Most analysis of the Greek debt crisis ignores an important reality: While Greece may be the villain du jour, every eurozone nation is profoundly short of cash. That’s because of a well-acknowledged, but not fully appreciated, flaw at the heart of eurozone financial architecture that converted a historically unprecedented number of nations from issuers of their own currency to users of a common currency.
Greece is simply the first country to experience the extreme consequences of that loss of monetary sovereignty. With no independent source of funding, no currency of its own, no central bank to guarantee its government liabilities, it has had to ask others for help. And as a condition for securing that help, Greece has until now been forced to consent to radical austerity policies.
As an analogy, consider a United States with a common currency but no Treasury to conduct macroeconomic policy, stabilization or stimulus spending. Imagine also that the Federal Reserve was banned by law from guaranteeing U.S. government debt. And imagine that one state, say, Illinois (think Germany) was the major net exporter, accumulating dollars (euros) while most other states (as is the case in the eurozone) were net importers, thereby bleeding dollars (or euros). Finally, imagine Illinois providing a loan to cash-strapped Georgia (think Greece), dictating that it implement slash-and-burn privatization of public assets and drastic cuts to state payrolls, pensions and other essential programs. This, in essence, is the situation in the eurozone today.
But Greek voters last month rejected continuation of an austerity program that has plunged their economy into depression, voting in a government determined to break out of the current terms on which Greece gets help from the Troika.
On Monday, it looked as if the negotiations had reached an impasse. Euro members refused to provide Greece with a bridging loan, demanding adherence to the austerity bailout terms negotiated under the previous government. Yet, Greek Finance Minister Yanis Varoufakis remained optimistic that Athens can renegotiate the terms on which it receives help from Brussels.
What are the stakes?
Greece can either accept the European ultimatum or refuse the deal (as Varoufakis has said he would, in line with his party’s promise to voters). If there is to be a compromise, it will almost surely come in the form of some European concessions. After all, Greece has already accepted 70 percent of the previous terms of the agreement and has thus met Europe more than halfway.
But European officials, so far, have refused to budge. They are betting that Greece will seek to avoid a default at all costs to dodge a possible banking crisis, which could inflict more hardship on the population and undermine confidence in the new government.
Default on its debts is not an appealing option to Greece, although the consequences of such a move may not be as dire as some expect. Greece currently runs a primary surplus, and may well have enough cash on hand to pursue its stimulus reforms for a while. But at some point, the funding problem will re-emerge. Greece is hoping that improvements to the economy, including rapid growth in employment, incomes and profits that would bring more tax revenue and reduce anti-poverty spending would be sufficiently swift to produce rapid short-term growth, all of which would improve Athens’ ability to borrow from private markets for long-term public investment projects. The fundamental problem, however, remains a loss of monetary sovereignty.
One way to abandon austerity while staying in the eurozone, is for Greece to issue a new financial instrument (a parallel currency of sorts) for use in Greece alongside the euro. Two such proposals are the tax-anticipation notes and tax-backed bonds, notes that can be used for payment of domestic taxes, thereby creating demand for the new currency and alleviating any shortages of euros as they occur.
Fears of a banking crisis in Greece in the event of a default, though, may be overstated. Greek banks are all already regulated by the European Central Bank (ECB). Continuing the U.S. analogy, would the Fed shut down Citibank if the state of Georgia went rogue and refused to pay its debts?
What’s at stake in the negotiations, however, is not just Greece’s prospects, but the ability of any eurozone nation to fund itself.
In keeping with popular sentiment at home, Varoufakis has taken the Grexit option off the table, arguably losing his main bargaining chip. That leaves him hoping his European counterparts respond with reason, goodwill and respect to the Greek government’s gesture.
He appears to be buying time to put forward a blueprint that not only restores the Greek economy, but also protects the other countries likely to fall into the same predicament. His primary challenge, then, is to convince his interlocutors that what is in Greece’s best interests are also in the best interests of Europe.
Germany may be determined to hold the eurozone together, but on terms that enforce the conservative economic orthodoxy first championed by President Ronald Reagan and Prime Minister Margaret Thatcher across Europe. If, indeed, all parties at the table seek to make the EU a political union, Varoufakis will be arguing that cannot be achieved on the basis of the Troika recipe, but requires broad embrace of more progressive pro-growth principles.
Greece needs nothing short of a Marshall plan to restore economic growth, but the same is true for much of Europe. Athens is seeking to demonstrate an alternative path for Europe, stopping the fire-sale privatization of public assets, reversing devastating labor-market reforms and hoping to implement an social safety net for the unemployed.
Deputy Labor Minster and Levy Institute Senior Scholar Rania Antonopoulos has developed a proposal for a Greek Job Guarantee to tackle the unemployment crisis. The European Commission already has a similar manifesto to address the staggering youth unemployment problem across Europe, called a Youth Job Guarantee. But the program remains unworkable because its implementation depends on cash-strapped nation states, rather than on a euro-wide fiscal authority with access to ECB funding.
To achieve the political union all sides say they seek, they would need to create not only a fiscal entity (a euro equivalent of the U.S. Treasury) but also a coordinated pro-growth macroeconomic policy for the eurozone as a whole and, crucially, the implementation of a euro-wide safety-net.
Greece takes to the negotiating table a desire to stem the humanitarian crisis created by austerity, while avoiding the go-it-alone option of ditching the euro and reintroducing the drachma. But convincing the powers that be in the eurozone, and the vested interests behind them, of the need for a fundamental policy re-orientation toward a more progressive consensus remains a tall order. Indeed, Varoufakis could be forgiven for imagining he’s treading a path blazed by another Greek legend — Sisyphus.