Greece's threat of euro exit has cheated it of a recovery

(This article was first published in today's Evening Standard)

Greece continues to dominate the headlines, with yet another repayment deadline looming tomorrow. So far the Greek Government has been able to cobble together the cash to meet its repayments. And while tomorrow’s payment could, if necessary, be delayed until the end of the month, it is clear that things are getting increasingly hairy, with two much more important deadlines looming ever larger. First and foremost the Greek Government has to reach agreement with its official creditors by the end of June if any further bailout funds are to be released. And only by releasing this cash can it have any hope of repaying the billions of euros it has to repay the ECB in July and August.

Hope remains that some sort of deal can be done before the end of June to prevent, for now at least, a Greek default and euro exit. But even if a deal can be reached, initial relief will rapidly give way to a more sober assessment of the damage done to the Greek economy by the Syriza Government. When it was first elected its arguments about the nature of the policies imposed on Greece by the Troika were not without merit and had fairly widespread sympathy. And they still have some merit. But the utterly shambolic, alienating and egotistical way in which Syriza has conducted the negotiations has seen the sympathy evaporate. Fundamentally, Syriza overestimated Greece’s bargaining power – in 2010 and 2012 Greek default and/or euro exit would likely have dragged the rest of the periphery down with it. That is simply no longer the case thanks to the firewalls put in place by euro area governments and the ECB - the Greek government’s metaphorical gun to the heads of euro leaders now contains only blanks.  

The upshot of this has been a consistent unwillingness by Greece’s creditors to offer much by way of meeting Syriza’s demands. But instead of accepting that reality and quickly taking what was on offer in terms of slightly less demanding austerity targets, the Syriza Government’s chaotic approach to its dealings with the “Institutions” (the renaming of which from the “Troika” may well go down in history as Syriza’s sole achievement) has put Greece’s status as a high-income country in much greater jeopardy than any amount of enforced austerity. In the near term, by making Grexit a plausible outcome for the first time since 2012, economic confidence has slumped, deposits have fled the banking system at a record rate, leaving it reliant on the ECB to grudgingly approve emergency liquidity, and the economy has been pushed back into recession. Even if a short-term deal is done, for as long as there is a government in Athens seemingly ready to openly contemplate Grexit rather than compromise, economic uncertainty will remain high and growth will remain weak. That, ironically, will mean that more austerity will be required for the government to meet its fiscal targets. 

Greece: Bank deposits of residents

Greece_Bank deposit of residents - 04Jun15Source: Bank of Greece and Daiwa Capital Markets Europe Ltd.

But that is nothing to the catastrophe that would face Greece if default and Grexit were the eventual outcome. Ignore the self-serving advice of eurosceptics arguing that all Greece needs is to be unshackled from the euro, with a large devaluation unleashing the economy’s latent competitiveness. Default accompanied by Grexit would be an economic and social disaster for the Greeks. A collapsed banking system and the forced redenomination of deposits do not make for economic success – just ask the Argentines.  

The tragedy is that it all could have been so different. What is happening in the rest of the euro periphery demonstrates what Greece could have won if a different path had been taken. Having begun to emerge from the crisis-induced recessions in the second half of last year, a slowing pace of fiscal consolidation coupled with the positive effects of the ECB’s QE has seen the peripheral economies start to flourish. In the six months to March Spain enjoyed the fastest economic growth of all of the major euro area countries, while more recent confidence indicators indicate that this improvement has been maintained. Without the destabilising impact of the Syriza Government, the Greek economy, which had returned to growth in 2014, would too be benefitting from the improved economic outlook, would be on the cusp of the ECB starting to buy its bonds as part of its QE programme and would probably be able to finance itself through private sector borrowing, loosening the grip of the Institutions so hated by Syriza over Greek economic policy.

But Greece is where it is. Those that argue that Grexit could be a good outcome are deluding both themselves and the Greeks. And while fiscal stimulus, rather than austerity, may be what Greece really needs, that is not on offer. Given this, the sooner that the Government in Athens makes a long-term commitment to what its creditors require of it and to the euro itself, the sooner the threat of Grexit will disappear and the sooner the economy can recover. Until then, Greece will continue to miss out on the good news story elsewhere in the periphery. 

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