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Back to the Stone Age

Wenkel Rolf Kommentarbild App
Rolf Wenkel
July 6, 2015

Ideology has triumphed over reason. The Greeks still dream of collecting relief funds from Europe without adopting any austerity measures. That dream will end badly, says Rolf Wenkel - perhaps with a disastrous Grexit.

https://p.dw.com/p/1FtCX
Griechenland Referendum Freude in Athen OXI
Image: picture-alliance/dpa/K. Nietfeld

It was almost inevitable: The Greeks voted on Sunday and an unexpectedly large majority rejected compromise with the country's creditors. But without a compromise, there won't be any interim financing past June 30 - and there won't be any negotiations over a third assistance program which could offer the country financial support from Europe and the IMF.

Although a majority of Greeks want to keep the euro, it seems unclear to them that they're now in danger - for technical reasons - of having to leave the common currency zone.

This is because the country doesn't have the money to pay back the 3.5 billion euros ($3.86 billion) that are due to the European Central Bank (ECB) for Greek sovereign bonds it holds.

Not paying those back would mean the beginning of the end. The ECB would have little choice but to declare the Greek state in default, and with that, Greece's banks - whose collateral with the ECB is mostly in the form of Greek government bonds - will become insolvent.

In that situation, ECB chief Mario Draghi would no longer be able to count on support from the heads of eurozone governments if he wanted to offer additional Emergency Liquidity Assistance (ELA) support to Greece's banks. Greece's banks have so far been kept afloat by ELA credit, and if further credits become unavailable that would mean a de-facto end to Greece's membership in the euro.

Just a few weeks more

It's clear now that without an agreement with its creditors, Greece will not be able to hang on in the eurozone for more than a few weeks. The capital controls established a week and a half ago have reduced the outflow of funds from the country's banks, but they haven't stopped them entirely.

Wenkel Rolf Kommentarbild App
Rolf Wenkel

Every day, an additional amount in the hundreds of millions leaves the country because the population, unsurprisingly, does not trust the solvency of the country's banks.

It isn't only the banks that are on the cusp of going under in Greece - the entire real economy will collapse under the constraints on the payment system, and the government's tax revenues will shrink dramatically as a result of the ongoing recession.

By the end of July at the latest, the state won't have enough money to pay the next instalment of pensions and civil service wage packets.

It's true that Athens could pay its employees, pensioners and suppliers by printing IOUs - as California did in 2009 when it faced a liquidity squeeze due to an overly constrained tax system. But such a parallel currency would quickly depreciate in relation to the euro.

Experts like Hans-Werner Sinn, the head of the Munich-based Ifo Institute think tank, has been urging Greece to return to the drachma and leave the eurozone. That would greatly benefit the Greek economy by making the country's exports cheaper, Sinn has said.

Tough years ahead

That may be, but in the short term Greece faces some very hard years ahead. After a depreciation of 30, 40 or 50 percent in the value of its reintroduced drachma compared to the euro, Greece's debt would become even more burdensome, because it will continue to be denominated in euros.

It's also debatable whether Greece's exports would benefit greatly in the short run: other than olives, cement, and tourism, Greece doesn't have much to offer in the way of exports. The proportion of exports as a percentage of GDP is around half that of Germany.

To produce high-value products for export, Greece would first have to import production machinery from other countries - and with a devalued drachma, that could prove unaffordable.

An analysis by "Le Monde Diplomatique" magazine has pointed to a further aspect of Greece's situation that could destabilize it altogether.

"A return to an inflationary drachma would deliver the much-squeezed poorer classes of Greek society to a caste of wealthy euro owners who would literally buy up whatever part of the country they don't already own. The consequence would be the biggest redistribution of wealth since capitalism was introduced to the Soviet Union," the magazine wrote.

New negotiations

That's why it seems likely that eurozone heads of government will relent and offer Athens another chance at negotiating a way out. Greece's governors don't seem able to manage the country's economy very well, but they play a good hand of poker. They apparently don't much care if they're dancing at the edge of a precipice. They know that their country is needed as a partner in the European Union, in NATO and in the OECD - and that they'll repeatedly be cut more slack as a result, slack that would not be given a normal debtor.

That's why a continuation of the Greek crisis - akin to a theater play that won't leave the main stage even after innumerable performances - will likely continue indefinitely. Important decisions in the ministerial councils of the EU require unanimity, which means they require assent from the leftist ideologues in Athens.

This compulsion of unanimity has, in principle, a positive aspect, because it forces all sides to compromise. But if the EU has to continue to deal with the masters of chaos currently governing in Athens, the stage is set for serious problems.