Tuesday, 4 August 2015

Third bailout for Greece - at what price?

*** This was originally posted by me in The Teen Economists on 16th July 2015 ***

The land of olives. The country that gave us the Olympic Games. The birthplace of democracy...and now the sick man of Europe. We’ve all been watching the Greek tragedy unfold over the past few months. What an economic nightmare! My question here is; will the latest bailout really help the Greek people?


There are some positive aspects of the latest bailout. Greece could be privy to €50 billion from privatisation, which would go towards paying off debt and helping the Greek economy recover. The downside, though, is that the money would come from the selling off of some of the Greek government’s assets. Yes, the money is much-needed in the short-term but this measure means that some wealth is lost. In the long run the government may be losing a source of revenue.

In order to even have a third bailout seriously considered the Greek government had to pass a severe reforms bill in Parliament yesterday. This included harsh economic policies such as increasing VAT, other tax rises, as well as reducing pensions; the latter would be partly achieved by raising the pension age to 67. Unpalatable prospects for anyone but more so for the Greeks, who have been used to retirement at 62 and a lax tax enforcement system. Economically, labour would become more demotivated as less salary could be taken home. This could result in lower tax revenue for the government and reduced economic growth. Moreover, Greece may be subject to further spending cuts.

To further rub salt in the wound these reforms were passed through by a grand majority of 229 to 64. This is despite the Greek people voting against similar measures just one week previously in their referendum. Greece, the birthplace of democracy? Indeed. In fact, 32 members of the ruling Syriza party voted NO; an uncooperative government is neither a stable nor an efficient one. Political instability is a further turn-off to potential investors.

My verdict is that even with up to €86 billion coming in Greece will not be able to truly prosper. I accept that it will deal with the immediate issues of upcoming payments to their creditors. Following the parliamentary vote the European Central Bank (ECB) agreed to deliver urgent liquidity assistance to Greece’s banks. The banks may finally be able to reopen.

Yet in the long run Greeks will have to live under a huge burden of debt with a substantial amount of revenue going towards repayments. Former finance minister Yanis Varoufakis likened the current situation to the Treaty of Versailles. That, quite ironically, was when Germany was subject to huge reparations after the First World War – and after the Second World War still had more payments outstanding. Eventually some of Germany’s debt was written off and this allowed more of the government’s money to go on current and capital spending, thus boosting economic growth. This may have been one of the reasons why the International Monetary Fund (IMF) suggested some debt relief for Greece. However the idea was turned down by the other creditors; the European Commission and the ECB.

Was this the right move, considering that distinct parallels can be struck with post WW1 Germany? The Nazis rose to power in the Great Depression that followed the Wall Street Crash of 1929.  Greece is struggling in the aftermath of the global financial crisis of 2008-9. While there may not yet be an extremist party even close to being in charge it must be remembered that the seeds of extremism have been successfully sown in similar circumstances in the past.