GENEVA, April 24, 2015 — All bets are off on a 2015 “Grexit,” according to popular UK betting site William Hill. “Grexit” is the term for a Greek exit from the euro zone. Since the country “could begin the process of departing” very shortly, the company has decided to stop taking bets on Athens’ packing its euro bags and heading out the backdoor.
The prediction largely falls in line with most rating agencies; on April 15, S&P cut the country’s rating from “B-“ to “CCC+” with a negative outlook. “Without deep economic reform or further relief, we expect Greece’s debt and other financial commitments will be unsustainable,” S&P wrote in a release.
Worries accrued in April after Athens asked the IMF for an extension on its May and June deadlines to repay roughly $2.7 billion in loans. Greece was turned down unconditionally and drew the fire of hawkish German finance minister Wolfgang Schaeuble, who said, “Greece must become competitive. Otherwise it’s a bottle without a bottom. And you can’t spend hundreds of billions … on a bottle without a bottom,”
The story is well known and reads like a disaster waiting to happen. Greece is floundering under the weight of its external debt, which has climbed to 175 percent of GDP. Markets are jittery and have sent bonds maturing in 2017 to yields of more than 27 percent, due at least in part to the actions of the uncompromising government headed by leftist firebrand Alexis Tsipras of the Syriza party, both of whom were elected on a populist platform to break with the IMF and its harsh austerity politics.
Athens, whose Central Bank boasted reserves of $6 billion in April, has to repay upwards of $7 billion this summer if it wants to stave off bankruptcy. International creditors have so far refused to budge an inch and, much as they have done with Ukraine, insisted that Greece must continue down the same beaten path of slashing government expenditures and raising taxes.
However, six years in and faced with worsening macroeconomic and social conditions, Germany and international lending institutions seem to be bogged down in the famous rhetorical trap. Long defenders of austerity, they cannot back down even in the face of clear contradictions between the aims of saving Greece and the reality of a Greece so deep in debt that it will take 50 years to pay off the existing loans.
The primary intellectual lesson of the Great Recession is that austerity does not work. The Harvard paper cited by austerity evangelists, “Growth in a Time of Debt” by Carmen Reinhart and Kenneth Rogoff − which concluded that countries with large debts grow slower − was debunked in 2013 by a 28-year-old student who discovered gross mathematical errors in the study.
Even the IMF admitted that it got it wrong with regard to the effects of budget cuts on growth. Yet somehow, austerity is still the only game in town, an inescapable one-size-fits-all policy that has been applied with an orthodoxy not seen since the dark days of the Spanish Inquisition.
Greece in the time of Syriza
It is often lost on pundits that the best way to reduce deficits and debt is simply to grow your economy without increasing debts. Syriza, if it wants to make a long term impact, shouldn’t be arguing for a return to the heyday of tax-and-spend socialism. Instead, young Tsipras should do what no political leader of a European indebted country has dared doing so far: embark on a course of structural, sector by sector, painfully meticulous pro-business reforms and bail itself out of the crisis.
Athens has so far embraced austerity. Taxes have shot up, government workers were laid off, salaries were slashed and the government ramped up efforts to crack down on tax evasion. But no government in the last six years undertook much needed pro-growth reforms, such as increasing the flexibility of the country’s labor market, remapping the tax system, privatizing state assets, incentivizing new businesses or stimulating innovation − all reforms that would have offset the pain caused by austerity while bringing the black market into the light.
Studies show that 70 percent of self-employed Greek citizens underreport their income to avoid taxes, causing a €25-30 billion loss in uncollected income for the government. What’s more, Greeks owe in excess of €72 billion to the state in unpaid taxes. Adding the two together yields a total of €102 billion, a third of the country’s debt.
But such simple, blanket, measures would fall short of the painstaking reforms Athens needs. The devil (and, in this case the potential for growth) is in the details.
Shipping, a Greek staple, is another sector that is in need of reform. Greece controls almost half of the European Union’s fleet and has the fourth largest fleet in world, accounting for 15 percent of global deadweight tonnage. The sector employs between 200,000 and 300,000 people and produces annual inflows between €13 and €19 billion (or 7 percent of GDP).
Shipyards, which once employed thousands of workers building world-class cargo ships and oil tankers, are now kept afloat by building yachts. Because of its simmering conflict with Turkey over Cyprus, Greece spends a whopping 4 percent of GDP on defense, money that could be used to revitalize its own military industry and create jobs in the process. However, unlike the French government, which has supported its shipbuilding industry by purchasing frigates or other assets, the Greek state shunned the sector and spent €2 billion instead on German submarines it didn’t need.
Even if it has the potential to become among the biggest in Europe, the Greek port of Piraeus is mismanaged and in a state of painful disrepair. Thanks to its geographical position, Piraeus can reduce by several days the transit time of goods flowing to and from Central Europe and the Far East. Athens should either invest in it or sell stakes to private contractors who have the resources to raise it to world-class status.
Greece sits on $600 billion worth of oil and gas, according to the U.S. Geological Society, but red tape has burdened the tender process. Apart from royalties collected from the exploitation of the undersea resources, the government also expects €150 billion in investment over the next 30 years. Athens should streamline the bureaucratic process and tap into its offshore riches
Unfortunately, the populist Tspiras has so far flirted with default, blackmailing European leaders into accepting softer terms for the country’s bailout, while paying a controversial visit to Moscow, where he tried unsuccessfully to woo Vladimir Putin.
Instead of translating “negotiable conflicts over economic policy into non-negotiable conflicts over ethnic identity,” Tsipras should stop the flashy grandstanding and focus on fine-tuning the Greek economy.
Athens can bail itself out.