Author : John E. Charalambakis
Date : July 4, 2015
Let me state it from the beginning: This Greek referendum is absurd simply because the government has failed its people, and also because the troika’s boneheaded mentality did not allow her to cut a deal with the previous government last fall (if the latter had taken place we wouldn’t be facing the potential chaotic situation now). In addition, the Syriza government is asking the people to vote on a proposal that is not even on the table. Moreover, how could the people decide on the country’s restructuring plan when the creditors and those with the Ph.D.’s have no idea yet how to go about it? The Syriza government reminds me of Steve Turner’s satirical poem called “Creed”:
We believe that everything’s getting better
Despite evidence to the contrary.
The evidence must be investigated
And you can prove anything with evidence.
Let me also add, that by no means do I desire to absolve the EU of its huge miscalculations and tremendous mistakes, especially the fact that the only thing that they cared about was to save the EU banks that were among the perpetrators of the crisis. The bailout funds were not used to save Greece since nothing went to Greece. It is all about a hijacked dream that turned out to be a nightmare.
In the beginning it was a dream about free trade and exchanges that would have uplifted freedom, growth, jobs, and incomes. The dream was hijacked by bureaucrats who knew the price of everything and the value of nothing. So the dream became a nightmare as those bureaucrats – a.k.a. as Eurocrats – used their centralization powers of cooking the books (in order to show compliance with subjective criteria so that the dysfunctional Euro could be born) and mispricing in order to advance unnatural goals (monetary union with a fiat currency at an unnatural exchange rates) for the sake of political expediency and the clientele mentality that ignores reality, basic principles such as productivity, fiscal discipline, and meritocracy, while ignoring fundamental, natural economic laws. The outcome of the EU dream was the birth of a baby known as the baby of nothing.
When Greek fiscal problems (that were originated in the 1980s and never really addressed by any government since then) were revealed in late 2009, the troika imposed unrealistic fiscal restraints that took the life out of the Greek economy. Thus, the asphyxiation of the Greek economy (GDP loss of about 28%, unemployment close to 26%, youth unemployment of over 50%, deterioration of its unsustainable debt from 118% to 177% of GDP in just five years, significant increase in poverty, deterioration of the balance sheets of banks, etc.) is troika-made.
However, both Greece and the EU have good potential and bright prospects if reforms take place, and my belief is that if reforms take place both in Greece as well as within the institutions of the EU, then whether together (i.e. as the Eurozone currently exists) or separately (implying a Grexit) they can both strive. I will touch briefly on the latter below, however it is proper to outline the dangers first of the cancerous situation both in Greece and within the EU since right treatment demands proper diagnosis.
Let’s start with potential consequences if the issues are not addressed: Unless Greece faces up to its problems with a determined competent leadership that does not serve the vested interests of oligarchs and/or of organized unions, and unless it commits itself to free markets that awaken dormant assets while attracting new capital to come in and re-start the engine of growth, then it potentially faces 5-6 years of more depression and misery.
At the same time, unless the EU is committed to serious deregulation, freer markets, austerity in terms of starving the Brussels monster, and unless it stops the unnatural process of political union and its awkward Euro-worship (with the later becoming an end in itself rather than a means to an end), it will soon be facing – with Grexit or no Grexit – the unraveling of its fragile structures, an unraveling that could shake up global markets.
Moreover, given that the current Greek government has lost the trust of the international community, geopolitical issues may surface on at least three fronts: First with Russia which seeks ways to enter the warm waters of the Mediterranean and ways to continue being a player in Europe through the energy pipelines. Second, the instability in the Middle East and North Africa requires that a strong western force is based in the Mediterranean. Third, the threat of having terrorists infiltrate to the West via a failed EU-state could become a threat unlike any other that EU has faced before. (Who could exclude the possibility of things unraveling so badly that Greece turns not just into a pariah state but also into a failed state?)
Let’s return now to the Greek situation and the potential outcomes of the referendum. I believe that regardless of a Yes or a No vote, and unless basic reforms (as described above as well as below) take place, Greece is facing a bankrupt banking sector with potential bail-in of the deposits. With a Yes vote that is less likely, but still possible. I also expect that capital controls – in either outcome – will continue for at least a year, while with a Yes vote the creditors would find ways to pay themselves, extend some life to the Greek banks via limited liquidity, but not pushing and/or allowing the right deep reforms that Greece needs. Hence, Greece will be sleepwalking into a semi-depressionary state for the years to come.
