Although there are the opinions that the Kremlin can play a meaningful role in the final resolution of the Greek crisis, it is hardly likely to be the case, given Russia’s own economic challenges.
A man passes graffiti in Athens, Greece, on July 21, 2015. Banks reopened Monday for the first time in three weeks, but for most Greeks, already buffeted by six years of recession, Monday was all about rising prices as tax hikes demanded by creditors took effect. Photo: AP
The announcement of an €86 billion bailout of the Greek economy last week by the “Troika” of the International Monetary Fund (IMF), the European Union (EU), and the European Central Bank (ECB) appears to have staved off a “Grexit” (a Greek exit from the euro zone) and rescued the Hellenic Republic. Coming on the heels of a popular referendum unequivocally opposed to harsh bailout measures or “austerity,” the new bailout appears to lay out a plan that is, in many ways, harsher than what the Greek populace rejected in early July.
More troublingly, while the markets have shown relief that a Grexit has been avoided in the short-term, the reality is that the latest agreement has only prolonged Greece’s slow-motion crisis even further. And given the economic health of Greece’s neighborhood, there is not much that anyone but Greece is willing or able to do about it.
The rapid deterioration of Greece’s financial condition
The past two weeks have seen incredibly fast-paced developments in Greece’s long-running economic tragedy, from the referendum to the imposition of capital controls to the final announcement of a bailout deal last week. While the details of the bailout remain subject to additional debate between the Greek government and the EU, it is apparent that the bailout will contain a toxic combination of tax increases in an effort to “broaden the tax base” and financial sector rescues, further straining the Greek government’s balance sheets.
Somewhat embarrassingly for the Marxist ruling party Syriza, the plan that Greek Prime Minister Alex Tsipras agreed to last week is somewhat stricter than the one he urged voters to reject, mainly because the freefall in the Greek economy as a result of the referendum has made public finance targets even more difficult to achieve. And given that much of the Greek crisis was precipitated by the revelation that the government was cooking the books on the extent of Greece’s troubles, it should be no surprise that new information reaches the markets every day – and they almost never are encouraging.
As an example, the day after the bailout deal was reached, the IMF revealed that Greece’s position was far worse than anticipated. More tellingly, a “dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date,” meaning that the bailout was rendered ineffective even before it was disbursed.
Even with the correct amount of money cobbled together from the ailing euro zone, the terms of the bailout still miss what is truly ailing Greece, and that is excessive spending. Greek government spending as a percentage of GDP is still above 2008 levels, and approximately 14 percent of the labor force is employed in the formal public sector (which doesn’t take into account the thousands of Greeks working for public corporations).
While the EU has included privatization and spending cuts as part of the bailout deal, these are longer-term conditions that may take years to implement, and are likely to not focus on removing the role of the Greek state from the Greek economy. Unfortunately, as economics research consistently shows, fiscal consolidations only work if they rely on spending cuts and not on tax increases.
Politically, as the referendum showed, this will be an impossible sell to the Greek electorate, who have had enough of “austerity” and small cutbacks in their enormous welfare state. When a polity votes for free unicorns, it is very difficult getting them to accept the fact that the unicorns aren’t free. Also, that the unicorns didn’t exist in the first place.
How the economics of uncertainty influence the situation in Greece
Another issue with the bailout, besides its misplaced focus, is that it prolongs the uncertainty surrounding Greece. A rich economics literature has explored the effects of political uncertainty on financial markets, showing how political events or news influence stock market movements regardless of the fundamentals of the markets themselves. Building on this research, economists have begun to explore how such political uncertainty feeds through to the real economy.
Early empirical results have not been encouraging. Repeated political uncertainty acts to a market like stress on a body, wearing it down and making it more susceptible to real illness. In this manner, given uncertainty about future policies, rational expectations are impossible to form. Politicians thus continue to cause all of the problems in the markets that they blame on “capitalism,” “speculators,” “kulaks,” or whatever epithet is in vogue for that week.
This is precisely what has been happening in the euro zone for five years and, with Greece’s deal, is set to happen for a bit longer. Greece has been able to threaten the viability of the euro, but not due to its tiny economic clout. Recently, Paul Krugman accurately pointed out that Greece’s GDP is about the size of the Miami metropolitan area. If you compare Greece to all the U.S. states, the Hellenic Republic does not even rate as high as the state of Wisconsin (approximately $281 billion for Greece in 2013 versus $292 billion for the cheese state).
Instead, the worry is about what the continuing Greek saga means for the euro zone, as there is no mechanism in place to deal with a country exiting the common currency. Years of “will they leave/won’t they leave” have created a huge amount of uncertainty regarding the euro itself, about the commitment of the EU to the euro, and about the divergent ideas surrounding the currency and its raison d'être.
