Many European countries seem willing to restructure their debt by lengthening terms and lowering interest rates, but it will be difficult for them to accept a program of fiscal expansion and wage increases. What if the deck breaks? Then we will improvise as we have been doing in Europe since 2009, and in Spain we will “enjoy” something unusual in economics: the painless experience of the experiment in someone else's head of the effects of Podemos's proposals, which greatly resemble those of Syriza. Maybe it's even worth it.
