Greek voters may not have realised the political price they are demanding from the euro area. It is far too high a price for the euro area to pay. It should not pay.
Greek `No’ voters scored 61% of the vote on a surprisingly low turnout of 62% of the 9.3m eligible voters. The concept is now quite clear: Greek PM Tsipras will claim that the 3.6 million Greeks who voted `No’ should now be entitled to debt relief from the rest of the eurozone.
Eurostat statistics show that the Greek minimum wage in January 2015 was nearly €700 per month – higher than five other euro members, and double that in Lithuania or Latvia. Thus 4 million `rich – relative to some of their creditors’ Greeks have voted for debt relief on the euro area’s exposure of close to €250 billion once the ECB’s Emergency Lending Arrangement (ELA) exposure is included.
However, the euro area already knows the Greek government’s approach to the private sector where “private sector involvement” (PSI) turned out to mean a `haircut’ of around 75% in value. So it is plausible to see that the euro area will have to pay off the full amount of the loans on schedule and only receive 25% from Greece over `a period’ – a loss of about €750 for each euro area voter. Alternatively, this could be described as a present via taxation on the 250m euro area voters of close to €20,000 per Greek voter. US commentators might wish to apply the 200-year-old concept of “no taxation without representation” and argue for a referendum of euro area voters on such a tax.
The political problem for the euro area’s statesmen and women is that a gift of the magnitude that Greek voters want to give themselves amounts to the permanent destruction of any credibility for the euro area’s economic governance system. This request coincides with the first discussion about the “Five Presidents Report” on further, far-reaching financial, economic and political integration. Bowing to Greek blackmail would put an end to the trend that earned the European Union the Noble Peace prize in 2012 for its six decades of work for peace in Europe.
How did this all happen?
Since Greece triggered the euro crisis in 2010, the euro area has had to deal with five bail-outs: Spain; Portugal; Ireland; Cyprus and Greece itself. The first three successfully concluded their economic programmes – designed along the same principle as that of Greece – and are expected to be amongst the fastest growing euro area members this year (Ireland at twice the average!). The Greeks in Cyprus are well on track to resume good growth next year. Six months ago – before Syriza was elected – the Greeks in Greece were expected to be in the fast-growth club. With confidence shattered by Syriza’s tactics, those prospects are a distant memory.
The result of rule by New Democracy or Pasok for 40 years has been utter ruin for the vast majority of Greeks, but great enrichment for a tiny minority of `oligarchs’. So amajor part of the case for a Syriza vote in early 2015 was their declaration of war on the `oligarchs’: Earlier this year, the Financial Times published a fascinating article describing their shadowy hold on power. Any casual reader of the Troika reports on Greek compliance with EU conditionality is struck by the dogged resistance of certain sectors of society to reforms that the rest of the EU takes for granted. Indeed, the ordinary electors of Greece also seem to want this.
This is the highly-charged political backdrop to a series of intensely technical decisions about the solvency of Greek banks. This drama underlines that Banking Union really was a major extension of Political Union. The supervisor of the four largest Greek banks is the Single Supervisory Mechanism (SSM) of the ECB. The ECB can only lend to `solvent banks’ – as reported by its independent arm, the SSM. If the situation deteriorates, then Europe’s new Single Resolution Authority (SRA) would have to put the relevant banks into resolution.
Without extra support from the ECB, it is difficult to see how Greek banks can meet their obligations to their depositors – the usual definition of insolvency. A formal default by the Government itself will put the whole system into even more extreme difficulty. How long can the SSM avoid recognising this situation? Can it even go to the end of July unless the euro area agrees a new package with the Tsipras government? Does it give way to Tsipras’ demands or the other way round? A cessation of ECB support for the banks would precipitate a collapse of the economy – taking it back to bartering with the existing (though substantial) stock of euro banknotes within Greece.
Five years of massive deepening of economic integration have paved the way to economic recovery in the euro area. It runs a current account surplus with the outside world that is more than four times that of Japan. Massive firewalls are in place – certainly relative to Greece. Public debt ratios are now beginning to fall and markets are starting to complain about a shortage of government bonds as the ECB is buying €60 billion of bonds each month under it QE programme. After initial concerns, the financial markets seem stable after the shock referendum result.
© Graham Bishop
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