Greek Election Result: An assessment
Greek voters gave their contradictory verdict: While 55% voted for parties that stood explicitly against the ‘bailout’ terms and conditions, a pro-’bailout’ government is about to be formed – such is the nature of Greece’s electoral system (which rewards the largest party with a bonus of 50 additional MPs in the 300 seat chamber). The New Democracy party will lead the government even though it is utterly clear that at least one in three of the voters who backed it think very little of the party and its leader but felt they had no option but to vote for them simple because the alternative, a Syriza government, might bring upon the nation the combined wrath of Berlin, Frankfurt and Brussels. This is as inauspicious a beginning for a new government with a mountain range of challenges as one could have imagined.
So, what next? Setting aside the shenanigans of the next few days (that will be necessary before the degenerate socialist party, PASOK, finds the ‘narrative’ which will allow it to explain to itself its support to the New Democracy-led government), the main ‘feature’ to look forward to is the upcoming EU Council meeting, on 28th and 29th June where a Greek Bailout Mk3 will no doubt be shaped. For despite Germany’s protestations (that Greece must stick to the terms and conditions of Bailout Mk2), reality has overtaken and effectively annulled Bailout Mk2. To put it simply, all the underlying hypotheses (primarily regarding Greece’s recession and the related tax revenue projections) have been violated by the facts on the ground. Bailout Mk3 is an inevitability, since a Grexit would be tantamount to the instant dismantling of the Eurozone.
What is beyond doubt is that Europe will reward New Democracy with a relaxation of the terms of conditions of Bailout Mk2. This relaxation will be heralded both in Greece and internationally as a triumph. Alas, the half life of those celebrations will be even more short-lived than that which followed Bailout Mk2 and infinitesimal compared to the duration of the merriment that followed Bailout Mk1.
What will be the essence of Bailout Mk3? A Bailout Mk2–lite of course. Greece will be given an additional three to five years to bring its budget deficit under the magic 3% mark. The Samaras government which is bound by the Bailout Mk2 ‘rules’ to cut public spending within a month by a further 11.5 billion, will probably be allowed to ‘get away’ with a smaller cull (of, say, 5 billion). Greece will probably be leant another 50 billion and some new announcements about structural funding of investment projects will be added to the mix. In my estimation, such a ‘relaxation’ will be the worst possible outcome for Greece and a calamitous one for Europe too!
Let me explain why I stand convinced that a loosening of Greece’s bailout’s terms and conditions will be a terrible outcome for everyone: The Greek economy is well and truly broken. The circuits of credit are so badly damaged that even efficient, profitable firms have been cut out of the capital markets but also out of the international markets (as their suppliers will no longer accept the Greek bank guarantees without which Greek firms cannot import raw materials). These credit circuits will remain broken even under new terms and conditions, as I described them above. Neither the extension of repayments of the new loans to the insolvent state (which everyone knows will be defaulting again – this time to official creditors) nor the new loans will change this. Moreover, the new spending cuts, even if they are less than what was envisaged under Mk2, will give the forces of recession another boost. To cut a long story short, there is no doubt that such loosening up will simply prolong, without averting, the agonising death of the Greek social economy while, at the same time, depleting the dwindling stock of patience with the logic of bailouts in Germany, in the Netherlands, in Finland and in Austria. To put it differently, when in December, it becomes, yet again, clear that another, more relaxed, Greek bailout has failed, that realisation will add to the strains and tensions in Europe, accelerating further the centrifugal forces tearing the Eurozone apart.
So, if a loosening up of the Greek bailout won’t do, what will? What should the Greek government bargain for? I have already answered this here. The gist of my suggestion is that Greece does not need more money per se. That throwing more good money after the mountains of the bad money that has gone into the pit of Ponzi Austerity is pointless. What we need is a different logic. A new prescription, as opposed to different doses of the same poison. Greece, Spain, Ireland, Italy, the whole of Europe requires, so as to stop the euro-derailment, need three things: (a) direct recapitalisation of its ailing banks from the EFSF (with central bank regulation from the ECB-EBA), (b) a shift of the Maastricht compliant debt of the Periphery onto the books of the ECB (with a parallel issue of ECB-bonds), and (c) an investment-led recovery program to be financed jointly by the EIB and the ECB (as opposed through the shoddy Brussels-administered structural funds). These three steps (reflecting our Modest Proposal) will prove no more expensive than the current cascade of mindless bailouts. The difference is that they stand an excellent chance of reversing the crisis, as opposed to the bailouts that are boosting it no end.
But can a Greek government negotiate all this on behalf of the Periphery? Of course not. But it can make a brisk start by asking for the following: That instead of new loans, as part of Bailout Mk3, Europe takes off the Greek state’s books the money given to it to pass on to Greek banks and that it Europeanises the banks. This makes perfect sense and would appeal even to the ECB, the IMF, to Paris and Washington; to all economically literate people. Moreover, the moment Greece asks for this, Spain will add its voice to such a terribly reasonable suggestion. And then Italy. Possibly Dublin too. A new agenda will be on the make throughout Europe. Debt mutualisation will follow naturally. And so on.
Of course, starting the ball rolling in the right direction requires a government in Athens that is capable of looking our German partners in the eye and not blinking for a few minutes. Tragically, the New Democracy lot, and their PASOK minions, won the day on a promise to blink from the outset. Europe may have got its wish this weekend. Soon, however, it will be reminded, yet again, that the most vengeful god is the one who grants such wishes.
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Copyright © 2012 · Yanis Varoufakis