The Economic Consequences Of Greece

Tyler Durden's picture

Authored by Alberto Bagnai, Brigitte Granville, and Antoni Soy, originally posted at Project Syndicate,

The first sentence of the 1957 Treaty of Rome – the founding document of what would eventually become the European Union – calls for “an ever-closer union among the peoples of Europe." Recently, however, that ideal has come under threat, undermined by its own political elite, which adopted a common currency while entirely neglecting the underlying fault lines.

Today, those cracks have been exposed – and widened – by the seemingly never-ending Greek crisis. And nowhere are they more evident than in Greece's relationship with the International Monetary Fund.

When the euro crisis erupted in 2010, European officials realized that they lacked the necessary expertise to manage the threat of sovereign defaults and the potential breakup of the monetary union. For EU officials, avoiding the eurozone's collapse became the top political imperative, so they turned to the IMF for help. The irregularities in the Fund's resulting intervention attest to how serious the eurozone's problems were – and continue to be.

For starters, the IMF's Articles of Agreement require it to interact only with entities that are fully accountable for the help received: a member country's “treasury, central bank, stabilization fund, or other similar fiscal agency." But the institutions with which the IMF is dealing in the eurozone are no longer responsible for their country's macroeconomic management; that power lies with the European Central Bank. In lending to Greece, it is as if the Fund had lent to a sub-national unit, such as a provincial or city government, without insisting on repayment guarantees from the national authorities.

Another problem is the sheer magnitude of the Fund's intervention. The size of the Greek debt necessitated lending on a scale far exceeding what other countries could expect. The “exceptional access" to IMF resources granted to Greece in 2010 was set at a “cumulative limit of 600%" of the country's IMF quota, a measure of a country's financial commitment to the IMF. Instead, in April 2013, cumulative financing was programmed to peak at 3,212% of Greece's quota.

The reason the IMF had to take on such huge exposure was Europe's initial refusal to contemplate debt reduction for Greece, owing to the authorities' fear that financial contagion would overwhelm the eurozone's firewall-free banking system. That decision resulted in uncertainty about the currency union's capacity to resolve the crisis and aggravated the contraction in Greek output. When a debt-restructuring agreement was finally reached in 2012, it provided a window for private creditors to reduce exposure by offloading their residual claims onto taxpayers.

Initially, the IMF took the official position that Greek debt was sustainable. But IMF staff knew otherwise. In 2013, the Fund admitted that its analysts knew that Greece's debt was not sustainable, but decided to go ahead with the program “because of the fear that spillovers from Greece would threaten the euro area and the global economy."

In addition, from November 2010 to April 2013, the IMF revised downward its forecast for 2014 Greek nominal GDP by 27%. This cast doubt on the transparency and accountability of the Fund's debt-sustainability projections. The implication is shocking: the IMF was unable to provide a credible framework for the adjustment that Greece would have to make.

This background provides crucial context for the ongoing negotiations, for it reveals that the aim of the Greek bailout was not to restore prosperity to the country's people, but to save the eurozone. Given this, the new Greek government is entirely justified in questioning the terms that the country was given.

The agreements previous administrations made will certainly reduce the range of policies available to the new government, especially with respect to debt reduction, which would require a unilateral default and withdrawal from the eurozone. But a democratically elected government need not be bound by its predecessors' commitments, and this is doubly true in the wake of an election that was a referendum on those very policies.

Ultimatums from unelected institutions that have compromised their own legitimacy have inflamed anti-EU sentiment across the continent. The single worst outcome of the current negotiations would be Greece's submission to its creditors' demands, with few concessions in return. Such a result would fuel greater public support for anti-EU parties and movements elsewhere, and would amount to a missed opportunity for Greece and Europe.

That opportunity is default and exit from the eurozone, which would allow Greece to begin correcting past mistakes and putting its economy on the path to recovery and sustainable growth. At that point, the EU would be wise to follow suit, by unraveling the currency union and providing debt reduction for its most distressed economies. Only then can the EU's founding ideals be realized.

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Thirst Mutilator's picture

Since when was any 'bailout' [aka 'money printing' operation, at interest] designed to 'RESTORE PROSPERITY TO A COUNTRY'S PEOPLE' [and not the zios who have the franchise on counterfeitting the money]?

Mark of Zerro's picture

"This background provides crucial context for the ongoing negotiations, for it reveals that the aim of the Greek bailout was not to restore prosperity to the country's people, but to save the eurozone."


Whaaaat?  Fat Cat Unelected Bankers in Brussels are not interested in the well being of the Eurozone's Serfs?  

KnuckleDragger-X's picture

The EU countries are basically drug addicts who require larger doses to have the same effect until the dosage kills them. If you look beyond the obvious disaster countries the rest of them are going to hell too, just more quietly.

NoVa's picture

off-topic but Leonard Nimoy "Spock" died.  RIP


Thirst Mutilator's picture

May the Schwartz be with you...

ShrNfr's picture

I ain't too Keynes on the EU myself.

GMadScientist's picture

I wish someone would cane the EU myself.

