Greece: choosing between bad and worse

Originally published in Russian

From early morning Sunday July 5 the Greeks headed to polling stations to decide how painful the following debt crisis phase is going to be. The choice is between two alternatives, each is worse than the other. It is either new expense reductions or a possibility of default.

The source of the current severe crisis lies in the absence of a realistic strategy on integration of new members of Eurozone.

The other day Bernard Lietaer, common European currency ideologist and a Belgian finance expert, admitted that no one could imagine the Eurozone in such a situation.

When Greece entered the Eurozone in 2001 it was experiencing incredible euro-romanticism, and the main slogan would be ‘We have nothing to share’. The latter was based on the illusion that the invisible hand of Europe would be equally generous to all of its children. After Euro was introduced the Greeks went as far as getting rid of their drachm printing presses, assured that they would never need one again.

However, soon it turned out that despite the common currency the economies of the EU members are not equally competitive, and they do not benefit equally from the common market and the currency union. For there are production centers – like Germany, France and Poland – that get the biggest profit from the integration, and there are service centers – for instance, service sector makes up 81 per cent of the Greek GDP – that cannot find their place in the division of labor and keep losing their working places and revenues.

The severe crisis in Greece is not caused by debts – those of households and corporations are not large sums. The problem is that the key holders of the securities for the Greek government were the Greek banks, and during the crisis they were the ones that fell in price more than the other.

Different level of competitiveness of economies within the EU as a systemic  flaw of the Eurozone was obvious from the beginning. Still there was an illusion that the EU market would share the profits justly.

Apart from the Greeks’ inflated expectations, the second main reason for the crisis was the euro-formalism of the Brussels and Berlin. The EU and Germany in particular are partly responsible for the crisis, dubbed man-made by some experts. In 2010 and 2012 Greece received aid packages not to stimulate the economic growth, but to stabilize the financial sector.  Timothy Geithner, US former Secretary of the Treasury, said his German counterpart Wolfgang Schäuble was trying to punish Greece for its ‘extra weight’ in 2010. But there was no strategy behind this.

The 240 bln euro Greece received were spent – by creditors’ demand – to stabilize the banking sphere and paying off investors. It never solved the systemic problem of the Greek competitiveness. At the same time Athens had to cut on government spending, and the revenues were plummeting down. Since 2010 the Greek GDP has shrunk by unprecedented 25 per cent, the unemployment rate has reached 26 per cent and the youth unemployment has totaled 50 per cent. It is remarkable how these circumstances have not caused a revolution.

Still, in 2014 the Antonis Samaras government managed to stabilize the macro-financial situation in the country and achieve a minimal economic growth. Greece was slowly recovering. in December  Samaras addressed Brussels with a technical request of postponing the deadline for several credits and was turned down – for formal reasons. This was the last straw that broke the camel’s back – the Greeks’ patience was lost. The government resigned and the elections were won by the left-wing populist Syriza.

Prime minister Alexis Tsipras and Finance minister Yanis Varoufakis found themselves in the face of the same problems as was the previous Greek cabinet. Their economic program was romantic and unrealizable, it consisted in preserving euro, writing off 30 per cent of the debt and attract new investments. After the EU refusal the Greek authorities went for broke and asked the people to vote again to confirm their choice on a referendum.

The decision left the EU aghast. Ever since the negotiations with Greece ceased it was not the destiny of the Greek debt that was on the table, but the future of the Eurozone.

Now it is Greeks who the stability of euro depends on. And this blackmail will never be forgotten.

What is next? The alternatives are bad, one worse than the other.

Were the Greeks to vote ‘for’ the proposals of ‘the Troika’, Greece would remain within the Eurozone with all its problems unsolved. And they would even exacerbate, for there are no prospects for Greece to improve its competitiveness. Thus, the country would continue degrading, losing its revenues and working places as well as its population and historical perspective. The Greeks would most likely not put up with such a fate and start sabotaging the program imposed by the EU in six to twelve months. Greece may end up with a social explosion.

Were the Greeks to vote ‘against’, default would be almost imminent. Greece might be asked to leave the Eurozone and stripped of an opportunity to benefit from credits that international and European institutes provide. While remaining a EU member, Athens would have to overcome the crisis alone. In these circumstances the Greeks may start to improvise the way Argentine does looking for support among all kinds of possible partners, starting with China and Russia.

With such a probability on the horizon Western analysts are starting to worry that Athens may become a EU Trojan horse that brings divide into the European unity and lobbies Russia’s interests. Today the Greeks are accused not only of economic inefficiency and corruption, but also charged with their Byzantine history and even their Orthodox Christianity. In the eyes of the West these are all symptoms of being close to Russia. Robert Kaplan put it most bluntly in the Wall Street Journal by saying:

“EU must help Greece to avoid the Russian navy in Greek ports”.

Such a hysterical reaction is yet another proof that the West lacks a strategy – again, and its actions are dictated by formalities, illusions and phobias.

What could be an alternative for this behavior? There are three reasonable scenarios.

The first one is that the Greek crisis may encourage deeper integration within the EU through actual ensuring the leading roles of production states in exchange for their buying the debts of bankrupt states. Germany would have to define a new role for Greece in the EU division of labor. As a result the Greeks would lose part of its sovereignty whereas Germany would expand its power. It would be economically efficient but rather wounding for Athens. As for Germany, this scenario opens up a new era in the EU, which with time would look less like a union of nations and more like a group of Berlin’s satellites. The psychological effect of such a change would be enormous since it would shift the initial idea and the meaning of the dictionary term of the EU.

The second scenario implies that Greece may be excluded from the Eurozone for its own good with the customs duty on imports from the EU restored. After the default a donor conference may be organized to attract investments to the Greek production sector. In case of success the country may be then reinstated within the Eurozone. As a result the Greek sovereignty may strengthen and its economy may recover, although this may come at high cost to the population.

The third option is the most dramatic. The EU borders move to the north of Greece with the latter excluded not only from the Eurozone and the common market, but also from the Union itself. The Greek problems would then be Greek problems only, while the EU would be consolidating within its new borders. Despite the radical character of such a scenario, it would solve the EU’s Greek burden problem.

Russia should not get too excited about Greece. Athens is in serious need and in the near future is bound to toss from one center of power to another one hoping to find some help. The Greek debt reaches 323 bln euro, which equals the cost of seven Sochi Olympics and or a half of the cost of the Russian rearmament program 2020. Even considering the possibility of buying the debt, Greece may not become a long-term partner on these conditions. For its ties with Russia are not close enough to keep the Greek economy afloat. Russian aid to Greece should be conditioned exclusively by Russian interests and based on real economic opportunities.

However, if the EU persists on lack of strategy, the circumstances will encourage not only Greece but other discontented states like Italy, Hungary, Cyprus and Finland to look for better opportunities. And some of them will inevitably address Russia for assistance. What is best for Russia in this case? Continuing to develop mutually favorable ties seems most reasonable. The erosion of discipline within the EU might push Brussels towards negotiating its differences with Moscow.

Still, for Russia the main conclusions are not about the EU. It is the lesson Moscow should learn from the European experience and realize the necessity to thoroughly calculate the economic appropriateness of integration of new members in the Eurasian Economic Union, especially when it reaches the phase of building a currency union.