Posted by Dr. Gopal Unnikrishna Kurup
Greece's Financial Meltdown
European policymakers would have done well to pay attention in 1997 when free-market political economist Milton Friedman predicted that the euro would be a disaster. Eighteen years later, with Greece on the verge of a financial meltdown, his analysis looks prophetic. European common market conditions are unfavorable for a common currency. The separate nations of different languages, customs, and nationalism have not yet developed the idea of 'Europe'. Despite being a free trade area, goods move less freely among them, regulation of industrial and employment practices differs far more from country to country, and as a result, wages and prices in Europe are more rigid, and labor less mobile.
It appears Friedman concluded rightly that " The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity".
The Greek government-debt crisis has its origin in the Greek Depression that started in late 2009, first of the four in the Eurozone. The root cause is said to be "a combination of structural weaknesses in the Greek economy along with a decade-long pre-existence of overly high structural deficits and debt-to-GDP levels of public accounts ". Fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations, confounded by the revelation that the government had hidden the actual data on government debt levels and deficits from public domain. In 2012, Greece's government had the largest sovereign debt default in history. Greece became the first developed country to fail to make an IMF €1.6 billion loan repayment on June 30, 2015. At that time, Greece's government had debts of €323bn. The resultant crisis of confidence had a cascading effect on worsening the financial predicament.
Now the time has run out for Greece, which is dealing with an economy in a protracted recession, with high unemployment and banks dangerously low on capital. The international bailout — under which it received nearly 240 billion euros in rescue loans — expired last week, on the same day Greece defaulted on an IMF repayment, becoming the first developed nation to do so. Of critical importance will be whether the European Central Bank (ECB) decides to maintain its lifeline to Greece in the form of emergency liquidity assistance, or ELA. The assistance, now at around 90 billion euros, has been maintained but not increased in past days, leaving the country's financial system in a stranglehold
Greece's debt crisis had taken a dramatic turn after Prime Minister Alexis Tsipras suddenly called a crunch referendum on bailout conditions (to implement austerity measures in exchange for a bail out ) early last Saturday knowing well that a 'no' vote could determine its financial future and even its place in the eurozone and could also make or break the radical-left government In answer to the fears Tsipras says the vote is needed to force creditors to finally accept his key demand of another round of debt relief to save Greece from financial meltdown and possibly crashing out of the euro.
Tsipras's gambit sparked consternation among his country's international creditors, and led to the breaking off of talks on the rescue plan just days before the country was due to repay 1.5 billion euros to the IMF. With nothing left in the state's coffers, Greece defaulted on its IMF debt, and was forced on Monday to impose capital controls and close banks to halt a haemorrhage of cash as anxious Greeks rushed to withdraw money.
Nevertheless, Tsipras got a rock-star welcome at an Athens rally late Friday as he sought to revive support for the 'No' vote in a referendum called to strengthen his hand in talks with international creditors.
Sunday's vote was held after a week of capital controls imposed to halt a bank run, with Greeks restricted to a daily cash withdrawal maximum of 60 euros ($67). Long lines have formed at ATMs, while pensioners without bank cards have thronged the few bank branches opened to allow them access to a maximum 120 euros for the week. Queues at ATMs swelled again as the initial results of the referendum, a thumping 'No' came in.
The ECB operates on rules according to which it can only continue ELA funding if Greece is in a bailout. Without an increase, it is unclear how much longer people will be allowed to withdraw 60 euros per day.Some analysts say Greece is so starved of cash that it could be forced to start issuing its own currency. No country has ever left the 19-member eurozone, established in 1999.
While EU leaders warned that a 'No' victory could cause Greece to crash out of the Eurozone and rival raliies of 'yes' supporters shouted pro-European slogans and voiced fears of a so-called "Grexit" from the eurozone and a return to Greece's former currency, the drachma, Tsipras got his way. The margin of victory was far wider than expected, which led the opposition leader to resign. This victory for the 'no' camp will unfortunately embolden the government, but is likely to do little to convince the creditors that Tsipras is a trustworthy negotiating partner who has any ability to implement a deal.
.
