Greece and Europe: An Unhealthy Affair
Remember the birth of the euro, when countries had to clear a set of economic hurdles to be considered worthy of membership? Those thresholds on debts and deficits had two purposes: to prevent profligate nations from tarnishing the new currency, and to make sure each country, once admitted, could keep up in bad times as well as good. The former is why Europe's leaders should jettison Greece; the latter is why their strenuous efforts to keep Greece in the euro are inappropriate and downright cruel.
I'm starting to think that Greece's increasingly desperate attempts to stay in the euro club hint at masochism, while Europe's contortions to prevent its first euro-quitter have a tinge of sadism. Less than two weeks after proclaiming victory in a referendum rejecting the bailout conditions he was offered, Prime Minister Alexis Tsipras has effectively ceded control over everything -- from which assets he must sell to reduce the country's debts to whether shops should open on Sunday. After months of resistance, his government "has accepted practically everything," Maltese Prime Minister Joseph Muscat said. Paul Krugman, writing for the New York Times on Sunday, had this to say:
This Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.
Reading the bank research about the proposed agreement, it's hard to find anyone who has a good word to say about it. "Half a deal," says Holger Schmieding at Berenberg, the German private bank. There's "bloated anticipation" about how much privatization can raise, says Brendan Brown at Mitsubishi UFJ. Grexit risks remain high and the asset sales target is unrealistic, says Nick Kounis at ABN Amro.
Related: Greece Default Watch
The centerpiece of the accord the Greek parliament will vote on this week is the establishment of a special privatization fund. The terms of the agreement specify that "valuable Greek assets" worth 50 billion euros ($55 billion) will be transferred to the fund; selling those off will raise 25 billion euros to recapitalize the country's banks, with 12.5 billion euros designated for paying off debts and the remainder used for unspecified "investments."
Jeroen Blokland, a Rotterdam-based strategist for fund manager Robeco, points out that the fund would be worth more than a quarter of what gross domestic product was at the end of 2013. By then, Greece's economy had a total value of 182 billion euros and had shrunk by a quarter in the space of five years, according to the country's statistics service. Since 2013, it's likely to have contracted even more.
When privatizations were first floated in 2011 as a solution to the debt crisis, 50 billion euros was often tossed about for how much might be raised. But as Gary Jenkins at LNG Capital points out, the Greek stock market is worth half what it was five years ago, suggesting that the crisis has badly impaired the value of Greek assets. Holding a fire sale doesn't seem like the best way to guarantee the country's economic future.
At any rate, Greece's track record on asset sales has been abysmal. Prime Minister Alexis Tsipras dropped plans to reduce the government's 51 percent stake in Public Power Corp., which controls two-thirds of the nation's power generation and almost all of its electricity supply, after his January election. By then, Greece had raised just 3.1 billion euros -- yes, just 3.1 billion euros in four years -- with the Syriza-led administration adamant it wouldn't carry through plans to sell the nation's ports, water companies or postal service.
Tsipras's capitulation means the creditors can now hang "for sale" signs on just about anything in the country. But the inflated optimism about how much cash might be raised shows how desperate everyone is to pretend that Greece can be made economically viable within the borders of the euro zone. That, I fear, is a mistake.
No one should underestimate how economically painful the initial separation would be. But when you're stuck in an unhealthy relationship with partners who say you've lost their trust, it's time to move on. And there's a lot to be said for the argument that Greece needs to regain self-determination over its monetary affairs, rather than ceding yet more sovereignty to its lenders.
I've written before that the euro would be better off without Greece, and Greece would be better off without the euro. Given the humiliating deal currently on the table, I'm more convinced than ever that keeping Greece in the economic straitjacket of euro membership is the wrong solution.
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