Prime Minister Tsipras has negotiated a third bailout for Greece with its Eurozone partners. The Greek Parliament should reject it, dump the euro and reintroduce the drachma.
European leaders have pledged up to €86 billion ($96 billion) in additional aid—up to €25 billion to recapitalize banks and the balance to prop up Athens’ finances.
In exchange, Greece would have to further raise taxes and cut pensions and other spending, liberalize labor laws and remove regulations protecting special interests in many markets for goods and services. It would privatize €50 billion of public assets through a fund administered by European officials—€37.5 billion would retire some its debt and recapitalize banks, while the balance would be available for investment.
Greece would undertake much needed modernization of its public administration but implementation of these measures and other reforms would be subject to strong external monitoring and controls. The latter goes far beyond what has been imposed on other Eurozone nations receiving bailout financing and is a direct affront to Greek sovereignty.
Throughout bailouts beginning in 2010, Athens embraced reform reluctantly but it has followed through in considerable measure. Before the crisis of confidence between the Tsipras and his EU colleagues, Greece had accomplished a primary budget surplus—revenues less expenditures net of debt service—of one percent of GDP.
What Eurozone leaders—and in particular German Finance Schauble who was most insistent on harsh terms—don’t get or refuse to admit is that for Greece and other troubled Mediterranean countries, austerity and marketplace reforms can’t guarantee economic recovery until Germany and its northern neighbors change their economic policies too.
To pay off debt, Greece must grow by expanding its limited export sector. Foreign receipts come mostly from shipping, petroleum refining and tourism, and trade composes a much smaller share of GDP than for other small economies.
Despite German criticism of Greek labor market inflexibility, private-sector wages are down 25 percent. Yet, even prior to the January election of Tsipras’ left-wing government, Greece had not attracted much new investment from northern countries.
Greece has a well educated labor force, and its network of small businesses attest to a strong entrepreneurial culture. But Germany and its northern neighbors pursue growth strategies premised on exports—in particular, running trade surpluses.
Despite its rhetoric and more flexible labor laws, Germany does not play by the rules it prescribes. For example, during the financial crisis, Berlin subsidized manufacturers to keep workers on the job—something poorer countries cannot afford to do and that biases plant location decisions in favor of Germany.
The greatest German advantage of all is the euro. It is undervalued for Germany and other northern economies and overvalued for the Greek and other Mediterranean economies.
Consequently, Germany and its neighbors accomplish trade surpluses, and the Mediterranean economies must endure trade deficits.
One way or another those deficits must be financed by borrowing from the north. Either Mediterranean governments sell bonds to foreign investors—the Italian and Greek approach—or banks take foreign deposits and provide easy credit through mortgages and consumer loans—the origins of Spain’s banking crisis and meltdown.
No amount of austerity and one-sided market reforms imposed by Schauble and his friends can change that calculus, and sooner or later either Mediterranean governments or their banks must fail.
Thanks to Schauble designed austerity and reforms, Greece’s economy has contracted 25 percent, sovereign debt has soared from 130 to 180 percent of GDP, and more than €100 billion or about 35 percent of bank loans are now classified as nonperforming.
Another bailout and more austerity will only make those figures worse, and €86 billion may prove hardly be enough to prop up the banks if Greece’s economy keeps on sinking, never mind provide needed funding to keep Greece’s government going.
Greece should unyoke itself of German mercantilism and dump the euro.
Mr. Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets at @pmorici1.