Greece's Financial Meltdown
European policymakers would have done well to pay attention in 1997 when free-market political economist Milton Friedman predicted that the euro would be a disaster. Eighteen years later, with Greece on the verge of a financial meltdown, his analysis looks prophetic. European common market conditions are unfavorable for a common currency. The separate nations of different languages, customs, and nationalism have not yet developed the idea of 'Europe'. Despite being a free trade area, goods move less freely among them, regulation of industrial and employment practices differs far more from country to country, and as a result, wages and prices in Europe are more rigid, and labor less mobile.
It appears Friedman concluded rightly that " The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity".
The Greek government-debt crisis has its origin in the Greek Depression that started in late 2009, first of the four in the Eurozone. The root cause is said to be "a combination of structural weaknesses in the Greek economy along with a decade-long pre-existence of overly high structural deficits and debt-to-GDP levels of public accounts ". Fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations, confounded by the revelation that the government had hidden the actual data on government debt levels and deficits from public domain. In 2012, Greece's government had the largest sovereign debt default in history. Greece became the first developed country to fail to make an IMF €1.6 billion loan repayment on June 30, 2015. At that time, Greece's government had debts of €323bn. The resultant crisis of confidence had a cascading effect on worsening the financial predicament.
Now the time has run out for Greece, which is dealing with an economy in a protracted recession, with high unemployment and banks dangerously low on capital. The international bailout — under which it received nearly 240 billion euros in rescue loans — expired last week, on the same day Greece defaulted on an IMF repayment, becoming the first developed nation to do so. Of critical importance will be whether the European Central Bank (ECB) decides to maintain its lifeline to Greece in the form of emergency liquidity assistance, or ELA. The assistance, now at around 90 billion euros, has been maintained but not increased in past days, leaving the country's financial system in a stranglehold
Greece's debt crisis had taken a dramatic turn after Prime Minister Alexis Tsipras suddenly called a crunch referendum on bailout conditions (to implement austerity measures in exchange for a bail out ) early last Saturday knowing well that a 'no' vote could determine its financial future and even its place in the eurozone and could also make or break the radical-left government In answer to the fears Tsipras says the vote is needed to force creditors to finally accept his key demand of another round of debt relief to save Greece from financial meltdown and possibly crashing out of the euro.
Tsipras's gambit sparked consternation among his country's international creditors, and led to the breaking off of talks on the rescue plan just days before the country was due to repay 1.5 billion euros to the IMF. With nothing left in the state's coffers, Greece defaulted on its IMF debt, and was forced on Monday to impose capital controls and close banks to halt a haemorrhage of cash as anxious Greeks rushed to withdraw money.
Nevertheless, Tsipras got a rock-star welcome at an Athens rally late Friday as he sought to revive support for the 'No' vote in a referendum called to strengthen his hand in talks with international creditors.
 |
| A pensioner crying before a bank |
Sunday's vote was held after a week of capital controls imposed to halt a bank run, with Greeks restricted to a daily cash withdrawal maximum of 60 euros ($67). Long lines have formed at ATMs, while pensioners without bank cards have thronged the few bank branches opened to allow them access to a maximum 120 euros for the week. Queues at ATMs swelled again as the initial results of the referendum, a thumping 'No' came in.
 |
| People celebrating a 'no' verdict |
The ECB operates on rules according to which it can only continue ELA funding if Greece is in a bailout. Without an increase, it is unclear how much longer people will be allowed to withdraw 60 euros per day.Some analysts say Greece is so starved of cash that it could be forced to start issuing its own currency. No country has ever left the 19-member eurozone, established in 1999.
While EU leaders warned that a 'No' victory could cause Greece to crash out of the Eurozone and rival raliies of 'yes' supporters shouted pro-European slogans and voiced fears of a so-called "Grexit" from the eurozone and a return to Greece's former currency, the drachma, Tsipras got his way. The margin of victory was far wider than expected, which led the opposition leader to resign. This victory for the 'no' camp will unfortunately embolden the government, but is likely to do little to convince the creditors that Tsipras is a trustworthy negotiating partner who has any ability to implement a deal.
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