Wednesday, 15 July 2015

The Crisis in Greece - Part II

As the Greek parliament nears its vote, we should all be well aware of how painful, in the short term, an exit from the Eurozone would be for the Greek people - should all be ready, if they decide to leave, to support the provision of the humanitarian aid which will be much needed. An exit would in all likelihood - again, in the short term - be even more painful than the results of accepting this third bailout. Were Greece to leave, a recovery in the medium-to-long-term - through a restoration of currency sovereignty, devaluation, a return to competitiveness, progress on the trade deficit, and eventually a recovery of the means to pursue productive investment and put the country back into a virtuous circle of economic development - is a very tall order, and by no means certain. But it seems very difficult, to me, to justify the position that the short-term pain and the burden of this uncertainty outweighs (a) the almost as painful experience of continuing in the Eurozone given the refusal of the German government to countenance serious debt write-offs and, much more fundamentally, to recognize the absolute need for a European surplus-recycling mechanism (see Varoufakis' fine book for much more on this point); and (b) the practical certainty that Greece's economy will never recover under these conditions, and that its debt level will not budge.

This is why the current vote is such an extraordinary circumstance, calling for such extraordinary courage. The thing that politicians are worst at is accepting short term pain for an uncertain chance at long term gain. This is precisely why the German government wanted to, and was able to, make the terms of this bailout so pointlessly destructive. From Germany's point of view, it hardly matters what Greece decides to do - Greece doesn't really matter to Germany at all. If the Greeks decide to stay tonight, they'll be forced out soon enough - in a year, 3 years, 5 years - because there is no chance for recovery under these terms. But the next time around, the Germans will be able to say the Greeks squandered yet another chance, and face less opposition, expend less political capital, in cutting them loose. If the Greeks leave, Germany has made sure it has nothing to fear even from a spectacular Greek recovery in the long term, precisely because, going all the way back to 2010, it has been engineering a situation in which a Greek exit would be maximally painful in the short term. To repeat: choosing short-term pain for long-term gain is the thing that politicians are worst at. Even if a non-Eurozone Greece is doing splendidly in 30 years, and Italy, Spain, Ireland and Portugal are still struggling, the torment which would immediately follow a Eurozone exit would still be seared into peoples' memories. The odds of losing a country with a large economy, the odds of a lose which could actually disrupt German economic hegemony in Europe, will still be quite low.

My hope for the Greek people is that their government has the courage to take this chance, that the rest of the world has the compassion to come to their aid, and that the rest of Europe wakes up to its need to begin correcting the fundamental design flaws in the currency union, however much capital may be opposed to those reforms.

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