GREECE AND EUROPE (1)
The Real Choice is Win-Win or Lose-Lose

by Kimon Valaskakis PhD

Greece and Europe are contemplating divorce. In the first of a two part series which I published on March 17 2015 in the World Post, the global division of the Huffington Post. I have argued that this would be a masochistic lose-lose outcome when alternative win-win solutions exist. The present essay is an expanded version of the World Post article which can be found at HuffingtonPost It’s also permanently listed in my author archive.

Following the recent Greek election where a new government was elected on an anti-austerity platform, an attempt to renegotiate the Greek Debt under the supervision of the so-called Troika (EU, Euro Zone and IMF) has, so far, been inconclusive. The final agreement (or non-agreement) will be decided upon in the next few months, although past experience has shown that most so called ‘agreements’ tend to be quite temporary. Behind this ambivalence and the protracted negotiations, what are the real choices ? How can we fly above the accountants quarrels to higher ground and see the whole forest ?

Many observers have presented the negotiations as a standard win-lose game. Either Europe ‘wins’ and Greece ‘loses’ or vice versa. In this post and its sequel I argue that the real choice is between ‘win-win’ for both or ‘lose-lose’. In developing my arguments I must acknowledge my intellectual debt to a colleague and friend John Evdokias, portfolio manager for his perceptive insights.

Argument 1 : The Debt Issue is Surprisingly Insignificant

The debt issue, blown out of proportion by professional alarmists, is actually relatively trivial for many reasons.

First the debt itself is small by global standards. 315 billion euros is high for you and me but small in the European and world economy. It can be managed. What is much more problematic is Greece’s capacity to repay it quickly, given current conditions.

The debt is 175% of GDP because the Greek Economy has contracted for the last 6 years due to imposed austerity. To ask for quick repayment is like asking an unemployed worker to immediately reimburse his mortgage. Not possible.

Second, since the debt is held not, thankfully, by the Mafia but by supposedly ‘friendly’ institutions including the European Central Bank and the IMF, what should be at issue are convivial repayment modalities, not the principle of repayment which has been accepted by both parties, These modalities involve (a) the date of maturity and (b) the rate of interest.

Concerning the date of maturity, it may surprise the reader to discover that long term loans (going to one hundred years) are increasing in popularity. At one point Disney Corporation obtained such a loan and as Evdokias pointed out “if a Mickey Mouse company can get such a loan, why not Greece”. Some countries allow 100 year mortgages and some companies issue 100 year bonds. What would have been unthinkable many years ago may become commonplace.

So, an extension of repayment of the Greek Debt would not be absurd perhaps to a hundred years but to a long enough time horizon.

As far as the rate of interest is concerned, as we all know, we live in a period of very low rates which are, in some cases, actually negative. What that means is that lenders are now paying to lend, an aberration a few years ago but now more and more frequent.

The reason behind both trends, longer repayment periods and lower interest rates is simple.

Contrary to popular belief, the world is awash with capital both private and public (via money creation and quantitative easing). The challenge for investors is, now, not where to get the highest returns but where to park their money, especially when the capital they themselves invest is usually obtained at extremely low rates. When you lend other people’s money, as banks do, you expect less than when you invest your own.

Given the above, a Greece-Europe divorce based on disagreement on debt repayment would be ridiculous. That’s not how things should be settled between members of the same family.

As to future debt, the question of structural reform, (preventing further imprudent borrowing etc.) is valid and will be addressed in my second post. For now, the argument I am advancing is that past debt issues should not be the casus belli or the cause of the divorce.

Argument 2 : Greece’s Exit From The Eurozone Would Be Very Dangerous For Both Parties 

The 19 country Eurozone with a common currency, the euro, is a work in progress. It was designed as a one way street leading towards more and better European integration.

In fact there is no clear mechanism to expel a delinquent member. In addition, consider that new members, joining the European Union, are now obligated to eventually join the Eurozone, although this does not apply to the original members.

If Greece leaves the Eurozone, it may have to leave the European Union itself.

The Eurozone was meant to be followed by some sort of fiscal union and ultimately a political union : the United States of Europe. This has not happened yet, because the economic problems of Europe, at large, since the Great Recession of 2008 have created many Euro skeptics.

A withdrawal from the Euro Zone and the adoption of a new national currency by Greece, may well offer short term benefits for that country since the new drachma will, most likely, be devalued vis-a-vis the euro thus making exports more competitive (and imports more expensive).

But how long will that benefit last ? The strategy of devaluation works if one country devalues and not others. In the 1930s Western countries, faced with depression and mass unemployment, resorted to competitive devaluations, which cancelled each other out. As a result everyone lost.

Furthermore, Grexit, as it is called, may not be an isolated phenomenon. If successful, other countries may be tempted to follow suit, including Spain, Italy and even France, if Marine Le Pen were to become the next French President .

Grexit could then be the first step to a break-up of the entire euro zone. It is very easy to destroy something and much more difficult to build it up. The negative momentum which this would entail, not immediately but over time, would be disastrous for the Old Continent and put the entire European Project in grave jeopardy.

Argument 3 : Beyond economics, serious geopolitical dangers lurk for both parties unless the issues are resolved.

If Greece is forced to stay in the Euro Zone under humiliating conditions this may not be the end of the matter. Right now the Syriza Government is the last bastion for left of center ‘respectable’ parties. If Syriza fails, then much more extreme and less ‘respectable’ parties from the far left and the far right, may be elected with ominous consequences.

Greece will then be vulnerable to serious social upheaval. Putin’s Russia may well seek an interesting new pied a terre in Greece, invoking the common link of orthodoxy. This will not please Western oriented Greeks. The upheaval, may, God forbid, lead to armed violence, including a potential civil war. It must not be forgotten that Greece went through a particularly bloody civil war, on class lines, after the end of World War II, where the extreme left opposed the extreme right. The scars are still there.

Not only would an unstable and weakened Greece be bad news for itself, it would also be very bad news for the entire European Union.
Beyond economics, Europe faces three additional threats. One comes from a newly aggressive Russia, as discussed above seeking to reverse the demise of the Soviet Union. A second one comes for the expansionist and disruptive ambitions of ISIS and radical jihadi terrorism. A third comes from the disaffected euro-skeptics, all over the Continent, some advocating a departure from the euro zone, others against the European Union itself and still others, promoting separatist movements designed to break up existing countries.

The balkanization of Europe would be bad, not only for this continent but for the world, because the European integration experiment which was started after the Second World War was initially seen as a model for better global integration. It could still serve as such a model, once it is restructured, perhaps even reinvented.

To give all this up for a mere question of debt, in a world drowning in unused capital would be to show unbelievable myopia and even masochism.

The Greece-Europe marriage can and must be saved. A reasonable accommodation is quite possible because of the win-win vs. lose-lose potential.

As self appointed ‘marriage counselor’ my recommendations for this accommodation will be
found in a subsequent post.

 

Dr. Kimon Valaskakis is a former ambassador of Canada to the OECD and now president of the New School of Athens Global Governance Group a global think tank newshcoolofathens.org. He is also professor emeritus of economics at the University of Montreal. Valaskakis is the author of a new book : Buffets and Breadlines : Is the World Really Broke or Just Grossly Mismanaged ?Amazon.com