As predicted by economic research, this uncertainty says nothing about the euro or Greece and everything about the perception of what lawmakers will do next. Perhaps the euro is not fundamentally flawed; an argument can be made that a common currency restricted to similarly situated countries could lessen transaction costs and increase trade. But the euro continues to be under sustained pressure due both to its internal issues with its poorer members and the political uncertainty surrounding what will be done in the future, and Greece has been the epicenter of this storm.
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The new bailout agreement almost institutionalized this uncertainty by not addressing the euro issues that surround Greece, a reality that is compounded by the lack of faith in the bailout being expressed publicly by those who crafted it. Without a concurrent resolution of the euro’s own issues (how to reconcile euro “ins” and “outs” in the EU, how can countries peacefully exit the currency, what is to be done with enforcing Maastricht criteria, etc.), the uncertainty will spread. And Greece will continue to suffer.
Is there a role for Russia in the Greek crisis?
Given the euro zone’s own difficulties, a possibility floated by some observers, more longingly than with basis in reality, is that Greece may turn to its Orthodox brethren in Russia for assistance. If the Germans continue to play hardball, this argument says, perhaps it is time for Greece to look elsewhere to countries that won’t impose such strict conditionality. Russia, as a highly visible ally-in-waiting, would fit this bill perfectly, as it would allow Russia to also score political points against an EU that has disapproved of Moscow over the past two years.
But while Tsipras has flirted with Russia in the past, it is highly unlikely that Russia can play a part in reviving the Greek economy. In the first instance, Russia is in no condition to assist Greece, even if it desired to do so as a political move against the EU. Struck mightily by low oil prices (going even lower as a result of the U.S. deal with Iran) and slowly by financial sanctions, Russia faces years of economic stagnation of its own making.
And like Greece, Russia is shrinking: In current U.S. dollars, Russia’s economy in 2014 was only about six and a half times that of Greece, or smaller than that of California, Texas or New York. Russia would not have the financial clout to put together a bailout package on the size that the EU could muster, even if it so wanted to acquire a property on the Mediterranean.
Secondly, Russia has already saddled itself with far too many bad bets in the past two years to make another basket case attractive. The annexation of Crimea, a peninsula that was almost entirely sustained by budget transfers from Kiev, added a major fiscal liability to the Kremlin’s books (in addition to international opprobrium), while the ongoing war that Russia supports in Ukraine is sapping manpower and resources.
The expansion of the Eurasian Economic Union (EEU) also may incur more debts on the Russian balance sheet, as recent unrest in newest member Armenia will likely require some concessions from Russia to bring the country safely back into the fold. Adding Greece to the list of Russia’s dependents would be a catastrophic move for the Russian budget.
This reality also applies to the BRICS countries (Brazil, Russia, India, China and South Africa), which can also ill afford to take on bankrolling a troubled country that has proven itself unable to follow external conditionality. China, the engine of the BRICS with a GDP larger than all other members combined, has gone through its own financial panic in the past month, with the stock market plunging by a third from June to July. The effect of a Chinese recession on the world economy cannot be understated, and thus it is unlikely that China will divert itself from its own issues in order to make some point about BRICS solidarity in Athens.
Similarly, Brazil is still undergoing its own economic crisis, beset with stagflation and a plunging currency and a projected growth rate of zero this year. Finally, South Africa has nowhere near the resources necessary to rescue Greece.
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Finally, Russia is in little position to help Greece mainly because there’s a little bit of Greece in Russia right now. In 2012, Russian President Vladimir Putin ordered higher levels of social spending across the country, resulting in a doubling of the fiscal burdens of Russia’s regions. Coupled with the ongoing economic crisis, 75 Russian regions face budget gaps according to the Higher School of Economics, and even some small nominal spending cuts in 2014 have not been enough to fill the hole. An economic slowdown, liabilities piling up, and spending bills coming due have all combined to make Russia’s interest in Greece purely academic.
Unfortunately, despite the events of the past two weeks, Greece’s crisis continues to move forward in slow motion, and the latest “bailout” from the EU has only delayed the day of reckoning. While a Grexit is less likely in the short term now, there is no guarantee that such a scenario will not reappear in the future, a reality that will continue to weigh on the euro project.
Unfortunately for Athens, there is no one that can really help the Greeks out of this mess but the Greeks themselves, as the EU is loath to finance Greece any further and the BRICS simply cannot afford it. Whether such a scenario is accepted by Greek voters is another story entirely, but reality may ensure that their acceptance will soon be immaterial.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.