Can the Greek Referendum offer any lessons?
In a historical referendum on July 5, 2015, the Greek voters overwhelmingly sided with the current government in its debt negotiations with its European partners. From a very narrow perspective, it was a victory for the governing Syriza Party, but provided only a temporary respite for the government which finds itself overwhelmed with debt, a banking crisis, and commitments made to its voters that could very well lead Greece on the path to years and years of uncertainty and downward economic spiral. Any economic and political crisis in Europe is bound to have ripple effects of the emerging countries of Asia, including Bangladesh, and unless the Greek crisis is resolved soon, the uncertainty in the financial markets will soon have a negative influence on Bangladesh and its trading partners in South East Asia.
For the newcomers trying to understand the latest round of happenings in Europe, the genesis of this crisis can be traced back to the period of 1999-2007 when the Greek government borrowed heavily to fund its extravagant projects, including the 2004 Summer Olympics in Athens. The extent of its indebtedness was concealed by the government, and Greece managed to cover up its budget deficit to the extent that its debt-to-GDP ratio rose to 127 percent in 2009 and to 146 percent in 2010. Greece faced the twin challenges of inability to service its international debts and meet its domestic obligations. In May 2010, the IMF, ECB, and European Commission (EC) offered a bailout package of more than 110 billion Euros on a quid pro quo basis: Greece promised to undertake a programme of structural reforms (drastic spending cuts, tax rises, and labor market and pension reforms), austerity measures, and privatisation in return for the loan to be released in four tranches.
Unfortunately, Greece dragged its feet in implementing its side of the bargain, and needed a second bailout in 2011. Matters took a turn for the worse in December 2014, when the Syriza Party forced a new election, which it won in January and threatened to scale back the austerity measures and scrap the deal worked out with the Eurozone countries. To cut the long story short, after six months of back and forth, Greece's debtors offered a new package in late June which the prime minister decided to place before the voters. In the meantime, the Greek banks are running out of money and Greece defaulted on its loan repayment on June 30; a 1.5 billion euro payment on a 21.2 billion euro total debt owed to the IMF. A full-blown default by Greece could potentially lead to instability in the financial market, severely limiting Greece's access to international loans, and curtailing economic activity further. Greek economy is currently in a state of shock, having taken the brunt of earlier budgetary and fiscal restrictions pretty hard after five years of austerity and reeling from a 25 percent unemployment rate.
The crisis in Europe has already shaken up global markets but only in a moderate way. The Euro has slid in the international market and is currently trading at 0.90 to the dollar, a drop from the recent high of 0.93 in April. But, the volatility in the financial market has been rather muted, and this can be attributed to many factors. Most importantly, the world market had already anticipated the turn of events, and market prices have factored in the risk element. Secondly, regardless of the public posturing of both European leaders led by German Chancellor Angela Merkel and EC Secretary General Jean-Claude Juncker on the one hand, and the Greek prime minister and finance ministers on the other, it is expected that European community leaders would leave no stone unturned to keep Greece in the Eurozone.
What's next? Could matters get worse if Greece drops Euro or leaves the EC? At this point it is unlikely that either of these catastrophes can happen. In various international forums, "Grexit" or the withdrawal of Greece from the Eurozone is not discussed as glibly as it was a few months ago since both sides have dismissed this option. However, some do not rule out the possibility of "Graccident", another possible scenario where Greece finds itself out of Eurozone due to some unforeseen circumstances such as a collapse of its banking system or a run on its commercial banks.
The future course of events on world market and economies farther away from the "zone of crisis" depends on the following key outcomes: Grexit or Graccident. Another payment deadline is coming up for Greece and a default on July 20 of 3.5 billion euro payment due to the European Central Bank will have a damaging impact unless there is some agreement on debt restructuring prior to that. On the larger scheme of things, the impact on Asia will be marginal and its impact on GDP will be less than half a percentage point. If one reads the tea leaves, the outlook after the new Greek Finance Minister Euclid Tsakalotos' initial rounds of discussions has changed for the better, and there is a good chance now of reaching a breakthrough in the Greek crisis before the next round of payments are due.
All said and done, the impact on the global economy will be limited. The markets, as efficient as they are, have already internalised the results of the referendum and Grexit. Even if negotiations with the debtors keep dragging on, with the Greek economy muddling through with some stop-gap measures, the rest of the world might find a way of containing any far-reaching impact. Greece after all represents only 2 percent of Eurozone's GDP and while the suffering of the Greeks and its economic outlook worsens in the short run, it can be expected to recover within five to ten years.
Finally, what are the lessons for the developing countries from all of this? For starters, here are three basic ones: Don't live beyond your means; give your lenders the respect they deserve; and don't promise the electorate more than what you can deliver.
More on this at a later juncture!
The writer is an economist who writes on international and policy issues.