Jan 23, 2015
Here we go again. There is talk of Greece exiting the euro, and the German government has tried to say that it would be no big deal for Europe, then apparently walked back from that position. At the same time, the German government appears to be trying to influence the Greek election scheduled for January 25 by saying that if the left party Syriza wins, a Greek exit will follow.
Syriza, led by the popular and charismatic Alexis Tsipras, is not threatening to leave the euro but promises to renegotiate Greece's unsustainable debt. Syriza also calls for reversing Greece's devastating austerity policies, imposed by the European authorities, which have brought the country six years of depression and more than 25 percent unemployment.
We have seen most of this story before, but the way it is presented in most of the press can be confusing. Most importantly, all this talk of how financial markets will respond to the election is somewhat misleading. The financial markets are not the driving force here. Rather, it is the European authorities, led by the European Central Bank. Mario Draghi, the president of the European Central Bank, proved this beyond a shadow of a doubt in July 2012, when he put an end to the financial crisis in Europe with just a few words, announcing that the bank was "ready to do whatever it takes to preserve the euro."
He didn't even have to back the statement up with any hard cash. Yields on the troubled European governments' bonds - including the potentially euro-meltdown-size debt of Italy and Spain -- went into decline and the financial crisis of the euro was over.
What this showed the world, for those who were paying attention, was that the previous two years of financial crisis (and recession) had little to do with what financial markets "thought." Rather they were a direct result of the European authorities' prolonging the crisis in order to extract concessions from the troubled governments of southern Europe.
Unfortunately, the end of the financial crisis was not the end of the eurozone's problems; since the fiscal austerity continued, the eurozone economy did not really recover. Unemployment, at 11.5 percent for the eurozone, remains near record levels; and the Euro Area Business Cycle Dating Committee has yet to announce an end to the second recession that began three years ago.
Tsipras is trying to walk a tightrope between demanding what the Greek people desperately need and want, and not allowing the European authorities to scare the electorate from voting for his party. The European authorities want Greek voters to think that they have no choice, that a vote for Syriza means that they will be forced out of the euro and economic disaster will ensue.
But in reality this is not true. Most importantly, Greece has quite a bit of bargaining power that has not been used. Whatever the German government says, it has a real and justified fear of kicking Greece out of the eurozone. The fear is not what will happen to financial markets - which the European Central Bank has demonstrated that it can take care of - but the prospect posed by former International Monetary Fund economist Arvind Subramanian in 2012: That Greece would, after an initial crisis, recover so much faster than the rest of the eurozone that other countries will also want to exit.
A robust recovery is by no means guaranteed - it would require good economic management - but for a number of reasons it is the most likely outcome of leaving the euro. This is even more true today than it was a few years ago, as Greece is running both a primary budget surplus and a trade surplus.
Greece continues to face a dismal future under the current European program, with more than 18 percent unemployment even in 2017. This is according to IMF projections, which have been consistently over-optimistic in the past. Mass unemployment will also be the norm for the eurozone, with more than 10 percent unemployment in 2017, even if it the eurozone authorities' program is "successful." Not to mention all the other sacrifices in living standards, including cuts in health care spending, public pensions, minimum wages and government services.
This prolonged punishment and regressive social engineering from the European authorities is only possible because the electorate has had little or no influence over the most important economic policy-making. The Greeks are trying to win some of that back; hence the intimidation from on high.
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