Tuesday, June 16, 2015

The Greek Exit

It now seems possible that Greece will exit the Euro, and it is worth talking about what this may mean.

The Greek government is driving a hard bargain with its creditors, not giving in to their various demands, particularly on Pension and Benefits cuts for retirees, and higher tax on goods sold. While this seems unreasonable and everyone seems to be blaming the Greeks for the trouble, at the core, there is a fundamental difference of priorities. The austerity strategy that the Greek government is resisting is a failed one, and it has resulted in a contraction of the Greek economy and worsened the Debt crisis rather than improving the situation. So, the fundamental position of the Greek government, that the debts will be paid but not by crippling the economy for generations to come and not by causing deeper social unrest, is more reasonable than it seems. The creditors position, in line with the currently dominant worldview, is the one that dominates the media, but its time seems to be running out.

We know, Debts must be paid! This is one rule that we seem to think should apply to everyone, particularly the poorer nations. However, it does not seem to apply to banks, which may squander money and when convenient, just turn up for the bail-outs! It does not apply to richer nations, which can run debts to whatever unsustainable levels just by spending the money on military, and then demand creditworthiness - or, otherwise, send the military to other countries so that they fall in line! Surely, the underlying principle governing the national debts, what must be paid and how it must be paid, is political, and the Greek government is fully justified in considering its political priorities.

One can see the word coming - Populist! Anything that is done for the poor people in any country is always populist! Democracy is indeed a game of words, and words only. Because one could give all the money to the erring banks and let their executives go scot-free, and yet sound tough and patriotic, while if one stands for the poor pensioners and try to protect the little they have got, they get the populist label. Austerity, as we have seen in the recent years, is never for everyone, just for those who do not have much. Greeks are just being asked to do what everyone else seems to accept without questioning.

Greeks have a big problem if they have to exit, as their economy will collapse and capital flight would occur. However, they may have weighed in all the options and this alternative may not look too bad compared to the others on the table. For Alexis Tsipras, the Greek Prime Minister, accepting the alternative deal means political suicide, letting down people who had voted for him and who trusted him to get the best deal for them. If he acts like the other left politicians (like the British Labour party), he would be forced out of office fairly soon, both by the disillusioned voters but also by those bankers and industrialists who he would have saved (like the Labour Party). And, this is not opportunism, but the very Churchillian politics of doggedness that we have come to admire so much. He has a mandate, and if he does anything else, just because The Economist or the Murdoch Press say so, he would be betraying his mandate.

But, then, here is his saving grace - the Greek exit is not just a problem for Greece, but the whole world system that came into being after the Second World War. This would be a nightmare for the EU, and the worst failure of the Bretton Woods institutions, particularly the IMF. The Keynesian common sense of allowing growth and saving the Greek economy would have been abandoned in favour of the narrow Monetarist dogma, and its rejection by the Greek people will be a first, and indeed not the last. Greek government would survive, and the country would move away from Europe and closer to the world of China and Russia. This may indeed become a big rescue act for the nascent BRICS Bank, which is far more amenable to Keynesian ideas of growth and development (because they have to). In the end, this is political twist at the tale of this economic saga, and the European leaders perhaps know that they can ill-afford such a situation.

There may be some in America and Britain who would quietly celebrate this as the end of EU, but this is, in effect, the end of the world they know. While this may not be the start of another catastrophic war, this is an institutional failure in the end, a classic case of post-war institutions not being in sync with democratic public opinion. We have had several systems in history which was constructed to maintain the world as is, and they broke down to give way to chaos and war. We have arrived at such a point. The choice is not just for the leaders of Greece, but for all those on the table who has an interest in averting a wholesale breakdown.

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