ONE is an epic of heroism, treachery, blood and tears that can be of three types –
tragedy, comedy and satiric. A tragedy is a mess with loss for all. January’s election
of the anti-austerity and left-leaning party in Greece (the fount of democracy)
highlights the bandwidth of Greek drama – an irrefutable democratic vote for debt
forgiveness facing an impossible condition for austerity.
A comedy is light-hearted, even though it can be heavy in messages, but often ends
in joy. A satire is a blend of all three, with an ability to laugh at itself.
The risk of the outcome of a Greek tragedy, not just for Greece but for Europe is
rising.
All drama and theatre are stories about reality, told from different perspectives. The
Greek drama is unfolding right now, because there is a stand-off between the Greek
people arguing that they can no longer bear the pain of austerity against a bunch of
European ministers of finance who insist that Greece must obey what its previous
governments agreed on – continued austerity.
This week, the Greek Prime Minister is visiting Moscow, but he is unlikely to get any
monetary help considering that Russia is bleeding from sharply lower oil revenue and
European Union sanctions arising from Ukraine. Anyone who has a sense of history
would know that the two countries share common faith in the form of the Eastern
Orthodox church. Furthermore, if Greece were to allow it, Russia would have naval
access to the Mediterranean.
There is no doubt that Greece has made many mistakes, such as running
unsustainable fiscal deficits within a fixed exchange rate regime (the Eurosystem).
Most of the deficits is due to the fact Greek pensions are amongst the most costly in
Europe, amounting to 17.5% of gross domestic product (GDP), compared with
German pension costs of 12.5% of GDP. Only 36% of Greeks between 55 and 64-
year-olds are still working, compared with 63% in Germany. Small wonder that aging
Germans who are still working are not keen to support Greeks who can retire earlier
with pensions.
Greece has in fact made significant progress since the crisis. It is already running a
current account surplus of 2.7% of GDP, but still running a budget deficit of 3.4% of
GDP, not bad compared with the 4% deficits incurred by France or Spain. However,
Greece cannot sustain that fiscal discipline, because it pays 11% per year on its 10
year debt, compared with 0.51% for France and 1.27% for Spain.
The Greek tragedy is that its unemployment level is running at 26% of the work force,
and about 50% for its youth. If the young people remain unemployed for too long
(crisis began in 2009), many will be unemployable. Uncertainty over Greek politics
has led to an effective silent run on Greek banks – said to amount to over two billion
euros per week. The government is supposed to repay the International Monetary
Fund (IMF) nearly half a billion dollars this month alone.
If Greece misses payments to the IMF, it will be technically at default. Thus, market
analysts are thinking aloud that Greece might impose capital controls or deposit
freezes in order to stop the capital flight. If that happens, then the chances of an exit
from the eurozone will follow suit. The major powers in Europe are already
psychologically prepared for such an event.
The unraveling of the Greek drama into tragedy carries valuable lessons for Asia.
Asians went through the Asian financial crisis of 1997, with bitter memories of the
mistakes of linking to the US dollar and being asked to take very tough medicine with
little aid compared with what the European crisis countries got from the IMF and the
European Central Bank.
The difference between Asia then and Greece today is that Greece is a member of a
monetary union, with the illusion that the union will bail it out of its fiscal and financial
mistakes. The Greeks now understand that joining the union carries with it a huge
financial and political price. In a perfect fiscal and banking union like the United
States, the collapse of Californian banks will be bailed out with Federal deposit
insurance and funds. Greek bank failure requires instead Greek fiscal austerity, but
since Greek deposits are in euros, the deposits can run to another eurozone bank,
whilst the Greek government would have to deal with the costs of bank failure. The
greater the austerity, the greater the risks of bank failure.
The second difference was the ability of Asian economies to devalue their currencies,
something that Greece could not do unilaterally. So it has to bite the bullet of
deflating the economy, subject to conditional cash flow aid from the Eurosystem.
The Greek Minister of Finance has posed a poignant question to Germany as to
when there should be a time to stop the pain, because Germany went through a
similar predicament in the World War I, when it was asked to bear unbearable war
reparations and debt burden. That led to hyperinflation in the 1920s, the resentment
of which led to the rise of Nazism and the World War II.
This is not a trivial political question. No one doubts that the debtor bears some pain
from over-borrowing, but shouldn’t the lenders also bear part of the losses from over-
lending?
Debt contracts are all about risk-shifting to the borrower, especially if the borrower is
too weak relative to powerful lenders. On the other hand, if you are the largest
reserve currency country, like the United States, you can borrow all you like but it’s
the lenders that have to do the worrying.
The system is only fair if there is equitable risk-sharing between the borrowers and
the lenders.
This drama is unlikely to have a good ending. If Greek pleas for help are unheeded in
Berlin, the tragedy will not just be on Greece, but on the whole of Europe. The
immediate financial impact of a Greek default may be less than earlier feared, but its
geopolitical consequences will send tremors that will be felt for the next decade.
Andrew Sheng writes on global issues from an Asian perspective.
A version of this article appeared in The Star Online, 11 April 2015
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