Since the Eurozone launched Jan. 1, 1999, it didn’t take long for the honeymoon to wear off in Greece, where transitioning from the affordable drachma to the pricey euro seemed OK at first but headed south quickly. With Greece’s socialized government, its $2.07 billion in monthly welfare and pension payments, it didn’t take long for the government to run out of cash. When Greece went on the euro in 2001 it was worth less than the U.S. dollar, soon inflating an average 20% to around $1.20, eventually soaring in 2005 to $1.61, quickly burning up Greece’s cash reserves. Hit by several recessions since 2006, 2007, 2008, Greece’s budget deficits soared, nearing default on its sovereign debt, prompting a $110 billion euro 2010 EU bailout to keep Athens from defaulting. Rioting occurred in Athens when the national treasury ran out of cash to pay civil servants, welfare and pension recipients
Once Greece, like all Eurzone countries, joined the euro, they no longer coined or printed currency to meet foreign and domestic debts, despite devaluing the currency. For countries with unstable economies, printing and devaluing currency is essential for survival. Once the European Central Bank took over Greece’s currency, they were at Frankfurt’s mercy and ridicule for not complying with ECB’s standards on deficits, and, most importantly, debt-to-GDP ratios. When Greece’s debt-to-GDP ratio hit 15.7% in 2009, more than three times the Eurozone average, it was well on its way to bankruptcy and exiting the Eurozone. Greece’s Prime Minister George Panandreaou entered into the bailout arrangement in 2010 with the ECB President Mario Draghi, promising austerity and fiscal responsibility. Riots returned to Athen’s Syntagma Square, calling for revolution.
Since Papandreaou’s $110 billion bailout, Greece has had four other prime ministers, now with 42-year-old socialist Alexis Tsipras, inaugurated Jan. 26, 2015. Tsipras promised to fight Eurozone austerity imposing reduced civil servant salaries and pension benefits on Greek citizens. Six months after coming to power, he’s a banana peel away from getting tossed from offcie. Trying to negotiate another bailout to meet Greece’s debt obligations to Christine Lagrarde’s International Monetary Fund, Tzipras finds himself caught between a-rock-and-a-hard place: If he accepts the Frankfurt-based ECB terms of the bailout, he’ll be forced to renege on promises to the Greek public to fight austerity. Kept afloat by a total of 240 billion euros, Tsipras must make good on a $1.6 billion euro debt to the IMF by June 30. All members of the Eurozone led by president Jeroen Dijsselbloem want to avoid a default.
Eurozone officials want to avoid the so-called long-overdue “Grexit” where Greece exits the Eurozone and returns to printing and coining drachmas. “It’s an opportunity to get that deal this week,” said Dijsselbloem, hoping to avoid any crack in the Eurozone that could lead to other economically distressed countries like Portugal, Spain and Ireland dumping the euro. Based on a history of broken promises, German Chancellor Angel Merkel cautioned about any expected deal. EU’s economic affairs minister Pierre Moscovici hoped Greece could avoid default. Geramny’s finance minister Wolfgang Schaeuble sounded less optimistic, convinced Tsipras wanted the EU to bail Greece out without economic consequences. “I do not see how we will be able to prepare a euro summit if we don not have sustained proposals,” said Schaeuble believing Tsipras’s proposals fall short.
Whatever happens this week when EU finance minister figure out how to kick the Greek can down the road, it’s obvious to all parties that the euro has failed Greek’s economy. All the recriminations from Germany, France, Belgium, Netherlands, etc., won’t change the Greek economy, or, more importantly, pay obligations to generations of workers who toiled for their civil salaries, welfare and pension benefits. Imposing austerity on Greece in the way of reduced salaries, disability payments or pensions won’t improve Greece’s economy, only guarantee political instability. With four prime minister in four years, Greece has no margin left for error. Already preyed upon by Russian President Vladimir Putin, it’s possible for the EU to push Greece into the Kremlin’s orbit. If the ECB, Eurozone or EU can’t see fit to bail out Greece, then letting them out of the euro is the right option.
Getting down to the wire, Tsipras must decide whether or not his government deals with reality or just borrows more time. Meeting with Putin at the St. Petersburg economic summit June 18, Tsipras looks at all options to keep the Greek economy going without the draconic austerity required by Frankfurt. “I do not see how we will be able to prepare a euro summit if we do not have sustainable proposals,” said Schaeuble, concerned that Greece—with or without ECB backing—headed for default. Given Russia’s economic challenges after invading Crimea, Putin can’t supply Greece the billions needed to keep Athens from defaulting on its debts, both foreign and domestic. Tsipras has little room to meet its $1.7 billion debt to the IMF. Doing a deal with Putin would drive Tsipras from office, accomplishing nothing other than delaying the day of reckoning for a short time.
