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Friday, 10 February 2012

Inevitable Greek default and a return to the drachma, so why delay?

Financial analysts continue to tell us that Greece has reached the eleventh hour and a deal must be struck with its creditors if the country is to receive any further bail-out money from the International Monetary Fund and the European Union. Despite this, and the threat of the country being forced to leave the eurozone and return to the Greek drachma, there seems to be a glaring lack of urgency. Greek leaders are struggling and have been since a deal was first supposed to be struck in early January. On the one hand, they have citizens holding general strikes and telling government they are unable to bear the pain - with unemployment having climbed to 19 per cent. On the other hand, economists right across the globe are telling the Greek administration it must cut further and do it faster.

With an election due in April, the deal and subsequent €130bn bail-out must come before March 20 – if Greece is to avoid default on a €14.5bn bond. Writing for PublicServiceEurope.com, Professor Philip Booth of the Institute of Economic Affairs think-tank, in the United Kingdom, claims that only radical reforms can produce a thriving economy that lives within its means and provides prosperity and opportunity for citizens.

Expanding the argument, Booth says: "If, as a young economist, one was to paint a picture of all the problems that would make economic adjustment difficult, one could not do better than to look to Greece – a huge public sector; exceptionally rigid working practices; a dysfunctional tax system; minimum wages. The list is almost endless. To cap it all, the Greek government also has an unsustainable debt burden. This problem is exacerbated by the fall in living standards in Greece – as gross domestic product falls, the debt burden relative to income goes up. It is the inability of the Greek government to repay its debt that is leading to such great urgency in the discussion of the austerity and reform programme; it is the fact that creditors have an interest in the success of the Greek economy that is leading to the outside intervention. But, reform in Greece is necessary for its own sake.

"The country has come to the end of the road. It can no longer sustain an economic model that involves loading the costs of consumption onto future generations. Whether Greece remains inside or outside the eurozone, those who have lent the country money will suffer. Either Greece will default further, or it will repay debts in a devalued currency. The fact that the creditors are at the door, though, should not lead the people of Greece to believe that they are the cause of the problem. If the government debt was 10 per cent of national income, the same issues would confront the government. They are just made more acute by membership of the euro and the timing is determined by the way in which the debt crisis is being played out."

Indeed, we know that Greece has only been kept afloat financially since 2010 by rescue loans from the international community and its European partners. We also know that the money was not enough. In addition, the next bail-out might also prove not be enough to avoid default – even if the "deal" is finally agreed. Sources say a 50-page document has now been drafted – including a 20 per cent reduction in the minimum wage, pension cuts and the loss of 15,000 civil service jobs. It may also mean that private sector lenders – banks and hedge funds – have to accept a write-down of up to 70 per cent on the money the Greek government owes them.

This, too, is likely to have major ramifications for the global economy. And so the waiting game goes on. How much longer the fragile framework, on which the eurozone rests, can bear the strain is unsure. What is not in doubt is that the Greeks, Germans, the IMF and the European Union will drag the discussions out to the nth degree. And, in the meantime, economies will be damaged and citizens disadvantaged. Greece is just one example of the shambles that Europe and the west has become.