Monday, 6 July 2015

Oxi

The Greek public have, by a fairly large margin, voted a big "Oxi" (No) to the bailout package proposed by the "troika" of the European Commission, the European Central bank and the IMF. Exactly what this means for the Greek people is not yet clear, but leaving the Euro seems to be almost a given.

The question now becomes what next? There appear to be two basic options:
  • Greece and her creditors return to the negotiating table and work out a new deal.
  • Greece leaves the Euro and reverts to a free floating Drachma
While both sides profess to want Greece to remain in the Euro it seems inevitable that there will be further negotiations before a final decision is made. Quite what Greece, bankrupt and isolated will be able to gain from these negotiations is not clear. The original offer has now expired, the first tranche of debt has been defaulted on and there is serious talk of Greek banks collapsing this week. On the EU's side of the table, we know from the fiasco over the Lisbon referendums that the EU do not like being snubbed by the electorate. The default position is to ask again and if this looks doubtful then you change the title slightly. There is no reason to think this won't be the same again this time. 

History and a bit of common sense tell us that this is the most likely course of action this time around. Prime Minister Tsipras has had his moment in the sun, Greece has shown it's mettle with the eyes of the world on it and crucially Yanis Varoufakis, the Finance Minister and bĂȘte noire of EU officials has gone, recognising that he would be a divisive figure in any negotiations. As an aside, what a curious situation here one of the principal architects of the No vote and leading figures in the search for an alternative solution is now excluded from the formulation of that solution because he upset the sensibilities of the European political elite.

So negotiations are likely to be quite empty, and as the cash, fuel and medicine run out in Greece, the negotiations are also likely to be quite quick. I would expect to see enormous pressure for a fresh referendum on an almost identical deal in the next few weeks, and enormous pressure from the Greek population to do something to get their country functioning again. 

It meems probable that the Greek government will cave in to this at some point as this the quickest and most certain way of getting essential services up and running again. Say yes and the money flows again. Until next time. 

However, if Greece can summons the courage to stand by its decision then it will find itself outside the Euro, and will have to come up with an alternative. The most obvious alternative would be the reintroduction of the Drachma, which would provide a tremendous opportunity to operate a currency which realistically reflects the economy behind it. This would enable exports and tourism to pick up, unemployment to fall and the country to return to something like growth. 

It would also mean a period of instability as the new currency found it's level against the Euro, probably at a level which would mean lower real incomes and consequently high inflation for a period. There would also likely be a transition period where importers would need to get their hands on foreign currency in order to bring in their goods from outside Greece. 

This would have the effect of forcing Greece to live within it's means as it would only be able to import what it could afford with hard currency earned from what it exported. As when Britain left the Exchange Rate Mechanism in 1992 this could, if handled properly be a rebirth from where Greece could build a stronger economy, which is better for Greece and better for Europe.