The Greek Tragedy Continues

It was the best of times, it was the worst of times. Currently, Greece is leaning towards the latter rather than the former.

Alexis Tsipras, who made promises to his constituents back in January when elected to ease up on the budget cuts and reforms, is trying to reach an agreements with Greece’s creditors including ECB and IMF about the changes needed to be made in order to receive the next bailout program. According to come accounts, however, Greece could keep going without a third bailout until November, under certain assumptions as presented herein.  

In any case, the major points that hold up the bailout deal revolve around cutting pensions, raising sales taxes, holding off on raising minimum wages and reintroducing collective wage negotiating and reducing the country’s debt levels (here is a more detailed account).

But the big question remains: will austerity improve Greece’s situation in the short, medium and long run?

After all, both sides – the creditors and the Greek government – want the same thing: a stronger Greek economy. To that end, however, each side has its own way of progressing. Syriza led by Alexis Tsipras think that keep running a deficit, improving labor conditions and basically putting more money in its citizen’s hands will do the job. Creditors want austerity. Greece implemented under the preceding regime budget cuts, which according to some, would have been the equivalent of $3 trillion if the U.S. had implemented them.

So far, however, this type of policy hasn’t worked so well for some countries including Spain, which still sees high levels of unemployment (23%) and elevated debt per GDP. Albeit the country has cut down its deficit spending per annum and its GDP is expected to rise faster than the EU. It’s not a clear cut case the lean towards one way over the other. But we still need to remember that no matter what you think is the right way, Germany, as well the rest of the EU, still need Greece to remain in the Union.

For Greece, the situation could have been a bit better if it was able to devalue its currency, albeit this would have resulted in an early 20’s Weimar Republic like devalued currency.

Failure in keeping Greece could have dire consequences for the rest of the EU members. This puts a bit bargaining power in Greece’s corner. Perhaps it could be enough to keep Greece in the EU even if it doesn’t pass all the reforms that its creditors wish it to implement.

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