EUROPE’S future depends on a deal over Athens’ multi-billion euro debt mountain, writes Peter Jones
At the time of writing, frantic meetings were being held by European politicians and central bankers to work out a deal to keep Greece in the euro and relieve its debt crisis. Most likely, it seemed to me, was a complicated compromise that would allow everyone, especially Alexis Tsipras, the Greek prime minister, to claim some sort of victory.
But still, the possibility that Greece might be forced out of the euro and back to the drachma looms large. What effect would that have on us? Directly, not very much, but indirectly, it could have a very profound effect.
First, we need to remind ourselves of how deep is the hole that Greece is in. The 11 million Greeks currently have a national debt of about €340 billion (£244bn). That would be manageable if, after the 2008 financial crisis, the Greek economy had not collapsed. Its GDP today is about €185bn, down from €242bn in 2008, a fall of about 25 per cent which has been accompanied by a rise in unemployment to about 25 per cent and the average Greek employee earning about €5,000 a year less than six years ago.
These last two, statistics symbolising an austerity far harsher than anything we have experienced, largely explain why the Greeks elected the far-left anti-austerity Syriza party and Mr Tsipras in January.
The fall in GDP, which measures how much wealth an economy is creating, has also worsened the debt problem. The GDP contraction means that the size of the national debt relative to the size of the economy, an important measure for judging whether the debt pile is sustainable or not, would have risen even if the government had not done any additional borrowing.
Greece’s public debt is now about 1.8 times bigger than its GDP, way above the 1.2 multiple generally accepted as the upper limit for the size of any country’s national debt.
Since Syriza’s election, the problem has got worse. The election seems to be responsible for halting a modest economic recovery, the first significant growth the country had seen since 2008. It also destroyed the first milestone on Greece’s route back to economic normality – that in 2013 and 2014 it had managed to record (in International Monetary Fund (IMF) accounting) what macroeconomists call a primary budget surplus. That is where tax revenues are greater than public spending before the servicing costs of debt are added in.
The surplus seems to have disappeared, mainly because since December, tax revenues have tumbled. That may not be disastrous, as the most plausible explanation is that Greeks stopped paying some taxes which Syriza had promised to either reform or abolish. So the revenue base is still there, it is finding ways to squeeze it a bit harder which is the problem.
Nevertheless, the fact remains that the Greek government is not raising enough tax revenue to pay the cost of its debt, basically the problem which was being discussed yesterday. The Friday deadline arises because the Greek government needs a final €7.6bn tranche of an EU/IMF/European Central Bank bail-out so it can meet a €1.6bn debt repayment to the IMF by 30 June.
As a condition for handing over the €7.6bn, the funding institutions are demanding more spending cuts/tax increases which the anti-austerity Mr Tsipras has so far refused to make. He has submitted some proposals, which apparently include raising the retirement age to 67 and increasing some taxes. Defence spending cuts also look probable.
The acceptability of his ideas depends on how desperate Europe’s policy-makers are to keep Greece in the euro. Spain, Portugal, and Ireland all accepted the necessity of austerity and indeed are now recovering quite strongly, so any major concession would leave them feeling short-changed. The Spanish government, facing elections before the end of the year, would become even more vulnerable to being ousted by the anti-austerity Podemos party. Although Spain did not take a bail-out package, a higher spending Spanish government would risk de-railing its recovery and threaten further eurozone instability.
If that is unappealing, so is maintaining a hard line and forcing Greece to default on its loan repayments. If Greece does default, the ECB is obliged to stop pumping cash into Greek banks (emergency liquidity assistance in the jargon).
It does so because depositors are estimated to have removed €70bn from their Greek accounts in the last nine months, 35 per cent of all individual and corporate accounts.
The removal of ECB support would then spark a rush to withdraw the remaining €133bn, the spectre of which is so awful that Mr Tsipras would have little alternative but to substitute the drachma for the euro, institute capital controls to prevent the country from being drained of money, and limit cash withdrawals.
This Grexit would not have much direct impact on the UK economy. British banks hold very little Greek debt (which would be slashed in value), exports to Greece are a tiny proportion of total exports, and Greek assets carry little weight on company balance sheets. Tourists, unless they have taken a large stock of euro notes (which would become more valuable), might find difficulties in getting hold of cash.
The indirect effects, however, might be a lot messier. Analysts at UBS, a Swiss bank, think that international investors would become much more nervous about the shakier European economies (debt costs for Spain, Italy, Portugal have already risen) and the currencies of non-eurozone countries like Poland, Romania, Bulgaria and Hungary would become devalued.
Though that might imply a boost to their exports, the lesson of the euro crisis of 2010-11 is that the uncertainty might tip these latter countries into recession and rising unemployment. That’s where the effects of a Grexit could become profound because it could mean a rise in migrants from these EU member states to countries like Britain.
And with disquiet about migrants troubling the British electorate, that could reduce David Cameron’s chances of winning an EU membership referendum. Greece might be a faraway country grappling with an economic and currency problem that is nothing to do with us, but the effects of failing to resolve it could change the shape of the EU and Britain’s place in it.