It may well be that a third “bailout” pact will be successfully negotiated over the weekend with Berlin and the European conservatives as usual calling the shots forcing the Syriza Government to discredit itself in the eyes of its voters by accepting another austerity oriented package but with the promise that in future there will be consideration to restructuring some of the debt in order to make it more sustainable over the long haul . It may also contain some legitimate reforms with respect to diminishing corruption and clientelism in Greece.Nevertheless if the press rumours are correct it also involves a larger austerity package than was rejected by the Greek electorate in the recent referendum which will meet with great disillusionment and anger in Greece already wrecked by the earlier austerity loaded packages. Joseph Stiglitz has pointed out that contrary to the economic analysis that was contained in the earlier bailouts and predicted the opposite ( which it should be stressed were largely designed to rescue the Greek banks and their German and French creditors and did not transfer funds for use in Greece for Greek citizens) the GDP shrank by 25 %. Prior to the crisis Greek GDP had been growing at 3.4 % per year versus a 2.4 % growth rate for the EU as a whole. Some analysts argue that the Greek debt is sustainable since the average interest on the debt is 2 % and if austerity were lifted and stimulus substituted a growth rate of more than 2 % could easily be accomplished which would shrink the debt to GDP ratio over time considerably. The Belgian economist Paul De Grauwe who teaches at the LSE argues this position. Greece is solvent but illiqid
The illiquidity comes about because of the policies of the ECB which has artificially and possibly illegally restricted the normal central bank function of a bank of last resort in helping a member bank deal with a bank run. There is over 26,ooo million euros in coin and cash in circulation in Greece but because of the fear that has been spread on account of the ECB’s restrictions on supply and the capital controls the cash is being hoarded in households and businesses. The normal velocity of circulation in Greece appears to be too low to sustain the economy in such circumstances. But because of the fear people’s behaviour has altered. Some wealthier persons have been trying to spend their cash and acquire alternative stores of value in jewelry, appliances, automobiles etc because they fear a bail in of part of their bank accounts as occurred in Cyprus. De Grauwe may well be right but unfortunately the Germans and other northern Europeans remain obsessed by the necessity of austerity despite all the scientific evidence to the contrary.
What can we North Americans do to help Greece. Well many of us live in colder northern climates and holidays in sunny Greece surrounded by classical antiquities , tavernas and music have a strong appeal. Stiglitz suggests in the absence of a more generous deal the US offer a swap line on debt to the Greek central bank to enable it to meet the needs of its clients Canada could do the same with a smaller ceiling than the US.In return perhaps both countries could qualify for more attractive holiday packages in the sun for all of our citizens.
If Greece is unable to get a reasonable deal there is a lot at stake in Europe with the danger of the rise of extremist parties .North Americans have had to rescue the Europeans once before in history at a terrible cost in lives and treasure. Indeed Germany who has been so tight fisted in its demands ought to recall the huge debt forgiveness and aid it received from the U.S after the second world war something which both Stiglitz and Piketty have pointed out. In addition to this sort of central bank help we should call an international conference on reconsidering austerity versus stimulus as a response to crises . For Greece itself it should consider very carefully the cost involved in hanging on to the euro and weigh that against the possibility of an orderly transition to a parallel currency that allows it to escape from the suffocating hand of austerity.