Breaking the Taboo: the Inevitability of a Greek Exit
Ever since the Greek debt crisis first appeared on the European political radar in late 2009, policymakers and experts of all colors and all stripes have been united in agreement on one basic illusion: that the prospect of Greece defaulting on its debts and leaving the eurozone was absolutely unthinkable — and that hence “there was no alternative” to continued EU/IMF bailouts, paired with endless austerity and radical structural reforms of the Greek economy.
But as Greece enters its fifth straight year of recession — its economy contracted by 6.5 percent last year — and as popular protests escalate all over again, signs are emerging that this neoliberal elite consensus may be crumbling. Faced with the glaring failure of austerity measures to reduce the country’s debt load, policymakers are finally starting to speak openly about the possibility of a default and a Greek exit from the eurozone.
“No Man Overboard” in Case of Greek Exit
Even the IMF recently recognized that its standard neoliberal medicine of harsh austerity measures is “harming Greece“. Poul Thomson, head of the IMF mission in Athens, admitted that the Fund’s “emphasis on fiscal consolidation has failed to work,” acknowledging that “social tolerance and political support have their limitations.” Yet ironically, the IMF continues to schizophrenically push for the same failing measures in its ongoing negotiations with Greece.
On Tuesday, Dutch EU Commissioner Neelie Kroes caused a stir when she stated that a Greek exit from the eurozone would not create the serious shock waves that policymakers have been warning about until now. “There is absolutely no ‘man overboard’ if we lose someone from the eurozone,” Kroes was quoted as saying. “They always said, ‘If a country lets you down or asks to get out, then the whole edifice collapses.’ But that is simply not true.”
While Kroes was immediately contradicted by the President of the Commission, Jose Manuel Barroso, her statement is remarkable because it fits into a broader shift in the official discourse. Whereas just a few months ago, the notion of a Greek exit was considered a total taboo, the Greek EU Commissioner, Maria Damanaki, recently stated that Brussels already has contingency plans in place for the event of a Greek default and exit from the eurozone.
The Inevitability of a Greek Default
Of course, policymakers are still light years behind the curve. Here at ROAR, we have been arguing since our very first article — published in the summer of 2010 — that the EU/IMF-imposed policy response to the crisis would only make matters worse, and that a massive default and exit from the eurozone would be the only credible long-term solution. Hundreds of thousands have taken to the Greek streets for the past 2 years to make exactly that same point.
With the government now spending over 70 percent of its official budget on debt repayments, and with its economy contracting 6.5 percent last year (projected to contract by another 4-6 percent this year), the country’s debt is set to soar to 180 percent of GDP by the end of 2012. In the absence of any prospects for growth, repaying this debt would not only unleash a humanitarian tragedy, but it would simply be impossible from an economic point of view.
This is why Greece’s foreign creditors — the European Union, the European Central Bank and the International Monetary Fund — are pushing Greece’s private creditors to write down a vast amount of Greek debt. Large banks and hedge funds are being asked to take a 50 to 70 percent loss on their holdings of Greek bonds in order to bring the country’s debt-to-GDP ratio back to 120 percent by 2020. But even this massive restructuring will fail to do so.
As Willem Buiter, chief economist at Citigroup, has argued, “Because of all this denial and delay, Greece will need to write down as much as 85 percent of its debt — 50 percent is not enough.” Since the Institute for International Finance, which represents some of the largest international banks in debt negotiations with Greece, is unwilling to settle for such losses, the haircut will simply have to be imposed — i.e., Greece will have to formally default on its debts.
The Inevitability of a Greek Exit
Such a default would immediately lead to a cessation of bailout loans from the EU and IMF, as well as causing the entire Greek banking system to freeze up. In order to be able to continue providing basic public services and avoid spiraling into uncontrollable social unrest, the Greek government will then have to start printing money to be able meet its domestic obligations. This means it will have to break out of its monetary straitjacket and reintroduce the drachma.