LawsofPhysics's picture

Economic consequences?  Does Greece have a significant economy?

I'd say that the political and social  consequences might be of some concern...

VWAndy's picture

Economics=imagination land.

Stoploss's picture


And protects.

disabledvet's picture

Until Europe turns over all their gold to the IMF they don't get no money.

Just ask South Korea.

I would imagine the World Bank is tapped out here too.

Obviously that gold is never to be lent out period.

semperfi's picture

Only then can the EU's founding ideals be realized.

Hello!  Those "founding ideals" where  a huge lie, a huge deception, so that the elites could impose complete central control - you know - totalitarianism. 

Its working masterfully - they are succeeding wildly !

trader1's picture

if the EZ disintegrates, then game on for breaking up the USA.  

why should cities / state transact in USD?

and while we're at it, why not default on all debts and wipe the system clean for a new OS installation?

smacker's picture

"... why not default on all debts and wipe the system clean"

In the US break-up you envisage, why not leave the national debt in Washington DC.

froze25's picture

The US will eventually break up as all nations do given enough time.  But I think that the Euro Breakup will be much sooner (in my life time) than the US's (probably after, God willing).

Itchy and Scratchy's picture

Don't blame Greece. The entire euro system is a failed socialist leverage model. The Greeks are simply the 1st casualty.

petkovplamen's picture

yet another Libertarian who confuses Socialism with Corporitism. ZH is full of 'em.

Itchy and Scratchy's picture

One in the same my friend! One big steaming facist stew! One cannot survive without the other!

czarangelus's picture

The world has been in a non-stop state of financial, martial, and moral constipation since 2008. Let's just get on with the bloody shits already christ the waiting is interminable.

smacker's picture

What's needed is for Brussels to send a packet of Vindaloo curry paste to every political slimeball in the EU. They'll have sh1t pouring out of every orifice soon afterwards.

q99x2's picture

The United States of America needs to exile Washington D.C. to Somalia and return both Mexicana and Canadana to their own sovereign nations. Down with the globalists. Long live the Q99x2vians.

Zymurguy's picture

If Greece abandons the euro and sets it's own non-fiat currency it's lights out for Greece.  There will be a false civil war, etc. of some sort and all the central bank controlled nations will sweep in there with their "support" and wipe out that shit real fast.

Greece will toe the line, dead or alive.

youngman's picture

Greeces biggest problem now is that no one is paying taxes....they have no faith in the government.....its going to be very hard to start people in paying again.....unless at the end of a gun....even if they go back to the Drachma...people still will not pay faith...

Itchy and Scratchy's picture

The silver lining is that by not paying taxes it will automatically shrink their bloated unproductive government bureaucracy thereby paving the way for sustainable growth & wealth creation.

VWAndy's picture

Guess again. The fiat games are not hamperd by money in any way.

Itchy and Scratchy's picture

If fiat currency is no problem then why do Greeks want foregiveness from it & more of it?

bag holder's picture

In the age of infinite fiat, governments should just print the revenue, collecting taxes by way of inflation. I'm sure this would put a lot of skimmers and kleptocrats out of business, but it seems more honest than most of the mechanisms in use today.

wmbz's picture

A ton of wasted energy has gone towards saving the euro. It was doomed from the start and a whole lot of people knew it and fought against it. Banksters Inc. got what they wanted. The fuse was lite it is going to blow up! Anyone who believes differently is just plain incorrect. Watch and see.

Get out Greece and start over. May as well, you'll have to anyway soon enough!

fiddy pence haff pound's picture

i think they wanted the small countries in the Euro to eventually

make them into internal colonies.

and, what a surprise, they've got 5 or 6 already.

adonisdemilo's picture

Just tell the"institutions" a.k.a. the TROIKA to fuck off, no money, nada, zilch.

Help put the abomination known as the EU out of business, fire the whole bloody lot of them plus all the other parasites who are sucking at the teat.

Itchy and Scratchy's picture

They'll just be stealing from other tax-payers!

Consumer Farm's picture

"so they turned to the IMF for help", is that like throwing a toaster in your bath water to help warm it up?

"When a debt-restructuring agreement was finally reached in 2012, it provided a window for private creditors to reduce exposure by offloading their residual claims onto taxpayers." ah I see, that help.

Batman11's picture

It is when the Left fail that the real problems start.

France swung to Hollande's Socialists who didn't deliver the goods, they are now backing Le Pen's Far Right.

Syriza seem to have failed in Greece and Golden Dawn are waiting in the wings.

We are following a well trodden path.

1920s/2000s - High inequality, high banker pay, globalisation phase

1929/2008 - Wall Street Crash

1930s/2010s - Currency wars, global recession, rising nationalism and extremism

1940s - Global war


fremannx's picture

France and Italy next? With Greece now on the verge of exiting the European Union, the contagion that the ECB and the IMF has feared appears to be happening. France and Italy may be next to succumb to the deflationary vortex enveloping Europe.

fiddy pence haff pound's picture

somehow, the Depression only ended by war.

don't know how that straightened out the banks,

but after WW2, there was more fairness in society,

good pay and stuff. the UK started social medicine in '48.

