A lot of people here seem to have no clue about what's happening in Greece..... [View all]
In reading responses to the news from Greece, I find that a lot of people are responding emotionally (Screw the banksters! Screw Germany! The Greeks are standing up to the 1%!) and showing no apparent understanding of what’s going on. International finance isn’t my area of expertise, so I went to someone for whom it is: my wife, a respect Tax Attorney with a specialty in international financial transactions. So allow me to clarify some important points.
1. Who’s to blame?
Answer: just about everybody. Yes, previous right-wing Greek Administrations did shady deals with investment banks, and got stung during the 2008-2010 recession. However, it’s not enough to blame them and “the 1%ers"
. Greece has three additional problems: a relatively weak economy (Greece has very few industries, and imports a lot of its food), public spending (a high proportion of government salaries and generous, early retirement pensions) that’s not commensurate with its economic health, and a notoriously low tax compliance philosophy that runs throughout Greek society. Financial restructuring is necessary but likely incredibly painful to the Greeck population, and thus incredibly dangerous for the Greek Government.
At the same time, the ECB and the foreign entities (particularly German) who’ve been providing “temporary” financial support have been stubborn by demanding a full payment of Greek debts, as well as restructuring the Greek economy. My wife’s view is that it’s functionally impossible to pay them off completely, and Greek’s creditors should recognize that. On the other hand, if they offer a sweetheart deal to Greece, what happens when payments come do for Spain, Portugal or other at-risk States?
2. What about the referendum?
The referendum held last weekend was a huge mistake. It allowed the Greek Government to avoid the immediate hard questions by rallying national pride and “sending a message” to the EU, while leaving the Greeks with no alternative solution, and hardening the resolve of their creditors to demand a settlement. As a result, Tsipras is faced with a likely set of harder terms (on both repayment and Government spending) than he was facing last week; if he gives in he’s likely to lose his political support; and if he refuses; Greece's funding will be cut off, and they'll be dropped from the EuroZone. Bottom line: this was not a “victory” for the working class; it was an invitation to a duel where one person’s gun has no bullets.
3. Why can’t Greece just stop paying the evil banks?
Two questions: why can’t it stop paying the European Central Bank (equivalent of the Federal Reserve) or the IMF and why can’t it stop paying the Greek banks? The second question first: the Greek banks, which weren’t the ones involved in the shady dealing above, loaned a lot of money to the Greek Government from their deposit assets, and the Greek Government can’t pay them back. THAT’s why the banks have been closed for a week: the Government ISN’T paying them, and they don’t have the cash on hand to pay back depositors (including small businesses and pensioners); in the current crisis, they’d collapse if there was a run on them. They HAD been receiving cash infusions from the ECB, but like the Treasury Dept printing money, there’s a risk of European inflation if too many bills are in circulation, so the infusion was supposed to be a temporary measure which was paid back. Needless to say, that’s not happening.
As to why it can’t just refuse to pay the “big banks”? Effectively, that would mean a default on its loans. Greece is sovereign, so the ECB can’t come in and seize their cars and houses, but it would mean two things: expulsion from the EuroZone and the inability to borrow for the foreseeable future. Some people here think that returning to the Drachma would be a sign of independence. But the problem is that that there would be no value BEHIND the Drachma. It would plunge in value against the Euro, and anyone providing imports would want cash up front and a high exchange rate, if they’d accept them at all. Others have suggested that Greece should just continue to use the Euro unofficially, as some nations (generally in the Caribbean us the US Dollar). That works in a small nation where there a large influx of bills from tourists; it would be next to impossible to keep the economy running with whatever spare Euros happen to be available.
4. What needs to happen now?
Serious negotiating on everyone’s part, without any political posturing. Greece must be prepared to cut Government spending and pensions, NOT because they’re not necessary, but because they’re not affordable. Until it can find a way to jumpstart economic activity AND find a way to collect tax revenue from every social class, it will have to cut its spending accordingly.
Meanwhile, the EU and Greek’s creditors have to recognize that they won’t be getting full payment any time soon, and will need to either restructure the loans to cut some of the indebtedness, or reduce interest rates to a point that Greece can afford to pay them (a level that I don’t think is practical).
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