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Greece votes ‘no’ to austerity; what now?

In a hastily arranged referendum on July 5, Greek citizens momentously voted to not continue with the austerity demanded of them by their European creditors. The celebratory mood in Syntagma Square in Athens was supposed to send a message to the European creditors in general and to German Chancellor Angela Merkel in particular that Greeks had had enough of austerity. Because Greeks have also told pollsters that they do not want to leave the European Union, Prime Minister Alexis Tsipras noted that the referendum result ought not to be viewed as a “no” to Europe but instead as a “no” to austerity.

But with capital controls in place and Greek banks tottering on the verge of insolvency, what does this “no” vote mean for the future of Greece and the European Union? Let us investigate.

Greece joined the eurozone in 2001 and there is reason to believe that it cooked the books in order to join. Otmar Issing, former chief economist of the European Central Bank, has said that Greece “cheated” to join the monetary union. The point to note here is that EU officials knew about this, and yet they let Greece in anyway.

Greece has often been one of the economic laggards in Europe. Its byzantine pension system is unsustainable, corruption is rampant, and tax collection is minimal. In addition, over the years, Greek politicians have systematically overpromised and underdelivered, with little regard for the fiscal implications of their actions. As a result, Greece has irresponsibly borrowed large amounts to perpetuate a lifestyle for its citizens that it simply cannot afford.

Post-2011, Greece’s European creditors should have known that Greece would not be able to pay back its enormous debt without significant economic growth. Yet, these creditors have insisted on foisting austerity programs on Greece even though there is no evidence to believe that these programs are working.

The lesson to learn from this is that just as it takes two to tango, Greece and its European creditors are jointly responsible for the current mess, although Greece’s role in this mess is much bigger. Greece has already defaulted on a payment to the International Monetary Fund and the ECB has refused to extend the support it has been offering to Greek banks. Hence, the situation is now dire.

With the mercurial and ultimately counterproductive Greek finance minister Yanis Varoufakis now gone, Tsipras needs to urgently put forward fresh proposals that credibly address the many problems faced by the Greek economy. But he cannot do it alone. A sagacious comment attributed to the noted economist John Maynard Keynes is that if an individual owes a bank a hundred pounds, then he has a problem, but if he owes the bank a million pounds, then the bank has a problem. It is high time that Greece’s European creditors recognize that they are in the latter situation delineated by Keynes. In particular, they need to comprehend—as the IMF already appears to have—that any resolution of the present mess must involve debt relief for Greece. Foisting yet more austerity on Greece without any debt relief would be akin to doing the same thing over and over again and expecting different results—the definition of insanity attributed to Albert Einstein.

If Tsipras is unable to procure an agreement with his European creditors with some debt relief, then he ought to exit the euro and go back to the drachma. This will involve a great deal of uncertainty and it will certainly impose considerable costs on Greece in the short run. However, in the long run, this is the least painful course of action that will enable Greece to exercise control over its own monetary destiny.

In the Melian dialogue, a part of Thucydides’ magisterial account of the Peloponnesian War, the Athenians supposedly claimed at Melos that “the strong do what they have the power to do, and the weak accept what they have to accept.” We shall soon see whether this holds true in the impasse between the contemporary Athenians (the European creditors) and present-day Melos (Greece).

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.

7/10/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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