Actually, middle super-rich were bankrupted by WW2.


This Depression has lasted almost as long, and no solution has been tried.

de-dollarisation is getting the US talking war with Russia.

anachronism's picture

"You can't get blood out of a stone."

Sure! There are many in Greece who are doing everything possible to avoid -even evade- taxes. But that is not the crux of the problem.

Greeks have gotten poorer every year since 2005. The taxable base has been shrinking and the amount of taxes that can be collected is also shrinking. Austerity measures just make everything get worse a lot faster than would have been the case otherwise.

Forget asking for debt forgiveness! Forget paying back debt on any kind of schedule, even if the interest rate is set to ZERO! Greece -as a country and as individuals- should declare bankruptcy and offer to go through what amounts to a Chapter 11: They should declare that Whenever -If Ever- there is a surplus of funds, the Greeks would pay 20% of that into a creditor's pool. If creditors can live long enough to see it, the debt will be paid in full. And the charade called the EURO can continue.

If that is unacceptable to the creditors -or to the Greeks, who should be given the chance to vote yea or nay on the deal- then the bankruptcy should be completed as a Chapter 7: all debts would be declared null and void. And the Greeks would enter a new world without debt and also without credit.

SquadronVBF94's picture

Granted that the Euro Zone bureacrats and bankers are a bunch of assholes but the Greek governments, none of them, have undertaken any effort to reduce their own bloated bureaucracies and public employee roles.  Plenty of guilt to go around for all concerned.

Spiro The Greek's picture

You second point has been rectified.

fremannx's picture

Greece's new FinMin has an interesting metaphorical take on the cause of current global economic problems. He call it 'The Global Minotaur'.

Nobody For President's picture

What a (long-running) shit-show this is. My take, after following this crap way too long, is that Greece (i.e. the Greece people) WANT to stay in the Euro UNION, but can't afford to stay in the Euro Monetary Union. 

Why? WWI, WWII, and about a thousand years worth of war. Fuck that, let's go back to the Trojan War of 12th or 13th century B.C. Let's say 30 fucking centuries - roughly 900 generations of people. The Greece people have a history that most of us on ZH (but not all) can not comprehend. But many, many Greeks can remember WWII, and it was not fun.

Short story: Mainland Greece was liberated in October 1944 with the German withdrawal in the face of the advancing Red Army, while German garrisons continued to hold out in the Aegean Islands until after the war's end. The country was devastated by war and occupation, and its economy and infrastructure lay in ruins. Greece suffered more than 400,000 casualties during the occupation, and the country's Jewish community was almost completely exterminated in the Holocaust

OK. There is a contingent on ZH that don't believe the Holocaust - just fuck you - my uncle (died at 100 years and one month last year) was in battle of the bulge and was at Dachua shortly after the war's end, so if you don't believe any of that happened, here is a site for you:

But I digress.

The Greece people want a Europe free of war. Simple. Everywhere I have traveled in Europe (a bunch since 2000 - retired, want to see and meet the world) feels the same way. Went back to to Vietnam in 1989 to set up this project - same deal (cried a lot).

The poeple, the sheeple, the dumb fucks, US - we are tired of war and shit. We are tired of wasting our youth and our treasure on this constant war. Everyone on this site is sick of it. The Greece People want a united Europe. They just can't, as the present rules are written, be part of it. Whether the Greeks are slothful, tax-evading, corrupt assholes or not (I suspect some are, most are not)- they  don't want a Europe  full of mini-states fighting and warring with one another. It has been going on for the last hundred years ()+) - well documented. So they voted for the impossible - keep us in the EU, but out of the EZ. This may be posisble,but not probable.

You poor fucked Greeks - my only advise is to shoot, choke, beat to death, or stone ANY representative you see from the Eurocrats...



Spiro The Greek's picture

Thanks for the support and advice Mr President.

couple of points....

Your country has build its wealth based on war, all the way from shooting Indians to shooting if I was to take your advice I should also take your example?, not really, you are right on many things in your post and one of them is that we are not the people that will see war on our land NO MATTER WHAT. The only reason we achieve this is a social phenomenon based on the fact that we stick together when the time comes and hence is very difficult for anyone to divide us and hence start conflict.

We just want and get one thing...Justice over our corrupted politicians of the last 40 years and for the Credit houses of this world to put their credit products where the sun dont shine and leave us alone as we were 25 years ago when credit did not exist in our society.

Thank you for caring.

fiddy pence haff pound's picture

i think Varoufakis was in favour of Grexit, but realises you need to have

fiat ready and it'll take months to print.

meanwhile, the world gets the message and bank runs

and cash flight would be massive.


Liam Halligan said, on Keiser , that maybe Italy will

leave the euro first.

Anyway, if Syriza fails, Podemos will take over Spain.

Slow, painful Euro death


williambanzai7's picture

One can conclude that the entire PIIGS bailout scheme was designed in the same way. No surprise there.

What continues to surprise is how long this farce is stretching and how far the people are willing to lean over without really complaining.