Friday, July 17, 2015

Saving Greece, Saving Europe?

Geir Moulson and Elena Becatoros of the Associated Press reports, German Parliament approves plan for new Greek bailout:
German lawmakers overwhelmingly backed Friday a new bailout plan for Greece after Chancellor Angela Merkel argued that the cash-strapped country would face chaos without a deal.

Following more than three hours of debate, German lawmakers voted 439-119 in favor of opening detailed discussions on the package. There were 40 abstentions.

The German Parliament's vote capped a week in which the proposed bailout agreed Monday by the 19 eurozone leaders, including Merkel and Greek Prime Minister Alexis Tsipras, has cleared a string of hurdles.

The developments have raised expectations that Greece will secure a financial lifeline to allow the country to get back toward some sort of economic normality following a crisis that has seen banks shuttered for nearly three weeks and withdrawals at ATMs limited to a paltry 60 euros a day.

Germany is one of the few eurozone countries whose parliaments had to approve the step. Earlier Friday, Austrian lawmakers also cleared the way for the talks.

Though the broad outlines of the bailout were agreed Monday, specific terms will now be thrashed out between Greece and its European creditors. The process is expected to last around four weeks and to lead to Greece getting around 85 billion euros ($93 billion) to help it pay off upcoming debts.

Germany has been the largest single contributor to Greece's bailouts and has taken a hard line, insisting on stringent spending cuts, tax hikes and wide-ranging economic reforms in return.

"The principle ... of responsibility and solidarity that has guided us since the beginning of the European debt crisis marks the entire result from Monday," Merkel told the special session of Parliament.

The alternative to an agreement, she added, "would not be a time-out from the euro that would be orderly ... but predictable chaos."

Merkel will have to return to Parliament to seek approval for the final deal when the negotiations are concluded.

"I know that many have doubts and concerns about whether this road will be successful, about whether Greece will have the strength to take it in the long term, and no one can brush aside these concerns," she said. "But I am firmly convinced of one thing: we would be grossly negligent, even irresponsible, if we did not at least try this road."

Merkel's finance minister, Wolfgang Schaeuble, who has talked particularly tough on Greece, said Germany will do its utmost toward "making this last chance a success" — provided Greece does its part.

In Athens, Tsipras is widely expected to reshuffle his Cabinet Friday or over the weekend, following a rebellion within his party over a parliamentary vote to approve the measures demanded for the bailout talks to start.

A little more than a quarter of the 149 lawmakers from Tsipras' radical-left Syriza party either voted against or abstained in Wednesday's vote, including two cabinet members as well as the parliament speaker and the former finance minister, Yanis Varoufakis. Tsipras still won an overwhelming majority as three opposition pro-European parties backed the proposals.

The legislation, which includes consumer tax increases and pension cuts, was demanded as a precondition to the launch of negotiations on a third Greek bailout. Elements of the bill are being implemented immediately, with changes to consumer taxes coming into effect Monday, the finance ministry said.

The Greek Parliament's approval paved the way for an increase in the amount of emergency liquidity assistance to Greek banks from the European Central Bank. It also led eurozone finance ministers to approve a bridging loan to Athens so the government can make a 4.2 billion-euro ($4.6 billion) payment due to the ECB Monday.

These moves are first steps in restoring some elements of normality to the Greek economy, which has been battered over the past few weeks as bailout talks dragged and fears of a Greek exit from the euro ratcheted higher.

The first visible sign of healing will emerge when the banks open their doors again. On Thursday, the government said they would reopen Monday for limited transactions, for the first time in three weeks after capital controls were imposed June 29 ahead of a referendum Tsipras called on previous creditor proposals.

Tsipras has acknowledged that the package he signed up to went against his election promises to repeal austerity imposed over the last five years in return for Greece's two international bailouts. But he has insisted he had no other choice, as the alternative would have seen Greece forced out of the euro — a development that would have further crashed the Greek economy as well as roiling financial markets.

In a party meeting Thursday, Tsipras criticized the hardliners who voted against him, arguing that their decision was "in conflict with the principles of comradeship and solidarity and at a crucial time creates an open wound," according to a government official at the meeting. The official revealed details of the closed-door meeting on condition of anonymity.

