Greece Is a Millstone for Europe
Ralitsa Kovacheva, March 8, 2012
The consequences of the Greek crisis will weigh on Greece itself and on Europe for many years, economists Dimitar Ashikov and Dr Evgenii Kanev commented in a conversation with euinside`s Adelina Marini. The topic of the latest edition of euOUTside was the second Greek rescue programme and the conditions, set by the EU and the IMF.
According to Evgenii Kanev the purpose of the deal is to save the status quo so the crisis does not to spread. However, there will be contagion in terms of distrust of the entire investment world to what is happening in Europe, the economist says. He gave the example of the credit default swaps (CDSs), which serve as insurance in case of bankruptcy. Greece is virtually bankrupt, but it is unclear whether the investors holding CDSs on the Greek debt will get their money back. Although the eurozone rescue fund will allocate 30 million euros of "sweeteners" for private lenders involved in the Greek debt swap, not all holders of Greek bonds will be "sweetened". This will bring distrust and decrease investors` interest, the economist believes.
In support of this thesis Dimitar Ashikov commented that if before the deal on the Greek debt restructuring we had strong and weak debtors, now we have strong and weak creditors. A club of 'immunised from losses' is being created - the ECB for instance, holding Greek debt worth around 50 billion euros and other euro area central banks. This is very demoralising to the general sovereign bonds investors, because if a voluntarily write-off of Spain`s or Portugal`s debt is needed and it proves that the proportion of those, who will not suffer losses is too big, it must be offset by even greater "haircuts" of private investors, Mr Ashikov said.
According to Dr Kanev, Greece is facing a dangerous spiral, where spending cuts will continue to reduce the economy and hence - budget revenues will be lower, because the vast majority of the Greek economy is tied with the public sector, "it is like the sun and the whole state revolves around it". Mr Kanev believes the state must continue to make certain spending so the private business to "vegetate" around it in order to provide jobs and pay taxes. In the future, the state must enter the economy in a Keynesian way and generate business and revenue. As an investment consultant, Evgenii Kanev sees the future of the Greek economy mostly in tourism - for example, the state can lease its islands in order to earn revenue. Another option is to use public-private partnerships following the example of the port of Piraeus, which has been leased to Chinese investors for 35 years.
Dimitar Ashikov noted that "Greece has a very poor history of economic and other reforms," and even if such would be implemented now their impact could be expected as early as 2015. During that time, however, the situation is expected to worsen and force many young and educated people to seek employment abroad.
According to Evgenii Kanev it is very important for Greece to remain in the euro area, because its economy is entirely tied to the EU and the euro area and a possible return to the drachma would lead to sharp impoverishment. Cutting incomes as it is happening now is inevitable, because this standard was artificially inflated and cannot be maintained anymore. For Europe, however, it is better Greece to leave the eurozone, because it has no option for an easy escape, unlike, for example, Portugal. If Greece remains on artificial respiration in the EU, this will have negative implications for the European integration. An internal attitude will be created against any enlargement of the euro zone to avoid a repetition of the Greek case.
Dimitar Ashikov also believes that countries like Greece and Portugal have managed to enter the club of rich countries not for economic reasons or based on real growth and competitiveness, but because of their EU membership and European subsidies. In this sense, the crisis brings them back to the real level of their economic and social development, the economist argues. But Europe must decide once and for all the dilemma whether to maintain this artificial status quo with great efforts or take radical steps.
According to Evgenii Kanev there are similarities between the Greek crisis and the Bulgarian crisis from 1996-1997, though he believes that Greece would hardly reach the bottom reached by Bulgaria then. What is common in both crises is the cause, is the state management of the economy in an unconcerned manner and without understanding of economic laws. However, unlike Greece now, Bulgaria had the chance to start recovering in a global upsurge cycle.
According to Dimitar Ashikov, the EU has not done well in tackling the Greek crisis because it tried to mask the problems with many words, rather than solve them. Evgenii Kanev believes that henceforth the EU has only two options - either increased integration or disintegration, but nothing in between.
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