Is Greece going to set off the long feared next wave of the Great Recession?

Responding to speculation he will have to resign if Greeks vote in a July 5 referendum to accept a reform-for-aid deal that he has already rejected, Tsipras told state television: "If the Greek people want to proceed with austerity plans in perpetuity, which will leave us unable to lift our heads ... we will respect it, but we will not be the ones to carry it out."

There has been much talk of this being an abdication of responsibility by the Greek government. I see it very differently. The brief which Tsipras was handed in January was a difficult one from the start. His mandate was clear: Greek people wanted (a) an end to austerity; and (b) to remain part of the euro. There was always a chance, depending on how hard the stance of our partners was, that those two aims would be incompatible. Tsipras is a leader honestly saying: "It turns out that, despite our best efforts, we cannot deliver both a and b. So, we are coming back for further instructions."

It seems extraordinary how averse we have become to democracy. How alien an honest leader, who is unwilling to sell the country out in exchange for continuing power, appears. Take a breath. Allow your eyes to adjust. Tsipras is what all leaders should actually be like. We have simply become so accustomed to seeing things through the warped prism of political expedience, that democracy as it should be appears twisted.

In the following op-ed, 13 prominent economists from around the world call on Greece to sign a credible agreement with the Europeans immediately.
The multi-month negotiation between Greece and the Europeans has not yet reached an agreement. The long negotiation has created unprecedented and unnecessary uncertainty that has brought the Greek economy to a standstill. Without an agreement, Greece will default in July within the euro or outside of the euro ("Grexit").

A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate. The new weak currency will make imports very expensive, cutting the purchasing power of Greeks by half or one third. Irresponsible politicians would print too many new drachmas, feeding additional inflation and eliminating any international competitiveness gains resulting from the weaker currency. Shortages of even necessities such as medicines and fuel would become the norm.

Some may argue that a bankruptcy within the euro avoids all these issues. This is very misleading. The Greek government would not be able to manage a bankruptcy within the euro. It would also require tremendous support from the European Central Bank, which would be unlikely in the circumstances leading to a Greek bankruptcy, such as not paying Greece's obligations to the International Monetary Fund or the ECB itself. Within a short time, bankruptcy within the euro would become a Grexit. Thus, both types of bankruptcy (within and outside of the euro) lead to the total disaster of the new drachma. It is also highly doubtful that Greece can actually remain in the EU itself, following a Grexit.

What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The "closed sectors" of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.

Finally, an agreement must restructure the Greek sovereign debt to European countries and the European Stability Mechanism. Keeping the nominal value constant, the best way to restructure the debt is to elongate its maturities. If maturities are moved to 75 years and the presently variable interest rates are converted to fixed ones and slightly reduced, the net present value of the debt will be reduced by 50 percent. A 10-year grace period (during which interest is not paid but recapitalized) with the money saved invested would promote growth.

Growth is, in fact, the only guarantee that Greece will pay its debts.

Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business

Many Greeks already feel humiliated by their economic tribulations. To hold on to power, Tsipras needs to keep their anger focused on the creditors at least for another week, until the referendum. It may be useful for Greek voters to recall, however, that political decisions motivated by wounded pride have rarely led to good outcomes. More often they have produced chaos, if not bloodshed, and further humiliation

Typically, the euro-enthusiast tells the public a nauseatingly win-win story. Nothing is being lost with European integration, just wonderful new things created. For European countries, the EU doesn't mean an undignified surrender of historically hard-won independence, but a giant bring-and-share party where, magically, European integration doesn't entail the loss of national sovereignty but simply the pooling of some of its attributes: e.g., border controls, the ability to print money. (If it helps, think of Brussels as home to a giant lazy Susan.)

As Godley saw, however, when it comes to currency union, the bring-and-share model is an illusion. Once European governments have put their drachmas and guilders, francs, lire and marks on the common table, they then discover that they've handed over whole branches of economic and political responsibilities too.

Despite supporting what he never ceased to call the "noble cause of European integration", therefore, Godley wasn't to be fooled:

Quote:

It needs to be emphasised from the start that the establishment of a single currency [...] would indeed bring to an end the sovereignty of [...] component nations and their power to take independent action on major issues.

And this is precisely what has happened. Faced with the slump in the global economy produced by the default of US investment banks in 2008, Greece could no longer devalue its currency. On the contrary, the euro strengthened as the dollar sank.