The dissenters' decision, Tsipras said, forced him to continue governing with a minority government until Greece's bailout deal is concluded.
On Monday, I wrote on how we finally have an Agreekment, praising French President Francois Hollande for his instrumental role in pushing against calls for a 'temporary Grexit' and cementing a third and much needed Greek bailout.

Admittedly, my hope is that this is the final saga in the Greek debt tragedy but when you look closely at the proposals, there are many much needed reforms (never mind what Varoufakis claims) but there are two significant lapses.

First, there was no proposal for debt relief, something the IMF is rightly pressing hard for. Second, and much more worrisome, there are no measures to kick start investments and growth, allowing the Greek economy to grow its way out of this debt crisis. Instead, more harsh austerity measures which will continue to disproportionately punish the Greek private sector, leaving the bloated public sector largely intact.

To be fair, debt relief has already come to Greece in the form of extending debt maturity and paying significantly lower interest rates on its debt and as far as growth, creditors want to see reforms implemented before they agree to any major growth projects.

But the reality is after all the all the drama and nail biting Eurogroup meetings, the eurozone isn't that much better off after the latest turn of events. In fact, I remain short euros and think the Euro deflation crisis will only get worse over the next couple of years.

Barry Eichengreen, Professor of Economics at the University of California, Berkeley, wrote an excellent comment for Project Syndicate, Saving Greece, Saving Europe, where he explains the crux of the problem with this latest bailout:
Economically, the new program is perverse, because it will plunge Greece deeper into depression. It envisages raising additional taxes, cutting pensions further, and implementing automatic spending cuts if fiscal targets are missed. But it provides no basis for recovery or growth. The Greek economy is already in free-fall, and structural reforms alone will not reverse the downward spiral.

The agreement continues to require primary budget surpluses (net of interest payments), rising to 3.5% of GDP by 2018, which will worsen Greece’s slump. Re-profiling the country’s debt, which is implicitly part of the agreement, will do nothing to ameliorate this, given that interest payments already are minimal through the end of the decade. As the depression deepens, the deficit targets will be missed, triggering further spending cuts and accelerating the economy’s contraction.

Eventually, the agreement will trigger Grexit, either because the creditors withdraw their support after fiscal targets are missed, or because the Greek people rebel. Triggering that exit is transparently Germany’s intent.

Finally, the privatization fund at the center of the new program will do nothing to encourage structural reform. Yes, Greece needs to privatize inefficient public enterprises. But the Greek government is being asked to privatize with a gun held to its head. Privatization at fire-sale prices, with most of the proceeds used to pay down debt, will not put Greek parliamentarians or the public in a mood to press ahead enthusiastically with structural reform.

Greece deserves better. It deserves a program that respects its sovereignty and allows the government to establish its credibility over time. It deserves a program capable of stabilizing its economy rather than bleeding it to death. And it deserves support from the ECB to enable it to remain a eurozone member.

Europe deserves better, too. Other European countries should not in good conscience accede to this politically destructive, economically perverse program. They should remind themselves that Greece had plenty of help from its European partners in getting to this point. They must continue to push for a better deal.

These partners should not allow the European project to be sacrificed on the altar of German public opinion or German leaders’ insistence on “rules.” If Germany’s government refuses to see the light, the others should find a way forward without it. Franco-German solidarity would be irreparably damaged, but Franco-German solidarity is worth nothing if the best it can produce is this agreement.

Last but not least, the German public deserve better. Germans deserve a leader who stands firm in the face of extremism, rather than encouraging it, whether at home or abroad. They deserve a Europe that can play a greater role in global affairs. Above all, given Germany’s stunning political and economic achievements since World War II, they deserve their fellow Europeans’ admiration and respect, not renewed resentment and suspicion.
Eichengreen echoes similar complaints other well-kown economists like Stiglitz, Krugman and Sachs have raised over the way eurozone's creditors are handling the Greek debt crisis.

Unfortunately, while I sympathize with the view that more asinine austerity measures are doomed to fail in Greece and elsewhere, these top economists really don't understand the Greek economy and the type of waste, corruption and rampant abuses that were going on over the last 30 years.

Importantly, the Greek economy is in desperate need of reforms to modernize it and bring it back to a competitive state, enabling it to thrive again. Anyone who knows anything about the Greek economy knows there are way too many public sector workers than the country can afford. The ratio of public to private sector workers was unsustainable before the crisis erupted. It's now completely unmanageable (2.5M private sector workers vs 1.5M public sector workers).

