Beware of Greeks bearing debts?
According to Prof Raymond Parsons from the North-West University's (NWU's) Potchefstroom Business School, it is understandable that, for South Africans as a whole and even for some professional observers, the tensions between Greece and the EU which flash on our TV screens enjoy but passing notice, given our own present economic challenges.
After all, these negotiations and discussions about Greece's financial woes are not new, but have been going on for some time. Yet the deteriorating relationship between Greece and its creditors in the past couple of weeks and days seems to have reached a point at which a real breach could occur. Fortunately, the latest proposals by Greece appear to hold out a possible basis for progress in the next few days.
Urgency has been injected in the situation by the fact that, by the end of June, there is a 'double whammy' for Greece: a large repayment to the International Monetary Fund, which Greece seemingly cannot afford, and simultaneously Greece's previous EU bail-out expires then. Negotiations are continuing right up to the last minute, because both sides are still keen to clinch a deal, although not at any price. The patience of the EU creditors, on the one hand, and the anti-austerity mandate of the recently elected Greek government on the other, are at a testing point. Mutual trust has been badly eroded. The chips may still fall either way in the days ahead.
Now it may be asked why so much trouble is being taken to reach an accommodation with an economy which only represents about 3% of the EU economy, when there are other important pressing issues like migration to be tackled by the EU? Why not just let the Greek economy cut itself loose from the EU and take charge of its own economic destiny if it wishes? After a protracted agony of several years of financial assistance to Greece, some observers welcome the prospect of a Greek exit. Good riddance, they say, to a country that is now seen as a total distraction on the EU socio-political landscape. The EU, it is said, must cut its losses and move on without Greece.
But the matter is not quite as simple as that, and a so-called 'divorce' between Greece and the EU would be costly and messy. Although a final breach may yet happen, it is understandable that so much time and effort is being invested by the parties in seeking a solution, up to the last minute. Even though there is enough blame to go around for everyone for what has gone wrong in the negotiations, the reality is that a Greek exit would impose costs on both parties. For Greece the gain from defaulting would be greatly outweighed by the potentially heavy costs. Although a default would mean that Greece could walk away from its foreign debts, the fact is that the interest rates on that debt are low and repayable over many decades as far ahead as 2050.
It is true that, by leaving the euro, Greece would have a new drachma and its own central bank and hence it could devalue and gain competitiveness. But Greek foreign trade is modest and there is no guarantee of a boom in exports. It may also still face severe inflation. Banks would still be in trouble, savings slashed,and confidence would be broken in both the short term and the long term. Greece might inevitably have to resort to capital controls. And investors might be unsettled because, without pressure from outside creditors, the poor policies and weak governance that lie at the root of Greece's misfortunes, will continue to sap its economy. Lawrence Summers, former U.S. Treasury Secretary, recently wrote that he thought Greece was on its way to becoming a 'failed state'.
So there are the broad reasons why, although the Greek government has been playing acute brinkmanship in these negotiations, it would prefer to stay in the EU if at all possible. From the EU side, too, first prize also remains wanting to keep Greece 'inside the tent', but within the EU rules. A failure to do so creates a bad precedent. A general worry is that a Greek exit may precipitate a domino effect in the bond markets, with a risk of other defaults, although so-called 'contagion' is less of a concern than it was a few years ago. The European Central Bank's quantitative easing program now provides more of a 'shock absorber'. The Greek government appears thus far to have been negotiating on the basis that the price of Greek exit is so high that the EU will give ground at the last minute, but that is a high risk strategy.
The problem is that, unless Greece and the EU improve the terms of their current poor relationship, even at this late stage, staying together would not be much better. While avoiding a break would be better for everyone, the Greek-EU link is no longer seen by everyone as worth saving at any price. That said, we must hope that pragmatism will prevail and that a workable solution will indeed be found. Or that in the event of a Greek exit it will at least be orderly, and aimed as far as possible at a 'soft landing' for the key players. While SA's direct exposure to the Greek situation is minimal, SA would not want to see increased uncertainty in international financial markets, stemming from a bad handling of this situation. The euro area remains a major trading partner for SA.
There is also two-fold lesson for SA in the Greek economic drama. Firstly, the seeds of the Greek economic woes were not sown yesterday but a couple of decades ago when certain fiscal choices were made which put Greece on an unsustainable financial path. This eventually forced drastic and painful austerity, when circumstances changed. This is what happens when socio-economic entitlements are ultimately based on unfunded mandates and get out of hand, because a sustainable fiscal balance is not maintained.
Secondly, every country should seek to broadly run its affairs so as to ensure that it does not end up being completely beholden to tough foreign creditors, which is not a story that usually ends happily. So when Finance Minister Nene regularly worries about deficits and debt management in SA we should support his message of applying sensible fiscal discipline timeously, rather than risk eventually falling into a 'debt trap' like Greece. Prudent fiscal discipline now is better than tough financial austerity later.
In the meantime, the immediate outcome of the latest negotiations will now be crucial for both Greece and the EU in deciding what the economic and political road ahead will be for both of them. And at the end of the day, even if an agreement is reached, it still has to be approved by a fractious Greek Parliament - so watch this space!