Are Greek voters pushing the country inadvertently to an exit from the euro?

Following the indecisive election of May 6th, it seems likely that another election will have to be held because it will prove impossible to form a government with a majority in parliament. The two parties which have alternated in power for most of the period since 1974 and which reluctantly were willing to work with the troika of the European Commission, European Central Bank and IMF on the basis of the Memorandum of Understanding for the second financial rescue package agreed in March 2012, received about a third of the popular vote. Because of the Greek voting system, which deliberately rewards the leading party with extra seats, the two parties very nearly achieved a majority of seats in parliament (Vouli). In fact they won 149 seats out of 300, but a small victory would have been very fragile given the frequent occurrence of party defections, and the two parties might not have been able to work together. Although they have supposedly worked together during the last five months, in practice the interim government, which was led by the non-aligned Lucas Papademos, has just done what it was told to do by Greece’s creditors, with ND indicating that it would attempt to adjust policy after the election. Very reluctantly ND was pushed into agreeing that such changes could not alter the broad thrust of the Memorandum.

Democracy has an inherent flaw in that to be elected parties in government have an incentive to spend more or tax less than is needed to prevent debt rising while parties out of government are more likely to be elected by making promises to spend even more or tax even less. Given these inbuilt incentives it is surprising that it is only recently that government finances in democracies in many countries have deteriorated to an extent that investors have begun to shun them.

The situation in Greece has now reached a condition where it is putting strains on the country’s democracy. This is not because of voting for extreme parties. Although the rise of the neo-Nazi Golden Dawn is cause for concern, the vast majority of Greece’s recently elected members of parliament are committed to democracy within the Greek constitution.

There are two problems. First that there is a high degree of disillusion with politicians, which seems only likely to get worse. The two main parties have lost support because they are seen to have led the Greek people into the present dire situation but the other parties are all saying that there is an alternative to the current austerity policies when no such alternative exists. Even if Greece renounces all its debt servicing it would still have to carry out the present austerity plan or one equally severe or end up unable to pay salaries or pensions.

Secondly, the Greek electorate does have a choice but does not seem aware of what the choice is. The choice is between following the conditions attached to the new financial rescue agreement, with only a modest room for negotiation and interpretation, or rejecting the Memorandum in which case it could no longer expect the financial support provided by euro zone partners, the ECB and the IMF to continue. If this happens Greece’s banks would be likely to collapse making normal economic life only possible if Greece reinstates its own currency.

In other words the Greek electorate has to decide whether they want to remain inside or outside the euro. Opinion polls show that 70% want to remain inside the euro but the general election result suggests that two thirds of the electorate does not want to accept the necessary conditions to do so.

 

If another general election takes place, the choice must be spelt out more clearly. The EU (both its member states and the Commission and Parliament) should have a duty to help Greeks make that choice since the EU is partly responsible for the condition in which Greece finds itself by enabling it to join the euro. Leaving the euro should not be seen as entirely negative and should not be equated with leaving the EU. It is argued that there is no provision in the Lisbon Treaty for a country to leave the euro although there is one for a country to leave the EU but there is also no provision that a country forced out of the euro would have to leave the EU.

 

The truth is that economists have different views as to whether, of two evils, staying in the euro is better or worse than re-introducing the drachma. In the end no-one can foresee all the consequences of either. Reintroducing the drachma would mean that a bank accounts would be converted into a weaker currency so effectively being devalued and would be likely to make imported goods which provide most of Greece’s everyday needs from food to clothes and energy even difficult to obtain. Thus the consequences of leaving the euro would be likely to lead in the short term to a sharp further drop in living standards.

 

On the other hand Greek governments would have more freedom. On the economic side, the very scarcity of foreign exchange would provide a very strong incentive to exporters.   If exports were to boom as a result then Greece would be able to emerge from its predicament. Unfortunately Greece’s agricultural and manufacturing base is weak (manufacturing accounts for 12% of GDP) and would not be likely to grow rapidly even in these circumstances and its strengths in services (notably shipping and tourism) would be unlikely to be sufficient to make up for these weaknesses.

 

The choice is an unenviable one but the Greeks should have be enabled to make it rather than being misled into policies which lead to its unchosen departure from the euro.

4 thoughts on “Are Greek voters pushing the country inadvertently to an exit from the euro?

  1. Charles, congratulations on your website.
    Although I am not politacally versed, I found your article on
    Greece very clear and imformative. Good luck in this new
    endevour.
    Thinking of you fondly
    Andi

    • Dear Andi

      I very much appreciate your message.

      It was lovely seeing Maira and your granddaughters recently.

      Love Charles

  2. Dear Charles,
    now that I have seen your website for the first time, I must say you have done extremely well. This will be my favourite commentary to read in future!
    Keep up with this excellent work.
    Best regards,
    Dieter

    • Dieter

      Many thanks for your encouraging message. Another post is up today. Situation in Greece looks pretty bad.

      Charles

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>