With a No vote, the banking situation will get worse (depositors’ haircuts, continuation of capital controls – recall that Iceland still has capital controls seven years later – with the Greek banks facing immediate bankruptcy), while the state will issue IOUs and similar promissory notes, that will become a parallel currency.
Greece needs a shock that will awaken its potential, energize its assets, attract capital, and allow the freedom of new ideas, innovations, and smart capital to create a base there, assuming that it commits herself to the rule of law and not to the rule of organized unions, or the rule of oligarchs whose vested interests were served in the last thirty years. If that happens, then starting with debt restructuring (both on a national as well as on corporate level) as well as by focusing on its competitive advantages (tourism, real estate, renewable energy, shipping, food, limited manufactured goods, etc.) and developing other competitive advantages (medical tourism, retirement villages, education-related joint ventures, etc.), Greece can face a bright future where people would enjoy a good standard of living while being a gatekeeper for Europe.
If the EU (with a Yes or a No vote) fails to be proactive, then it potentially faces a failed state (where political, social, and economic instability may prevail) within its ranks with geopolitical ramifications. Besides the huge costs it faces (EFSF, ELA, state-guarantees, Target2) and the embarrassment of having to recapitalize its central banks, the reversibility of the Euro will possibly reveal other areas of vulnerability where newly surfaced economic and financial conflicts will require the EU to be the fire-station that tries to put out flames with limited resources. The party will start when the contempt of the creditors refuses to tango with the resentment of the debtors, and at that point the Euro may go into a tailspin.
The internal contradictions of the dysfunctional Eurozone have an epitome called centrally-imposed exchange rate pricing (I call it the party of mispricing) for the sake of a monetary union that should have never taken place. That monetary fanaticism distorted prices everywhere (from goods, commodities, money markets, debt markets, equity markets, labor markets, exchange rates, etc.), and that distortion led to the destruction of competitive advantages, the unnatural re-focusing of countries into consumption rather than production, while vested interests found ways to be served like never before ignoring productivity and the need to create capital and wealth. Moreover, the “free-lunches” of corporate and individual welfare blinded everyone, without ever wondering how a member-state can leave the party of mispricing in an orderly and organized manner. That time may have come, but no one seems to be prepared for that. The required reforms for both Greece and the EU need time and commitment to deregulated markets which implies that it will follow a J curve where things will deteriorate first before better days come, and we always need to take into account the implementation lag.
I am not that optimistic that what is required will be done either on a Greek-state level or on an EU-wide level. Thus, we cannot but be cautious that the Son of Nothing will return and will repeat some additional lines from Steve Turner’s satirical poem:
If chance be
the Father of all flesh,
disaster is his rainbow in the sky,
and when you hear
State of Emergency!
Sniper kills Ten!
Troops on Rampage!
Whites go Looting!
Bomb Blasts School!
It is but the sound of the EU
(Disclosure: The last two lines are mine).
While I was contemplating all of the above, I heard from my daughter’s room a familiar sound. As I focused to figure out what it was, it hit me: It was the Pink Floyd playing their song called “The Return of the Son of Nothing”. Enjoy their lyrics with me.
Planets meeting face to face
One to the other cried, how sweet!
If endlessly we might embrace
The perfect union deep in space
Heaven might this once relent
And give us leave to shine as one
Our two lights here forever, one light blended
And in that longing to be one
The parting summons’ sound is drawn
I see you’ve got to travel on
And on and on, around the sun
Strangers passing in the street
By chance two separate glances meet
And I am you and what I see is me
And do I take you by the hand
And lead you through the land
And help me understand the best I can
And no one calls us to move on
And no one forces down our eyes
And no one speaks and no one tries
No one flies around the sun
Cloudless everyday you fall
Upon my waking eyes
Inviting and inciting me to rise
And through the window in the wall
Come streaming in on sunlight wings
A million bright ambassadors of morning
And no one sings me lullabies
And no one makes me close my eyes
So I throw the windows wide
And call to you, across the sky