- Moreover, private creditors were not off the hook, and, in 2012, debt was substantially reduced: The 2012 private sector involvement (PSI) operation led to a haircut of more than 50% on about €200 billion of privately held debt, so leading to a decrease in debt of over €100 billion (to be concrete, a reduction of debt of 10,000 euros per Greek citizen).
- .. To take an extreme case, if the European creditors were willing to simply forget all existing debt and extend further financing, there would be little need for more adjustment. But, clearly, there were and are political limits to what they can ask their own citizens to contribute.
- .. The introduction of a new currency, and of redenomination of contracts, raises extremely complex legal and technical issues, and is likely to be associated with a further large decline in output. It may take a long time for the depreciation of the new currency to lead to a substantial turnaround.
How a Chinese puzzle could enable the Greeks to have the last laugh
The German/EU offer maintains that the price for staying in the Euro is possibly 10 to 15 years of austerity with no alternative industrial model. There should be no debt forgiveness and there should be years of low to zero growth as the Greeks grind out a meagre existence largely from tourist euros. Because there is no capital, this will occur at a time when Greek tourist assets will plummet and those that are worth something, such as tourist hotels, will be bought off by German and other investors for half nothing.
In time, the Greeks will end up as workers in the tourist industry, working for foreign owners of the assets. The profits from these assets will be repatriated back to Germany, boosting the German current account surplus, while the wages for this labour will be spent in Greece on imported goods, which may or may not be made in Germany. Basically Jamaica with ouzo!
.. Why not do what Ireland has done over the years and adopt some other country’s currency?
What’s in it for China? Everything!
The Chinese get a foothold into Europe. They invest billions into Greece, where they reassemble Chinese goods into Europe with no tariffs or hassle. They gradually move up the value curve, making ever more sophisticated goods in Greece – just as the Americans have done here.
.. After all, Sweden, the UK and Denmark don’t use the Euro and are in the EU, why not Greece?
Greece’s Surrender: A Return to 1919, or to 1905?
But in bringing Greece to the brink, and demonstrating that its creditors were willing to see it collapse if it didn’t buckle to their demands, they did, arguably, succeed in showing up the eurozone as a deflationary straightjacket dominated by creditors. And they did this with all of the world watching. “One must know who the enemy is, in order to fight the enemy,” Alex Andreou, a Greek blogger who is sympathetic to Tsipras, wrote last week. “Syriza has achieved that. Now, it is over to you, Spain. Take what we’ve learned and apply it wisely.”
The Eurozone’s Fault Lines
Instead, unelected eurozone officials have taken sides in the standoff, warning of catastrophe if the Greeks refuse to accede to the creditors’ demands. The European Central Bank aided a run on Greek banks by refusing to supply enough liquidity, in the process violating its legal mandate to uphold financial stability across the currency union. Now, the central bank may only restore liquidity in a piecemeal manner as Greece complies with each step of the agreement with its creditors.
.. Following the deal on Monday, Greece faces a herculean task: Meet a very short deadline to pass a raft of reforms through Parliament, agree to yet more austerity and cede control over privatization of state assets to the eurozone in return for another bailout.
.. Rather than fostering economic convergence, the euro is driving its members apart. Despite a common eurozone interest rate, borrowing costs vary widely across the currency union because of differing rates of inflation. So-called real interest rates are higher in economically weak member states like Greece, where inflation is negative, and much lower in economically strong countries such as Germany, where inflation is positive.
As a result, capital and skilled labor concentrate in the richer regions.
.. And if there is a Greek exit, investors will be fully aware that a sovereign default could lead to a banking sector collapse. Many eurozone economies could face deep recessions despite having barely returned to their pre-crisis size. The course of Greek politics could easily be repeated elsewhere, with anti-austerity and anti-establishment parties coming to power