Why I’ve Changed My Mind About Grexit
Daniel Munevar
Daniel Munevar is a 30-year-old post-Keynesian economist from Bogotá,
Colombia. From March to July 2015 he worked as a close aide to former
Greek finance minister Yanis Varoufakis, advising him on issues of
fiscal policy and debt sustainability. He was previously fiscal
advisor to the Ministry of Finance of Colombia and special advisor on
Foreign Direct Investment for the Ministry of Foreign Affairs of
Ecuador. He is considered to be one of the foremost figures in the study
of Latin American public debt. Here he talks to Thomas Fazi about the
latest bailout deal, explaining why the events of the past few weeks
have made him change his mind about Grexit.
What do you make of the latest bailout agreed between Greece and its creditors?
Well, first of all it’s still not clear
that there will be an actual agreement – there are several parliaments
that need to approve their country’s participation in an ESM bailout.
And even if they somehow reach an agreement, there is simply no way it
can work. The economics of the program are just insane. They haven’t
announced the precise fiscal targets yet, but if we look at the Debt
Sustainability Analyses (DSAs) published by the IMF and the Commission,
they both state that the target should be a 3.5% primary surplus in the
medium term. But if you look at what has happened over the course of the
past five years, Greece has managed to ‘improve’ its structural balance
by 19 points of GDP. During that same time, GDP has collapsed by about
20% – that’s an almost one-to-one relation. So if you start from -1% –
which is the general assumption for this year – to make it to 3.5 means
you need an adjustment of over 4% of GDP, which means GDP will collapse
by another 4 points between now and 2018.
This brings us to another point, which
is that the current agreement is just a taste of things to come. The
final Memorandum of Understanding (MoU) is definitely going to contain
much harsher austerity measure than the ones currently on the table, to
offset the drop in GDP that we have witnessed in the past months as a
result of the standoff with the creditors. The problem is that these
Memorandums are turning Greece into a debt colony: you’re basically
creating a set of rules which, as the government misses its fiscal
targets – knowing for a fact that it will –, will force the government
to keep retrenching even more, which will cause GDP to collapse even
further, which will mean even more austerity, etc. It’s a never-ending
vicious circle.
This underscores one of the core
problems of this whole situation: i.e., that the institutions have
always disentangled the fiscal targets from the debt sustainability
analyses. The logic of having debt relief is that it allows you to
basically have lower fiscal targets and distribute over time the impact
of fiscal consolidation. But in Greece’s case, even if there is debt
relief on the scale that they are suggesting – which is unlikely –
Greece will still have to implement massive consolidation, on top of
everything that has been already done.
At least debt relief is being openly discussed now…
Yes, that’s a good thing. But the
creditors have known all along what the IMF has only recently admitted:
i.e., that Greece was/is insolvent and that its debt was/is
unsustainable. The IMF’s latest DSA is very clear on that point. But
previous non-published DSAs all said pretty much the same thing: Greek
debt was/is fundamentally unsustainable. But the Europeans never agreed
to that, even though it was clear to everyone that without debt
restructuring – and, importantly, without tying this to lower fiscal
targets – there was never going to be a sustainable deal. Only now is
the issue starting to be openly debated and that is partly because the
situation has gotten so bad that it can’t be ignored any more, and
partly because, when the risk of Greece exiting the euro became evident,
the US started putting pressure on the IMF to put pressure on Europe on
the issue of debt restructuring.
Speaking of Grexit, isn’t it
somewhat contradictory that Germany opposes debt relief but is willing
to contemplate a solution that would almost certainly cause
Greece to
default on its external debts – meaning that Germany would lose all the money it is owed?
If you look at this in purely economic
terms, yes. It doesn’t make sense. But this whole drama was never about
economics, or about Germany not losing any money. We are talking of a
German exposure of about 80 billion euros, after all – peanuts, in the
larger scheme of things. This is about making an example out of SYRIZA
and setting an example for the rest of Europe. Everything that has
happened over the past months was simply a way of telling the people of
Europe: ‘Look, you shouldn’t vote for parties that have this type of
agenda because we will crush you. This is what happens when someone
doesn’t follow the rules or refuses to pay the bills. It’s either
austerity or you’re out’. Tsipras said it clearly – that he signed the
deal with a knife to his throat. This was Schäuble’s argument for
Grexit: if the Greeks don’t want to pay, let’s kick them out, watch them
suffer, and then use that as a catalyst to put the fear of God into all
other indebted nations.
Was the Greek government aware
right from the beginning that the creditors were not willing to budge on
the issue of debt relief?
Yes, but Varoufakis’ position was that
Greece should nonetheless fight to get a deal that made economic sense –
i.e., one that included debt relief and sustainable fiscal targets.
