Grexit is still an option

Peter Cheney assesses how Greece’s debt crisis could potentially impact on Ireland. Integration can no longer be taken for granted as national interests become more prominent.

Greece’s withdrawal from the euro zone (a Grexit) would be an unprecedented move which rolls back against the historic trend of European integration. In June, Greece became the first developed country to delay a payment to the IMF. It must pay back €30 billion to creditors (principally Germany) this year.

No country has defaulted on IMF loans since the institution was established in 1945. However, 32 countries have built up protracted arrears (of six months or more) due to internal instability. Demands for repayments to the European Central Bank will also continue as €6.7 billion in repayments from Greece are due by 31 August.

Under its current repayment schedule, the country will pay off its IMF loans by 2025 but the European bail-out repayments will continue until 2054. Greece can expect to pay back €5-10 billion per year in the coming decades.

The greatest immediate risk for Greece, which was realised in late June, was that a default will cut off its €80 billion financial lifeline (emergency liquidity assistance) from the European Central Bank, leading to a bank run and a Grexit. The country cannot ‘print money’ independently while remaining a euro zone member. Syriza sources have indicated that a new drachma could be introduced as a ‘parallel currency’ to be phased in as the euro is phased out.

Greece’s crisis puts Ireland’s successful bail-out exit in stark relief. However, a further crisis will undoubtedly reverberate on the markets and potentially weaken the euro’s exchange rate.

European fiscal policy since 2010 has sought to preserve the euro zone’s integrity. A Grexit will therefore be viewed as a major political failure.

University of California economist Andrew Rose, though, has analysed 69 currency exits since 1945 and concluded that, if anything, a crises will keep a country inside a currency union. “Countries simply do not seem to exit monetary unions around the times of large shocks,” he noted in a 2008 article.

Rose’s analysis predates the financial crisis but it also takes the long view across almost seven decades. “High-inflation countries may find it more difficult to remain in currency unions, as they cannot regain competitiveness through a nominal devaluation,” he remarked. However, an exit offers no panacea as countries with independent currencies “may simply have systematically less disciplined monetary institutions and accordingly higher inflation.”

Stability
Ireland’s most direct interests in Greece are the well-being of its citizens and its exports to the country – valued at €274 million in 2014. Greek imports into Ireland totalled €34 million. The urgency of the story can sometimes hide some of its more interesting aspects which also say a lot about Europe in 2015.

Relatively little recent coverage has been given to how Germany’s banks lent excessively to Greece. An estimate from Reuters in January put their exposure in Greece at €23.5 billion. In an everyday financial transaction, some of the responsibility for taking the risk would fall on the lender.

The cut-off of liquidity illustrated not only an unprecedented situation for a modern European country but also a deep clash between an elected government and the unelected troika.

Yanis Varoufakis alluded to this in an Irish Times article at the height of the crisis. Greece’s proposals were put to the Commission but he was prevented from bringing them to the Council comprising, on this occasion, Europe’s finance ministers. The same point was taken up by Michael Noonan at the meeting.

Varoufakis surmised that the euro zone “moves in a mysterious way” with momentous decisions “rubber-stamped by finance ministers who remain in the dark on the details, while unelected officials of mighty institutions are locked into one-sided negotiations with a solitary government-in-distress.”

This goes to the heart of one of Europe’s most serious perception problems: the Commission (and indeed the Central Bank and the IMF) is only accountable to governments at the time of its appointment. It then acts not only as the EU’s secretariat but the only institution that can bring forward legislation. That role, in theory, was designed to protect the interests of smaller member states who would be outvoted by larger ones. However, in the financial crisis, the Commission has largely required austerity from relatively small countries – Greece being the starkest example.

Syriza and its supporters argue that this also reflects an ideological bias against a leftist administration. Alexis Tsípras is the only head of government from the hard-left GUE/NGL alliance and success for him will embolden others, including Sinn Féin, and prove that IMF demands can be resisted and overcome.

A referendum puts a particular challenge to the troika as it directly tests their proposals at the ballot box – exactly the same level of accountability as a national government.

Interestingly, there is a precedent for massive debts to be revised down or written off for the ‘greater good’ of Europe. After the First World War, Germany was required to pay $436 billion (in today’s terms) in reparations to the allies. After the hyperinflation crisis in 1923, the amount was reduced in order to restore economic stability. Historians estimate that $80-90 billion was actually paid off. The process was managed by national governments which recognised the need to balance reparations for the past with the needs of voters and their families in the present.

The best outcome, for the euro zone and Europe as a whole, is naturally one which improves stability and also rebuilds the sense of solidarity on which the European project depends for its own success.

As for Greece, with another deal agreed at the end of July the crisis has been postponed until the autumn. A third bailout is yet to be finalised, with the IMF insisting on debt relief. Greece needs a massive debt write off, whilst the re-profiling of debt will just push off the problem until the autumn. The issue of an exit from the Eurozone remains on the cards.