Despite fears some had of an inconclusive and divisive knife-edge verdict, Greece delivered a resoundingly strong ‘No’ vote in yesterday’s referendum. The country partied last night, but today faces the hangover. Some of London’s leading think tanks have given Breitbart London their view of what happens next.
Adam Memon, Head of Economic Research at the Centre For Policy Studies, suggested to Breitbart London Greece may not have the means to raise itself from the position it finds itself in. He said:
“The Greek vote highlights once again the value of independent nations having their own monetary policy and freely floating exchange rates. It also demonstrates the fact that pro-growth structural reforms must come along side deficit reduction measures in order to raise living standards and provide economic stability.”
The immediate concern for Greek voters is the banking system. The Bank of Greece was quick off the mark last night with a conference call to domestic banks on which the liquidity crisis was discussed. As Greeks continue to withdraw money from their accounts the risk of ATMs literally running out of cash is high. It could even mean that money to pay for crucial imported goods such as food and medicine is unavailable.
The Telegraph reports the head of the Hellenic Chambers of Commerce, Constantine Michalos, predicting that even capped at €60 a day the situation is unsustainable:
“We are reliably informed that the cash reserves of the banks are down to €500m. Anybody who thinks they are going to open again on Tuesday is day-dreaming. The cash would not last an hour.
“We are in an extremely dangerous situation. Greek companies have been excluded from the electronic transfers of Europe’s Target2 system. The entire Greek business community is unable to import anything, and without raw materials they can’t produce anything.”
Proving Michalos correct, Greek banking authorities are now set to extend last week’s bank closures further into this week.
The operation of the European Central Bank (ECB) is governed by strict rules, so in theory it cannot simply use its discretion to lift the current level of emergency liquidity assistance (ELA). The level was set after Greece went into arrears on its repayments to the International Monetary Fund (IMF) and it should not be lifted until a new deal is done or realistic progress towards one is made.
The ECB could suspend funding meaning Greek banks having to repay ELA liquidity. The likely outcome of that nuclear option would be Greece crashing out of the eurozone immediately, so analysts believe it is unlikely to happen without the express support of political leaders.
The more likely option is waiting to see what the leaders of the eurozone countries decide at Tuesday’s meeting. The incendiary language of the referendum campaign could have been a barrier to negotiation, nobody likes being called a “terrorist”, but the removal of Greek Finance Minister Yanis Varoufakis may alleviate that somewhat. In his resignation statement Varoufakis said the Greek Prime Minister, Alexis Tsipras, judged his “absence” from Eurogroup meetings “to be potentially helpful to him in reaching an agreement.”
Of course it is not a one-sided issue. Greece may feel emboldened by the ‘No’ vote, but Germany is still holding to its line. German Deputy Chancellor and Economy Minister Sigmar Gabriel is reported to have said Greece is now threatened with insolvency and if it wants to stay in the eurozone it has to present proposals that go beyond what it has offered before.
In addition many eurozone leaders were last week saying the referendum on whether to stay in the euro, not just about a proposed bailout. It would be hard for them to back down now without losing face. If they did so it could embolden anti-austerity forces already gathering strength both in Italy and, especially, Spain.
Speaking to Breitbart London, Ryan Bourne, Head of Public Policy at the Institute of Economic Affairs, predicted Greece will leave the eurozone following a failure to reach agreement in time. Asked to predict the outcome he replied: “If I were a betting man I’d say last night’s referendum result makes Grexit more or less inevitable.”
Bourne still sees the appetite for a solution, and indeed it is reported that Prime Minister Tsipras is expected to present a “comprehensive” proposal for an aid deal at tomorrow’s summit, but he could not identify the means of reaching it, saying:
“Politicians will attempt to negotiate a deal, but Syriza’s renewed mandate and the constraints of domestic public opinion on the likes of Chancellor Merkel will combine in such a way that a new comprehensive debt relief deal with relaxed conditions appears a very long way off.”
In the week that the United Kingdom approaches George Osborne’s first Budget presented as the Chancellor of the Exchequer of a majority Conservative government, the Head of Economics and Social Policy at Policy Exchange, Steve Hughes, drew a contrast between Greece and the UK. He told Breitbart London:
“When George Osborne gave his first Budget speech in 2010 the Greek crisis was really beginning to take hold. Five years later and Greece is no closer to finding a permanent solution to their economic problems.
“In many ways, comparing the economic performance of Greece and the UK is like comparing apples and oranges. There are different histories, different drivers of growth and different monetary systems, all of which provide context to their post-financial crisis experiences. But that is not to say that no lessons can be learned from each other.
“Greece can look at the benefits of the UK having an active central bank and its own currency, as well as how state pension and welfare reform has been justified and enacted. While UK policymakers can see what happens when the population of a country believes it is being asked to shoulder an austerity that is too unfairly imposed.
“With the credibility he has earned, a track record of dealing with big policy problems before they become chronic, and strong levels of employment and growth, George Osborne will be able to stand at the dispatch box on Wednesday, point to events of the last week, and say, ‘Greece is what happens when an economy is mismanaged’.”
The next repayment deadline for Greece is two weeks today, Monday 20th July, when Greece must repay €3.5 billion to the ECB. If missed, the ECB may be obliged to cancel ELA payments and sever the Greek banks’ one remaining lifeline. At that point Greece will need to have found its ‘Plan B’ to survive without the euro.