A must-read piece for readers of this blog and beyond. My only caveat concerns the last sentence: Defaulting within the eurozone is the optimal strategy, as it allows Europe one last chance to rejig the euro. Most likely, Europe will not take this chance and then the euro will disintegrate anyway. Greece has no reason to leave the euro before that and thus to destroy, by exiting, Europe’s last chance at a rational solution. [Originally appeared here on the New Economic Perspectives website.]
Here’s the draft of the supposed agreement to “sort out” the Greek debt problem once and for all. According to Bloomberg, here are the essentials:
- Greece’s 2012 GDP will shrink by as much as 5%.
- Greece is expected to return to growth in 2013.
- Greece will cut 15,000 state jobs in 2012.
- Minimum wage will be cut by 20 percent.
- There will be no increase to sales tax.
- The government will cut medicine spending from 1.9% to 1.5% and merge all auxiliary pension funds.
- It will also sell stakes in six companies—in particular, energy companies and refineries.
Of course, the current thrust of fiscal policy will almost certainly guarantee that there still will be a default, involuntary or otherwise, in spite of this agreement. If you don’t have a mechanism to allow growth, then how can the Greeks service their debt, even with the reduced debt burden?
Perhaps that’s the idea. Make the deal so miserable for the Greek people that the Spanish, Portuguese, Irish and Italians don’t even begin to think of trying to get a similar haircut on their debt.
Certainly, the deficit reduction won’t come. It can’t when you deflate a rapidly declining economy into the ground. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies.
Even with all of the concessions, the euro bosses have not officially signed off on the agreement:
* Finance ministers of the 17-nation euro zone arriving for talks in Brussels warned there would be no immediate green light for the rescue package and said Athens must prove itself first.
* “It’s up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work,” EU Economic and Monetary Affairs Commissioner Olli Rehn said.
* German Finance Minister Wolfgang Schaeuble, whose country is Europe’s biggest paymaster, told reporters: “You don’t need to wait around because there will be no decision (tonight).”
* Greek Finance Minister Evangelos Venizelos flew to Brussels after all-night talks involving Prime Minister Lucas Papademos, leaders of the three coalition parties and chief EU and IMF inspectors left one sensitive issue – pension cuts – unresolved.
It is also worth pointing out that Greece’s pension payments on a per capita basis are amongst the lowest in Europe. Still, apparently, this plunder hasn’t gone far enough The Greek people must feel like Sabine Women right now.
Game, set and match to the Troika.
While we’re at it, let’s address this “Greeks as tax cheats” canard once and for all. Greece’s tax revenue from VAT collapsed by 18.7pc in January from a year earlier. As Ambrose Evans Pritchard noted:
“Nobody can seriously blame tax evasion for this. It has happened because 60,000 small firms and family businesses have gone bankrupt since the summer.
The VAT rate for food and drink rose from 13pc to 23pc in September to comply with EU-IMF Troika demands. The revenue effect has been overwhelmed by the contraction of the economy.
Overall tax receipts fell 7pc year-on-year.”
We’re one step closer to ensuring that the birthplace of democracy becomes a form of national indentured servitude. That is of course, unless Greece regains some modicum of self-respect and tells the Troika to take a hike and leaves the euro zone.
(*) Marshall Auerback is portfolio strategist with Madison Street Partners, LLC, a Denver based investment management group, a Fellow with the Economists for Peace and Security, and a Research Associate for the Levy Institute.