That left Athens at the mercy of the European Central Bank in Frankfurt, the sole institution created to manage the single currency. It might agree to cover Greece's mounting debts or it might not. Either way, the voice of more powerful members of the currency union - above all, Germany - would count for more in its decision than that of Greece.

Starting from 2010, the seat of the Greek government was thus effectively transferred from Athens to Brussels, Washington and Berlin. Left in Greece itself was little more than the power to administer national policies and implement sovereign decisions made abroad. In Godley's words, a country in such a position "acquires the status of a local authority or a colony".

For this reason, the referendum the Greek government has called for next weekend wrongly is seen as simply irresponsible or bizarrely pointless. Yes, the terms of the bailout the Greek people are being asked to ratify or reject will have expired. Yes, the Greek government might already have failed to make its June 30 repayments.

But in appearances at least, Greece is still at the negotiating table. Rather than jumping, Greece has effectively waited to be pushed out of the euro.

This not only allows the blame for the resulting economic repercussions to land primarily on Angela Merkel and Christine Lagarde's shoulders. It also expresses the fact that Athens sees itself not as reclaiming a sovereign right to set monetary and fiscal policy surrendered with the adoption of the euro, but as asserting rights it never ceased to possess.

Whatever the outcome, by calling the referendum and imposing currency controls, Athens is showing that, politically and economically, it's master in its own house.

You watch though, if July 5 goes yes Merkel will come around....after the Greek banks are basically ruined and the EBC is forced to sink another 50 billion at least into them, and after faith in the EU project and the Euro have taken a needless big hit.

The Germans cant afford to let the Greeks up for the reasons you give, but she did have to take the german boot off the neck of the Greeks enough that the Greeks did not get to ENOUGH! The lack of any debt forgiveness is all on Merkel.

The real issue between the Greek government and the EU was the potential efficacy of Greek government policies in stimulating the growth in the Greek economy that is necessary both for the welfare of the Greek people and the repayment of the debt.

Nonsense. None of the holders of Greek debt have voluntered to relinquish repayment, though each of them are able to do so if they wish.

Even if an angry and impoverished Greece ultimately remains inside the tent, the link between the EU and prosperity will have been ruptured. For the horrible truth is dawning that it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment – the euro – it is now actively destroying wealth, stability and European solidarity.

The dangers of that process are all the more pronounced because Greece is in a highly strategic location. To the south lies the chaos and bloodshed of Libya; to the north lies the instability of the Balkans; to the east, an angry and resurgent Russia.

Knowing all this, the administration of Barack Obama is increasingly incredulous about the EU's apparent willingness to let Greece fail. To some in Washington, it seems as if the Europeans have forgotten all the strategic lessons learnt during the cold war about the country's importance.

That, however, is unfair to the Europeans. Their response to the criticism from Washington is that the EU works only because it is a community of laws and mutual obligations. If you allow a country such as Greece to flout those laws and obligations – by, for example, reneging on its debts – then the club will begin to disintegrate anyway. If, by contrast, you kick Greece out there is still a chance of confining the damage to one country.

Now as the country stands on the edge of defaulting on a 1.6 billion euro ($1.8 billion) payment to the Fund, Lagarde's tenure at the head of the IMF since 2011 will be shaped by Greece, which holds a referendum on Sunday that could pave the way to its exit from the euro.

By its own admission the Washington-based institution broke many of its rules in lending to Greece. It ended up endorsing austerity measures proposed by the European Commission and European Central Bank, its partners in the troika of Greece's lenders, instead of leading talks as it had done with other countries such as Russia and in the Asian financial crisis.

Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

“The Greek government will make use of all our legal rights,” said the finance minister, Yanis Varoufakis.
“We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable,“ he told the Telegraph.

Variufakis may argue the absence of any legally specified process for exiting the Eurozone, but the simple fact is that, when the Greek banks collapse; and it can no longer borrow hard currency, Euros and the Eurozone will depart Greece.

You might find six greeks who believe that the EU masters care about their wellbeing, but not ten. Just looking at this round of negotiations we see the EU making demands (such as the tax demand) that practically no economist thinks is good for Greece. But if I had to boil this mess down to one main problem it would have to be that the Germans and the rest of the bosses where fine with letting the Greeks go into deep depression without hardly any aid to get out of it because they were pissed off that the Greeks did not keep their word to sell everything that was not nailed down and completely reorganize their economy as demanded by the austerity buffs, headed up by Merkel. The Germans decided that the Greeks still could not be trusted, and the greeks concluded that the germans dont care about them.