A Greek drama or a Greek tragedy?

A comedy is light-hearted, even though it can be heavy in messages, but often ends in joy. A satire is a blend of all three, with an ability to laugh at itself.

The risk of the outcome of a Greek tragedy, not just for Greece but for Europe is rising. All drama and theatre are stories about reality, told from different perspectives. The Greek drama is unfolding right now, because there is now a stand-off between the Greek people arguing that they can no longer bear the pain of austerity against a bunch of European ministers of finance who insist that Greece must obey what its previous governments agreed on – continued austerity. This week, the Greek prime minister is visiting Moscow, but he is unlikely to get any monetary help considering that Russia is bleeding from sharply lower oil revenue and EU sanctions arising from Ukraine. Anyone who has a sense of history would know that the two countries share common faith in the form of the Eastern Orthodox church. Furthermore, if Greece were to allow it, Russia would have naval access to the Mediterranean. 

There is no doubt that Greece has made many mistakes, such as running unsustainable fiscal deficits within a fixed exchange rate regime (the Euro-system). Most of the deficits is due to the fact that Greek pensions are amongst the most costly in Europe, amounting to 17.5 per cent of GDP, compared with German pension costs of 12.5 per cent of GDP. Only 36 per cent of Greeks between 55-64 years old are still working, compared with 63 per cent in Germany. Small wonder that ageing Germans who are still working are not keen to support Greeks who can retire earlier with pensions. 

Greece has in fact made significant progress since the crisis. It is already running a current account surplus of 2.7 per cent of GDP, but still running a budget deficit of 3.4 per cent of GDP, not bad compared to the 4-per-cent deficits incurred by France or Spain. However, Greece cannot sustain that fiscal discipline, because it pays 11 per cent per year on its 10-year debt, compared to 0.51 per cent for France and 1.27 per cent for Spain. The Greek tragedy is that its unemployment level is running at 26 per cent of the work force, and about 50 per cent for its youth. If the young remain unemployed for too long (crisis began in 2009), many will be unemployable. Unr Greek politics has led to an effective silent run on Greek banks – said to amount to over €2 billion per week. The government is supposed to repay the IMF nearly half a billion dollars this month alone. 

If Greece misses payments to the IMF, it will be technically a default. Thus, market analysts are thinking aloud that Greece might impose capital controls or deposit freezes in order to stop the capital flight. If that happens, then the chances of an exit from the euro zone will follow suit. The major powers in Europe are already psychologically prepared for such an event. The unravelling of the Greek drama into tragedy carries valuable lessons for Asia. 

Asians went through the Asian financial crisis of 1997-99, with bitter memories of the mistakes of linking to the US dollar and being asked to take very tough medicine with little aid compared to what the European crisis countries got from the IMF and ECB. 

The difference between Asia then and Greece today is that Greece is a member of a monetary union, with the illusion that the union will bail it out of its fiscal and financial mistakes. The Greeks now understand that joining the union carries with it a huge financial and political price. In a perfect fiscal and banking union like the US, the collapse of Californian banks will be bailed out with Federal deposit insurance and funds. Greek bank failure requires instead Greek fiscal austerity, but since Greek deposits are in euros, the deposits can run to another euro-zone bank, whilst the Greek government would have to deal with the costs of bank failure. The greater the austerity, the greater the risks of bank failure.

The second difference was the ability of Asian economies to devalue their currencies, something that Greece could not do unilaterally. So it has to bit the bullet of deflating the economy, subject to conditional cash flow aid from the euro-system. The Greek finance minister has posed a poignant question to Germany as to when there should be a time to stop the pain, because Germany went through a similar predicament in the First World War, when she was asked to bear unbearable war reparations and debt burden. That led to hyper-inflation in the 1920s, the resentment of which led to the rise of Nazism and the Second World War.  This is not a trivial political question. No one doubts that the debtor bears some pain from over-borrowing, but shouldn’t the lenders also bear part of the losses from over-lending? 

Debt contracts are all about shifting risk to the borrower, especially if the borrower is too weak relative to powerful lenders. On the other hand, if you are the largest reserve currency country, like the United States, you can borrow all you like but it’s the lenders that have to do the worrying. The system is only fair if there is equitable risk-sharing between the borrowers and the lenders. 

This drama is unlikely to have a good ending. If Greek pleas for help are unheeded in Berlin, the tragedy will not just be on Greece, but on the whole of Europe. The immediate financial impact of a Greek default may be less than earlier feared, but its geopolitical consequences will send tremors that will be felt for the next decade. 

 

Andrew Sheng writes on global issues from an Asian perspective.