But, as he explained in his interview to the New Statesman,
all along he was working under a collegial decision-making system where
he was always in the minority. So his actual capacity to do things was
quite limited. The point is that the majority of Tsipras’ inner circle
sincerely believed that if Greece made concessions, it would be able to
achieve a good deal. Which is why after the Riga Eurogroup, Tsipras
essentially sidelined Varoufakis and decided to start making concessions
to see if that would work. This has been the position of the government
in the last months. If you compare the proposals from March with the
ones that are now on the table, there has been a complete turnover for
the worse. And that is because these people believed that through
concessions they could get a good agreement – which is also why, up
until the referendum, debt relief wasn’t even on the table. But of
course it didn’t work, because the creditors were not willing to give
Greece anything that it could claim as a political victory.
Do you think it would have been better for the Greek government to stick to Varoufakis’ debt-relief-or-nothing strategy?
In all honesty, it’s hard to see how
things could have gone differently. The Greeks had no money and no
power. The only weapons they could bring to the negotiating table were
reason, logic and European solidarity. But apparently we will live in a
Europe were none of those things mean anything.
So both strategies – Varoufakis’ and Tsipras’ – were bound to fail from the start?
Yes, it was a trap. Every time the
European institutions faced a challenge from a national government in
the past they resorted to threats – raising the interest rates of
government bonds, threatening to shut down the banking system, etc. – to
bring it back into line. And in the past these threats had always
worked: the governments always backed down. And they assumed that with
SYRIZA it was going to be the same. But Greece didn’t back down. Which
is why the institutions reacted in such a vicious manner.
Do you think the introduction of IOUs – as suggested both by Varoufakis and by Schäuble – was a viable alternative for Greece?
The problem is that once you start
introducing IOUs to pay salaries and pensions, you end up going down a
slippery slope, because people are going to assume that this is the
first step towards actually leaving the euro, so they will adjust
accordingly and hoard available euros. As a consequence, economic
activity would decline even further and a higher share of tax revenues
would need to be denominated in IOUs. This in turn would force the
government to issue even more IOUs to cover its funding. So you would
basically find yourself in a self-fulfilling cycle, which would
eventually lead to a de facto exit.
This is why the Greek government refused
to use this financing method, because the risk of starting a process
from which you cannot come back is real. Look at what is already
happening now, with Greek banking deposits: in a sense Greece is already
one step out of the euro, because it’s in a situation in which the
deposits in the bank accounts are not trading at par, meaning that one
euro in the banking system is effectively worth less than a euro in
cash. This is because the simple talk of exit has created a risk
differential between cash and deposits, since it’s the deposits that
would get converted into drachmas in the case of an exit. This is why a
lot of businesses in Athens are not willing to accept electronic
transactions. With IOUs it would very likely be the same: you would put
in motion a self-fulfilling mechanism that could easily lead to an exit,
regardless of whether the government wants it or not.
Which is probably exactly what Schäuble was hoping for…
Exactly. And in the end he will probably
get what he wants – i.e., a Grexit –, because this deal doesn’t solve
anything. Not for Greece, not for the eurozone. It actually makes the
underlying problems even worse. As I said earlier, even if you provide
all the debt relief that is on the table, if that’s not connected to
lower fiscal targets you’re still going down the path of contraction.
Which means that it’s only a matter of time before the Greek economy
goes off the rails and the whole discussion about Grexit comes back to
the fore.
Do you think that Greece should opt out of the euro?
Look, I’ve always been against Grexit –
like Varoufakis. But now, as a result of the bailout agreement, Greece
is a situation where the costs of staying in the euro have gone up so
much that it’s possible to establish that there is a trade-off between
going out – and facing all of the short-term costs of leaving the euro –
versus staying in a circumstance where you are forced to renounce your
sovereignty without getting any economic relief in exchange. I think
that Tsipras has made up his mind on this issue and has concluded that
the best thing for Greece is to stay in the euro, regardless of the
costs. And it’s a respectable decision. But once you start assessing the
economic logic and everything that has happened, you can’t but conclude
that Greece has no future in the euro.
So this deal simply postpones the
inevitable. Because it’s clear at this point that there is not enough
political will in the eurozone to fix the structural problems of the
euro. Which, interestingly, is exactly what the IMF is implying in its
latest DSA, which essentially states: either you do a haircut or you
establish a system of transfers for Greece – in other words, you create a
federal Europe. We all know that this is the original sin of the euro:
to have established a common currency without a system of common
transfers. But there is no will to fix it. So we might as well accept
that it doesn’t work. This shouldn’t be a taboo in Europe anymore after
what happened in Greece.
Where does Varoufakis go from here?
Well, based on his ‘no’ vote in the
parliament, it would seem that he is de facto positioning himself to the
left of Tsipras, which could eventually translate into an actual
political alternative. So look out for that.
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