‘Grexit’ whispers are making the rounds yet again

A commentary by Dr. Sameer Kumar, Senior Lecturer, Asia-Europe Institute (AEI)

grexit

 

Greece, seeking a second disbursement of money in the ongoing third bailout, has already accumulated a massive €320 billion debt. It now finds itself in a precarious financial position, bringing ‘Grexit’ or exit of Greece from the Eurozone again to the forefront of international political debate. Ever since Greece’s financial woes began some 8 years back, the nation’s coffers have been continually running dry, needing regular bailouts by the IMF and other large creditors such as ECB, Germany and France. So will Greece leave the Eurozone and return to its old currency, drachma?

The answer to this question is relevant to regionalism in our own ASEAN region. ASEAN is observing these developments in the EU very closely. Since its formation nearly half a century ago, this southeast Asian regional grouping has followed the policy of consultations and consensus among its member nations whilst enshrining the principle of non-interference. In its efforts toward regional integration and community building, ASEAN has taken several steps, one of which is the setting up of the ASEAN Economic Community (AEC) in 2015. There have been ambitious plans in the past that AEC adopt a common currency, similar to the euro in Europe. But taking cues from Euro’s current situation, this idea has been shelved, at least for now.

A common currency, just as the case with the euro, also necessitates that monetary policy be conducted by a central body (i.e., ECB in the case of the Eurozone). Hence, just in case ASEAN were to ever adopt a common currency and in case one of its member countries found itself in a bad fiscal situation, it would have necessitated the need for a central authority to at least indirectly intervene in the domestic affairs of the country. Such an action would directly contradict its key principle of non-interference. Unlike the EU, Southeast Asia is a highly diverse region with great economic, historical, social and cultural disparities among nations. Hence the realization on the part of ASEAN that strengthening one’s own currency would be a better strategy than having a common currency was a good lesson learnt from the current European model.

EU (then, EEC) and ASEAN have been formal dialogue partners since 1972. These two regional blocs have also recently agreed on 90 joint actions between 2013 and 2017 to further strengthen their partnership. Hence, any possibility of the disintegration of EU, whether partial or total, is likely to weaken or even dismantle their ongoing joint efforts, leaving nations in the EU to individually fend for themselves by striking their own bilateral agreements. In the context of China’s recent rise, new leadership in the US, and Russia reasserting its position as a world power, it would be intriguing to see how Grexit impacts world financial and regional structures.

The three bailouts since 2010 have come with the condition that Greece would slash government spending while bringing in structural reforms—i.e., modernising its pension system, raising taxes, increasing privatization, etc. The country has been forced to cut public spending by over €75 billion. Greece has tried to comply. However, protracted austerity measures have shrunk the economy and resulted in a gloomy financial situation to such an extent that the Troika (EC, ECB, and the IMF) and other creditors want assurance of further commitment to reform before signing another cheque, post the second compliance review of the current third bailout of €86 Billion. The bailout is under the aegis of the European Stability Mechanism (ESM) program.

The Euro was accepted as legal tender by a majority of the EU nations as proof that it was moving in the direction of becoming a unified block of nations having similar goals. After being initially left out of the group of nations that joined the Euro, Greece finally joined the club in 2001. Greece later admitted that it fudged its Euro entry by claiming that its budget deficit was much lower than it really was. The country saw an initial jump in its GDP following its joining the Euro. However, the increased availability of cheap credit led to deficit spending. After the global financial crisis of 2008, Greece has been on the brink of bankruptcy ever since.

The Greeks are disappointed with Tsipras, who came to power on the promise of providing relief to Greeks from the brutal cycle of austerity measures, as they feel that he has not lived up to that promise. The country’s economy has now shrunk by as much as 25%, and public debt as a percentage of GDP has risen to as high as 172%. One-fourth of Greece’s population is unemployed, with maximum unemployment (about 50%) in the 15-24 year age group. The widening income gap is shrinking the middle class to the point of no return. A serious brain drain is another problem for Greece, which is the last thing it needs in these difficult times.

Nonetheless, the Greek economy is showing some signs of recovery. The employment figures are better, and there is overall improved economic sentiment. Greece is expected to register a 0.3% growth in GDP for 2016. S&P has also given Greece a credit rating for the current year of B-/B, with a ‘stable’ outlook. This is all good news. However, Greece also must repay €7.4 billion to its creditors by July of this year, which Greece says it cannot do unless it receives the money from the current bailout.

Greece is now finding it hard to maintain the 3.5% fiscal surplus that it has promised to European institutions and other creditors by 2018. The IMF holds the key now, and if it pulls out the entire bailout plan may fail. The IMF says that Greece’s debt is highly unsustainable and has proposed a multi-pronged agenda before it commits additional money. However, the Greek government does not want to promise further reforms, as they fear they may hurt the common people, who are already reeling under the effects of ongoing austerity measures and demonstrating on the streets every other day. Wolfgang Schäuble, Germany’s Finance Minister, has not backed the IMF’s recommendation of debt relief to Greece and has demanded that Greece commit to and implement reforms. Obviously this stance has not gone over well with the Greeks, who think that other EU members are taking advantage of their bad financial situation.

Many see this debt crisis as the failure of the Euro that ties together 19 out of the 28 EU nations.

The majority of Greeks now believe that it wasn’t wise of Greece to join the Eurozone. Yanis Varoufakis, the former Greek Finance Minister who since the late 1990s has campaigned against Greece joining the Eurozone, now says that the idea of ‘Grexit never went away’. He compares the current situation to the Titanic (referring to ‘Eurozone’) heading towards the iceberg. As the vessel (Eurozone) sinks, the lower-class passengers in the lower deck (Greece) feel the drowning effect first and perish, but the upper-deck second- and first-class passengers (Germany and other countries in the EU) also are subsequently drowned.

However, it is hard to say whether Greece will take the first step to exit from the monetary union, or if EU member countries will take collective action to eject the debt-laden nation. In either scenario, Greece’s exit from the Eurozone may plunge the nation into deeper financial trouble. The re-introduced drachma would see its value significantly fall vis-à-vis the Euro, thereby increasing its current debt, which it still must pay to its creditors, many times over. Nonetheless, an exit may also give Greece more independence to experiment with its currency and economy.

In the meantime, Greece must determine how to further reduce public spending, catch tax evaders, and arrest recycling of debts, etc., while ensuring that fresh money comes to the country. The problem is further exacerbated for Greece in that while its fiscal policy is largely controlled by the Greeks, its monetary policy is in the hands of the ECB.

While creditors can keep lending to Greece and delaying the inevitable, the fact is that the impasse is a ticking time bomb waiting to explode. The exit of Greece from the Eurozone would almost certainly prompt it to leave the EU altogether.

There lies another danger. The exit of Greece may have a domino effect on other EU countries, where the likes of Marine Le Pen and Geert Wilder are calling for the exit of France and the Netherlands, respectively, from the Eurozone and even from the EU. These leaders have promised a referendum should they come to power in the coming elections. With populism on the rise in several European countries, especially after Brexit, “my country first” is a favourite agenda of opposition political parties. Three of the four prominent parties in Italy have raised suspicions about their country’s continuation in the monetary union. Thus, the upcoming elections in the Netherlands and France ve a lot at stake. Such a scenario, if it ever comes to pass, is a recipe for the collapse of the entire European Union, but only time will tell.

14 March 2017