Chances Of Greek Euro Exit Have Not Diminished

 By Henry To 

 Forbes

http://www.forbes.com/sites/greatspeculations/2015/03/09/chances-of-greek-euro-exit-have-not-diminished/

Both European politicians and investors must be experiencing a sense of déjà vu with the current Greek government and its fruitless attempts to extract more lenient terms for its 240 billion euro bailout package orchestrated by the troika of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF ).

Back on October 4, 2009, George Papandreou’s center-left Panhellenic Socialist Movement party was elected with an overwhelming mandate by the Greek populace on a platform of anti-austerity measures and economic revitalization. Papandreou, whose father was elected prime minister three times, also promised an anti-corruption campaign and pledged an immediate 3 billion euro stimulus package to help the ailing Greek economy. Six months later, with Greek finances in dire straits, Papandreou was forced to request Greece’s first of two bailouts from the troika. In return for 110 billion euros in loans, the Greek government retracted its election promises and embarked on a series of austerity measures, structural reforms, and privatization of government assets.

Just over a year later, in November 2011, Papandreou was forced to resign as the general populace lost confidence in the Greek government amid a double-digit shrinkage of the Greek economy, a 20% unemployment rate, and a 25% jump in homelessness from 2009 to 2011. By early 2012, the newly-elected Greek government, led by Antonis Samaras of the New Democracy party, was forced to request an additional 130 billion euro bailout in an effort to save the country from imminent bankruptcy.

Three years after Greece’s second bailout, we are back to the same story. Again, the Greek populace elected a new government on a platform of avoiding hard choices and not surprisingly, in another repeat of history, the newly-elected prime minister, Alexis Tsipras, is backtracking on the vast majority of his campaign promises. In many ways, the Greek economy, unlike those of other euro zone member states, is worse off than ever. For example, the Greek unemployment rate recently ticked higher (from 25.9% to 26.0%) after having declined most of last year. Meanwhile, the Greek government still does not have access to the financial markets. Greek borrowing costs remains elevated, while Greek equities have had no bids, despite the ECB’s imminent implementation of its one trillion euro quantitative easing policy on Monday.

It is obvious that far from uniting Western Europe, the euro project is driving the 19 members of the euro zone further apart. A recent poll suggests that the majority of Germans wants Greece to exit the euro unless the country abides by its bailout terms, including austerity measures. Meanwhile, Bild, Germany’s biggest-selling mass-market paper (with a 2.5 million daily circulation), continues to whip its readers into a state of anti-Greek bailout frenzy. Through its inflammatory articles, Bild welds significant political power and any German politician who sign up for an unconditional Greek bailout will thus be quickly run out of office.

The political uncertainty is severely damaging the Greek economy. After growing by 0.7% in the third quarter of 2014, Greek economic output fell by 0.2% in the fourth quarter. Since the beginning of the Greek sovereign debt crisis in late 2009, Greece has lost about one-third of its private deposit base, or about 70 billion euros. Greece’s private deposit base is now estimated to be 147 billion to 148 billion euros, down from 220 billion euros in late 2009. Investors have exited or are putting projects on hold until a lasting deal is sealed with the Troika (ironically, the Greek government itself is discouraging foreign investments by blocking Eldorado Gold’s construction of a processing plant). To make matters worse, the newly-elected Syriza government is being widely ridiculed for a proposed reform to hire ‘students, housekeepers and even tourists” to clamp down on widespread tax evasion. Such a reform, if implemented, will breed a new layer of distrust and reduce economic activity still further.

History suggests that economic and currency unions could only work if: 1) wealthier states directly subsidize poorer states with no strings attached, and 2) there is constant and free movement of labor across states so workers and their families could relocate to more prosperous areas and balance out economic growth. For example, U.S. states such as New Mexico and West Virginia have consistently received more funds from the federal government than they collected in taxes. These ‘state subsidies’ were supported by funds from New York and Delaware. In recent years, immigrants from other parts of the U.S. flocked to states such as Texas and North Dakota as the U.S. shale oil industry boomed. Neither option exists within the Euro Zone or are available to Greek citizens.

Without direct, unconditional cash subsidies, the chance of a long-term Greek solution—one that allows Greece to stay in the euro—is very slim. A recent McKinsey study gave Greece a dubious #7 ranking among the world’s most indebted countries. At 317% of GDP, the Greek debt load (including private and government debt) simply cannot be reduced through austerity measures, especially given today’s environment of weak global economic growth. Unless Greece’s substantial debt levels are restructured, we will likely see this movie again in a few years. In that case, Greece may do better by exiting the euro zone rather than staying in.