Yet another round of marathon negotiations yielded the tentative deal Europe reached with Greece for additional loans and another bailout. If approved by various European parliaments, the deal will be the third Greek bailout, giving the country yet another lifeline. Greek Prime Minister Alexis Tsipras, from the leftist Syriza party, said that he is opposed to the reforms mandated by Europe but will implement them. German Chancellor Angela Merkel, the subject of much ire from Greek opponents of European hardline negotiators, said that the positives outweigh the negatives.
The reforms to which the Greek parliament must agree today include increasing the corporate tax rate, raising the sales tax, streamlining revenue collection, cutting spending, and overhauling the pension system.
Bizarrely, these are the same reforms included in both prior European proposal documents, which were denied implementation by the Greek referendum vote. The referendum was announced by P.M. Tsipras months after he stopped applying the previous, already agreed to, Greek reform package. In other words, Greece, a country with enormous debt and teetering on the brink of default, spurned the people giving it money and went back on its word. One can only conclude that Tsipras stopped implementation, challenged Europe, and held a referendum as a political show. The indebted shouldn’t pretend to have leverage over their creditors.
Greece will implement all of these painful (as Syriza argues) reforms with the goal of staying in the Eurozone. The natural question is, why?
The euro was launched as a political project to unify Europe, an optimistic effort in such an economically and culturally diverse continent. The eurozone’s own rules surrounding debt and deficits were broken by its two largest members, Germany and France, within five years of the currency’s adoption. The underlying issue of the euro is that it is even theoretically impossible to have one currency, one inflation rate, and one exchange rate accurate enough to describe nineteen different countries with different economic prospects and debt levels. The eurozone’s original rules, designed to limit the debt levels of member nations in order to ensure currency stability, have been broken so many times that mentioning them is more worthy of laughter than analysis.
Indeed, we see this with Germany and Greece; the Germans have an enormous trade surplus, meaning they produce much and export it abroad, while the Greeks have a service-based economy with half of German industrial output. The IMF estimates that German exchange rates are undervalued by five to fifteen percent, and the German trade surplus means that German goods end up being worth less and less with time. There are several ways for the German government to address this imbalance, but every other country would necessarily make currency adjustments one of those ways. In the Eurozone, every country is shackled to the others.
Greece, though in no way the victim of its own irresponsible borrowing, is likewise shackled. The weak euro helps Germany export at a lower cost, ultimately costing exports and employment in its fellow eurozone countries, including Greece. The eurozone at present, which Greece is desperately trying to stay in, is hurting Greek production. Add in extremely burdensome Greek taxation and regulation, maybe with a dash of leftist political brinksmanship, and it’s hard to see how anything can go right.
The IMF has recently recommended more Greek reforms and a possible 30-year grace period for Greek debt. If the grace period is the only way for Greece to pay back its creditors, then so be it, but the Greeks should consider how much the euro hurts them as they fight for it.
(Update: The Greek parliament passed the negotiated reforms, 229-64)
Michael Moroz (275)