The Vigorous Euro
The last months were new to the European Union and the IMF. Elusive new: closed banks, capital controls, the first IMF default by a developed country, the deficit of a multi-billion-euro bailout, a referendum about creditors’ restructuring plan, discussions about a Grexit, and the penury of the Greek people.
But no matter how deep the Greek financial crisis is, the Euro is the second most important currency in the world. The Euro has a share of nearly a quarter of global foreign exchange reserves, although Europe is the world’s second smallest continent. Almost sixty countries and territories around the world are either directly or indirectly backing their currency to the Euro.
The Greek financial crisis is not forcing the Euro as a currency into a dilemma, that is beyond dispute. Greece represents only two percent of the Eurozone GDP, and less than one-half of a percent of world GDP. Europe and the rest of the world would probably survive a Grexit quite well as we see that the links between Greece and the rest of the world are limited.
Sunday, July 12th
Funeral or resurrection? The Greece debt hits the rocks. Today, July 12th will decide whether Greece will stay afloat inside the euro or if Greece will be kicked towards the Grexit. Today the leaders of the euro-zone countries will discuss Tsipras’ proposals about reforms and cuts. It is again the “final deadline” as Donald Tusk, the president of the European Council, describes the present day.
The proposal which was delivered by Tsipras, the Greek Prime Minister, divided the opinions of Europe’s finance ministers. While François Hollande, the French president, called the proposals “serious and credible” Schäuble, Germans Minister of Finance, told to the FAZ: “These proposals are missing central important areas of reforms to modernize the country and to advance the long-term economic growth and sustainable development”.
Yesterday’s meeting of the Euro finance ministers was unpromising and will be continued today. Due to reports of the SZ, a few ministers had strong objects against the proposals of Greece. Schäuble once again stressed out that every trust was destroyed in recent developments.
The Greece flip-flop
Greece complies with its latest proposal with most points the creditors proposed last week. The new VAT reform states a standard rate of 23%. The creditors want a 23% VAT rate on hotels as well, but the Greek government seems to insist on a discounted 13% VAT rate on hotels. The pension reforms demanded by the creditors have been accepted, the creditors words are copied and pasted into the new document. The minimum income supplement for pensioners will be stopped as the creditors had demanded. But Greece is still not willing to cut military spending by 400M€ per year as the creditors demanded, they prefer a 100M€ cut this year. All other mentionable points (concerning the labor market, privatization, public financial management) are in common with the creditors demands in their last proposal. Leonid Bershidsky from Bloomberg pointed out that the Greeks did hold their referendum basically for three things: “1) a lower VAT rate for hotels; 2) an extra 300 million euros in military spending; 3) no privatization revenue targets.”
Whatever the Greeks concessions are, any deal with the creditors will stay in contrast to everything Mr. Tsipras’ government has done this year. It will bring further cuts in government spending, higher taxes and short-term pressure on the economy. This leads to a political problem: a democracy deficit. Mr. Tsipras had two choices. The first one was to cherish the hope he promised to the Greek people, what will lead to a devasting Grexit (the people do not want). Now it is up to the creditors whether they accept or refuse Tsipras’ second choice: his proposal.
The Money Issue
The European Stability Mechanism (ESM) is only allowed to grant stability support if the European Commission in liaison with the ECB has assessed the financial situation of Greece as a risk of the financial stability of the euro area as a whole. The Commission and the ECB stated that without a stability support of the ESM the financial risks of Greece are way too huge that they can’t be handled and will result in a collapse of the Greece banking system. According to the European Commission and the ECB, the support of the ESM is necessary to prevent the well-assured insolvency of Greece. An insolvency, according to them, will lead to a collapse of the banking sector and the Greek citizens will suffer a significant income loss.
This argumentation is criticized heavily by several European politicians. They claim that a Grexit would have no effect on the European economy and the stability of the euro area at all. This argumentation should be scrutinized especially because political consequences and riots have not been thought about.
Solution in Fractions
Harsh criticism of the Greeks proposal comes from several European financial ministers who tried to find a common opinion in today’s negotiation marathon.
Schäuble published a position paper where he criticized the current proposal of the Greek government rigorous. He proposed two possible choices: Either Greece will adopt as soon as possible additional necessary reforms, cuts, and political security or Greece should be “offered swift negotiations on a time-out from the euro zone, with possible debt restructuring, if necessary”.
This half-half approach is not a permanent solution but just a strategy of saving time. Schäuble wants Greece to be kept out of the euro zone for at least five years. But the longer Greece is adapting a complementary currency, the less likely will be a return to the Euro.
And as The Economist brilliantly points out in his Leader article of currents issue:
The irony is that the new lending and debt-forbearance by Europe needed to prevent Grexit from causing a catastrophe are the elements needed to keep Greece in the euro.
By demanding a complementary currency, Schäuble just kicks his responsibility down the road on behalf of the European Dream, which is dreamt by so many young Europeans as never before.
To all intents and purposes, a Grexit is not necessary and a deal between Greece and the creditors should not be that hard but it seems probable as never before. Mr. Tsipras offered a proposal which is close to those demanded by the creditors. In spite of all concessions by the Greek government, diplomats still estimated a Grexit at 50/50 last night. The European Union already planned humanitarian aid for Greece if they will be forced out of the Euro today, on July 12th.
The International Monetary Fund (IMF) estimated in 2012 that any currency which will replace the Euro within Greece will devalue by half. Greece will lose 8% of GDP and the inflation will rise approximately to 35% because the cost of imports will zoom upwards.
As the IMF estimated, a Grexit will hit Greece’s economy harder than staying in the Euro and a Grexit will cost the creditors a lot more money.
Why risk a Grexit? Is it correct to blame a left-wing party for the future of Greece and Europe as a whole?
Many Greeks took Germany’s resistance personally. It is shocking to see posters and graffiti denouncing what they see as the rigidity of Chancellor Angela Merkel and Wolfgang Schäuble.
The European integration seems to stagnate since recent months. The current crisis-tore Germany and Greece-wide apart. Greece people revived memories of the Nazi occupation and Germans were insulted as Nazis. The BILD tabloid called the Greece people again and again lazy and provoked an anti-European mood which has to be prevented.
To ensure the European future for the next Generation the option of Grexit is not acceptable. TheEuropean future may not be gambled because of a left-wing Syriza party nor some conservative national parties in Europe!
Both sides are needed to cut a deal. Europe planned the worst but is hopefully choosing the future.