The conclusion is that a Greek exit from the eurozone is — and always has been — a fairly straightforward inevitability. Nothing has changed in this respect. What has changed, however, is that the taboo of a Greek exit has now been broken by Greek and European policymakers alike. Why is this? Why are leaders suddenly willing to discuss what was previously conceived absolutely unthinkable? Why are they allowing the neoliberal mask to slip? Why now?
Part of the answer lies in the obvious unsustainability of the “rescue packages” from a political point of view. Just like Argentina ten years before it, Greece is rapidly becoming ungovernable. On Tuesday, the second general strike of the year brought the country grinding to a halt, with thousands braving torrential downpours in Syntagma Square and clashing with riot police as they attempted to break into Parliament. Another 48-hour strike is scheduled for next week.
Earlier this week, the leader of the right-wing LAOS Party, which is a member of the technocratic coalition government of Prime Minister Papademos, told reporters that “I’m not going to contribute to the explosion of a revolution [by backing] a wretchedness that will then spread across Europe.” On Wednesday, a hundred angry workers stormed the Ministry of Development, trapping the Minister inside for hours until police finally evacuated him.
The Unsustainability of the Reforms
The EU-ECB-IMF Troika, in the meanwhile, is demanding that the government sign up to a radical reform package that will see 15,000 public sector jobs slashed this year, with another 150,000 to go in the next four years. The private sector wage is to be cut by 20 percent, including the minimum wage, which is set to be lowered to 600 euros per month (before tax). Meanwhile, the Troika is pushing for a 14 percent drop in auxiliary pensions to balance the budget.
With the prospect of the economy contracting or stagnating for at least two or three more years, the question becomes how much longer the Greek people are willing to suffer unprecedented hardship in order to pay off foreign creditors. The burning of a German flag in Syntagma Square is indicative of a resurgent nationalism; one that can prove explosive in coming weeks as Greece is set to strike an accord with its creditors on the second 130bn euro bailout.
Yet if the Greek government — under intense pressure from civil society — is not able to strike an agreement with private creditors and push through the reforms demanded by the Troika, it risks being denied the next installment of its bailout. In the absence of this payment, Greece will be forced into an unruly default — and consequent euro exit — by March 20, when 14bn euros in bond payments are due. The country is literally teetering on the brink of bankruptcy.
Has Greece Become Expendable?
But perhaps the main reason that a Greek exit is suddenly being openly debated, is that the large European banks seem to have stopped caring much about Greece. After the European Central Bank opened its monetary floodgates in December, private banks can borrow money at the extremely low interest rate of 1 percent, and then lend this money to European governments at much higher interest — making neat profits to help replenish their capital reserves.
In effect, what has happened is that the eurozone, through the ECB, has begun to subsidize its financial fat cats — those banks responsible for the crisis in the first place — in order to restore “market confidence” by preparing the banking system for a cascading series of defaults in the periphery. Greece, in other words, has largely become expendable to Europe. Now that the country has been sucked dry and the ECB has taken over the provision of financial blood, Greece is slowly becoming an afterthought.
And so, what the Greeks have been told for three years — that a default would trigger a national disaster, a break-up of the eurozone and another global financial crisis — is suddenly “just not true” anymore, according to an EU Commissioner. Clearly, we already knew that two years ago. The narrative was always meant to scare the Greek people into submission; to keep them showing up at their jobs while their pensions and tax money were being siphoned off to Deutsche Bank and Société Générale.
Yet at the same time, the EU and IMF do not seem to realize that, by slowly lifting the taboo on the possibility of a Greek euro exit, they may in fact be opening Pandora’s Box. Ever since the first bailout in May 2010, the main weapon of those in power has been the ideological smokescreen that “there is no alternative”. With this smokescreen gradually evaporating, Greece’s liberation from the neoliberal shackles of the eurozone now seems closer than ever.