Greek Crisis Update

The latest on Greece is the country may leave the euro zone and adopt a new currency -- a Greek euro - something of a cross between a drachma and a euro to be used only internally. Some humorous economists have jokingly given the new money a nickname: the "Gyro."

A bailout from the European Union or its partner countries is growing increasingly unlikely. German Chancellor Angela Merkel just stopped all possibilities of future discussions of this topic at the upcoming EU Summit. While the International Monetary Fund is ready to help, it is unlikely the EU would allow its aid, and stigma, to affect the other Euro nations. As a member of a currency union, Greece is "stuck in a eurozone straightjacket," writes economist Desmond Lachman of the American Enterprise Institute. Its options to dispose of its debt are limited: a default is not politically viable, a restructuring is unworkable, and currency devaluation to make the mess go away -- a tactic Argentina used in 2001 -- is impossible. To remain in the EU, Greece must accept its rules in good times, and in bad. If Greece thinks it's trapped in a bad marriage, it could choose to leave the eurozone, but that would be a shocking development, one that Prime Minister George Papandreou insists is not on the table.

As the crisis deepens, Greece's "leaving the Euro area, though still a low probability scenario, can no longer be ruled out," says Uri Dadush, the director of Carnegie International Economics Program. "It's a painful route, but a lot less painful than others." Greeks are starting to wonder what a euro-less future might look like. One possible roadmap: copying California's 2009 debt solution of issuing warrants later redeemable for dollars. The proposal by London School of Economics' Charles Goodhart and Oxford Said Business School's Dimitrios Tsomocos, would introduce a new way to pay debts inside Greece. The same may hold true for the other countries in crisis such as Spain, Portugal, and possibly Italy while leaving the euro in place for international transactions. Interestingly, along with Greece, these countries combined are known appropriately as P.I.G.S. in certain circles.

Public unrest in Greece over the austerity measures is increasing in intensity: “They’ve ruined us, these measures,” complained Thanassis Apostolakis, a mover, referring to the government’s austerity plan. “Even these are getting expensive,” Mr. Apostolakis said, tossing a half-smoked cigarette — now subject to higher tobacco taxes — in the gutter next to his truck.
There is no question that Greece is in for several years of slumping incomes, slower growth and social strife as the government slashes spending to reduce its huge budget deficit. Anastassios Haros, who owns a women’s clothing store in Athens, said his sales had fallen by about half over the past few months. “Consumers have been bombarded by messages of doom,” he said. “Even if they have some cash in their pocket they’re not going to spend it.” Alexandros Douvanas, a 38-year-old nurse — and union leader — at a public children’s hospital in Athens, said he might be forced to consider a job in the private sector if things got much worse. He is facing a wage freeze and a 12 percent cut to vacation pay, as well as higher costs of living because the value-added sales tax is going up by two percentage points, to 21 percent. “I make €1,100 a month,” he said, an amount equivalent to $1,490. “I don’t have a lot room for maneuver.”

The Greek Central Bank warned Monday that growth this year could slump 2 percent. The runaway spending that provoked Greece’s debt crisis and unsettled markets worldwide is a symptom of much deeper problems, including an uncompetitive economy, rampant tax evasion and a bloated civil service that invites corruption. However, though it is barely visible from today’s perspective, there may also be an upside to Greece’s predicament: Things are so bad that even a little reform would go a long way to stimulate economic growth — if the government can maintain public support. Greek leaders, who were slammed by the debt crisis shortly after taking office late last year, insist the country is ready for change.

C. Cohn
The Cohn-Reilly Report

Sources: CNN, The New York Times