Grexit or no Grexit, this ratio has to come down to a more manageable and sustainable size. In my opinion, this will require fiscal tightening and growth initiatives to lay off public sector workers and to spur private sector hiring.

The problem with Yanis Varoufakis and all these prominent Western economists railing against austerity is they don't realize the extent of fiscal profligacy that has been going on in Greece over the last 30 years (or conveniently choose to ignore it). What other country gave out generous pensions at 50 or provided public sector workers with a bonus for showing up to work on time? (I kid you not!).

Greek politicians were handing out insane goodies and expanding the public sector as if they were going to be able to keep up this charade in perpetuity. Now that the music has stopped and creditors want to get paid back for their loans, which admittedly are nothing more than corporate and bank giveaways, Greeks are crying foul against austerity.

Well, Greeks can't have their cake and eat it too. Either they accept that being part of the eurozone means giving up their fiscal sovereignty or they can opt for Grexit and drachma which will only impose much harder austerity, deeper budget cuts and sink their economy into a prolonged depression.

I realize that not everyone shares my views on Grexit. Brian Romanchuk of the Bond Economics blog wrote a comment on The Greek Fix where he argues for Schaeuble's temporary Grexit proposal. Brian also posted his comment on Seeking Alpha where we exchanged comments on the topic.

I agree with Brian that austerity alone will sink the Greek economy further into a deeper hole but these measures are only the beginning to repair a damaged process and restore faith among creditors and the left-wing SYRIZA government.

The political angle is that once SYRIZA commits to these reforms, it will be significantly weaker, allowing for new elections and a coalition government which will be more eurozone friendly. At that time, I expect Germany to muzzle Schaeuble (hopefully for good) and provide Greece with much needed debt relief.

But remember what I continuously tell you, never trust Greek politicians. They're hopelessly corrupt and have mastered the art of lying. Tsipras and Varoufakis are just the latest in a long line of liars. This is why I maintain that debt relief, while very needed, won't suffice to get Greece back on track.

Importantly, even if you wipe out all of Greece's debt, unless Greek politicians implement significant structural reforms, their economy is doomed. Any honest Greek will agree with that last statement.

On the flip side, if Germans keep imposing harsh and asinine austerity measures on periphery economies without initiating commensurate growth projects, they will ensure the end of the eurozone and fail miserably to achieve a strong European economy which they desperately need to strive and maintain peace.

One final note. There are endless opinions on the Greek debt crisis. Some are excellent but many lack a complete and global view of all the issues at play within Greece, Europe and rest of the world.

One opinion I really enjoyed reading was from Lee Jong-Wha, Professor of Economics and Director of the Asiatic Research Institute at Korea University. His comment on Project Syndicate, Asia’s View of the Greek Crisis, is excellent and ends on this sober note:
Greece’s government then demanded more financial support with less stringent conditions. But, as its creditors have now recognized, providing more money will not address Greece’s insolvency. That is why the new deal requires that the government immediately cut pensions, hike taxes (beginning with the value-added tax), liberalize the labor market, and adhere to severe spending constraints. At the same time, a write-down of official debt, like the “haircut” given to private creditors in 2012, will be necessary.

Many have questioned whether agonizing reforms are entirely necessary; if the country returned to the drachma, they suggest, it could implement interest-rate cuts and devalue its exchange rate, thereby engineering an export-led recovery. But, given Greece’s small export sector, not to mention the weakness of the global economy, such a recovery may be impossible. Greece’s best bet is reform.

So far, Greece has shown itself to be unwilling to implement a painful internal-wage adjustment and reform measures forced by outsiders. Perhaps the latest deal, which was reached with Greece on the brink, will prove to be a turning point, with Greece finally committing actively to economic and fiscal reform. Otherwise, Greece’s exit from the eurozone – with all the concomitant social and economic strife – seems all but inevitable.

Asians watch with sympathy the fall from grace of the birthplace of Western civilization. But perhaps Greece should look to Asia for proof that, by taking responsibility for its own destiny, a country can emerge stronger from even the most difficult trials.
Below, RNN's Richard French discusses the Greek debt deal with Nicholas Economides, Professor of Economics from the Stern School of Business. Professor Economides is arguing for a "national salvation government now!", knowing full well the terms of the agreement are tough for Greece and there are many more issues that need to be ironed out in the coming months. 

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