Letter to the Greeks

JUN 29, 2011 09:38 EDT

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Dear Greeks,The anger you feel about your plight is understandable. You are staring at several unpalatable alternatives, all of which will involve big cuts in living standards for years to come. But the options you face are not all equally bad. You must avoid an emotional reaction that leaves you in an even worse state — and you must ostracise those who resort to violence.

One option is to persuade your politicians to say “no” (or “ohi”) to the euro zone/International Monetary Fund austerity plan. The scheme is not perfect. But rejecting it out of hand would be childish. If there is no agreed plan, you will get no money. The consequence isn’t just that the government would default on the loans it took out on your behalf. There would be a run on your banks and an even deeper recession. You would probably also lose your remaining friends in Europe who would consider you spoiled brats.

That’s not to say you should repay all your debts. Even with Herculean efforts, that won’t be possible. But you can probably negotiate an orderly default some time in the next year. An orderly default would be one where your debts were cut, say in half, but in the context of an agreed euro zone/IMF programme which provided you with enough money to survive until you are healthier.

You might ask why you can’t have an “orderly” default now. Wouldn’t that be better than waiting? The answer would be “yes” if an orderly default could be agreed now. Unfortunately, the rest of Europe isn’t yet ready for your default. So they won’t agree on one; and that, by definition, means a default now would be disorderly.

Fast forward a few months, though, and the rest of Europe might be in a better shape to withstand a Greek debt restructuring, particularly if they’ve used the time well and shored up their banks. You, too, might be in a better position to negotiate a new package — provided you recapitalise your own banks and squeeze your budget deficit so you are less dependent on external money.

There’s no denying this course of action would be painful. Your challenge isn’t just to cut the deficit but also to restore your economic competitiveness. That means further cuts in living standards.

Is there a short-cut that avoids this pain: bringing back the drachma? Wouldn’t that restore competitiveness? The answer is probably no. It’s true that you should never have joined the euro. But nobody has yet come up with a way of putting this particular toothpaste back in the tube without creating a giant mess. Again, the weak link is your banks. If your compatriots thought the drachma was about to come back (at what would be a much lower rate), they would be crazy to keep their money in a Greek bank. There would be a panic before the new drachmas were even minted.

All this may seem terribly unfair — and to an extent it is. Politicians of both major parties have let the people down for decades. They presided over a monstrously inefficient public sector, often staffed by friends and clients. They spent too much money, and then cheated on the figures so Greece could get into the euro. Corruption and tax evasion have been rampant — and gone largely unpunished.

You can also blame foreigners for your plight. Foreign banks were among those that lent you all that money. Some also helped you fiddle your figures. And the rest of the euro zone turned a blind eye when you ran up astronomical debts. But remember: your creditors (both banks and governments) won’t get off scot free. When you default, they will pay a hefty price.

You should also realize that you are not blameless. Many of you were evading taxes; many of you were enjoying those highly-paid public-sector jobs; most of you were consuming more than you produced and retiring too early. You also voted for your useless politicians. Actions have consequences. By all means, protest. But focus on the right goals, don’t cut off your nose to spite your face by turning away foreign help — and, what’s more, keep it peaceful.