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Ross Buckley
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Oxi: By saying "no" Greece has placed its economic future in the hands of others. Photo:
Reuters
The Greek people have rejected more austerity imposed from Frankfurt. This
is unsurprising. Voters rarely vote for higher taxes and lower pensions.
However other polls reveal that the Greek people equally strongly want to
retain the euro. So this is one giant gamble. The Greeks are betting that the
potential damage to other countries, especially Spain and Italy, and thus to
the very fabric of the euro, is simply too great for the eurozone to eject
Greece.
When voting on Sunday, most Greeks probably felt they were reclaiming
control of their own economy. However, paradoxically, the No vote has done
the opposite. Greece's short to medium-term economic future is now in the
hands of others, particularly Germany and France.
Greek banks are all but out of euros. Normally in this situation a nation's
central bank simply prints more currency. Greece can't do that, as no one
country controls production of the euro. So the options over the next month
or so seem to be that either Germany, France and the European Central
Bank blink, and extend more credit to Greece, or Greece's financial system
will cease functioning and ultimately it will be forced to print drachma.
Whether Greece's creditors blink is now the pressing question but what of
the bigger picture? How did Greece get into this mess in the first place?
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At one level the answer is because Greece has managed itself appallingly for
the past 20 years. Governments bought votes by bestowing unaffordable
pensions on civil servants and retirees more generally, compounded the
problem by failing to collect taxes properly, and went on a borrowing binge.
After joining the euro in 2001 interest rates on Greek and German
government debt were essentially the same for the next seven years. The
financial markets failed to properly price Greek risk. The fact the euro was
Greece's currency never meant it was as good a bet financially as Germany.
Yet once the Greek government could borrow as cheaply as the German
government, it did, and spent with abandon.
For instance, to stage the 2004 Summer Olympics Greece spent nine times
as much as Sydney had four years earlier. To be fair, the Greek expenses
included building a new subway system; whereas, somehow, Sydney simply
managed to make its existing train system work efficiently a trick the city
has never been able to replicate before or since. But Greece spent money as
if there would never be any reckoning.
Furthermore, Greece had earlier fudged its budget figures to gain entry to
the euro in 2001, as its Finance Minister explicitly admitted in 2004. Greece's
actual budget deficits were 6.44 per cent and 4.13 per cent when they
needed to be under 3 per cent to be eligible to join the euro. Greece
achieved this sleight-of-hand with some very creative accounting, ably
assisted by a leading Wall Street investment bank.
So a large part of the blame for the present mess falls upon Greece, but not
all the blame. As mentioned, for seven years the markets failed to properly
price Greek credit risk. And for a century before joining the euro, Greece's
currency devalued almost every year. This was how Greece remained
competitive, and it is the magic of floating exchange rates. When an
economy is doing poorly, its exchange rate depreciates which makes its
exports cheaper and imports more expensive, and so the balance of trade
improves and the economy tends to grow and return to equilibrium.
A good example was seen here during the Asian crisis. Between January
1997 and June 1998 the Aussie dollar fell 24 per cent in value. So an