No Winners in the Greek Debt Crisis

The decision by more than 61% of Greek voters to reject the terms of a new bailout package offered by Greece’s international lenders has brought Greece and the European Union to a critical juncture in the region’s long-running debt crisis.  The question now is, will either side make the level of concessions needed to stave off a complete financial collapse in Greece and, if so, what are the repercussions of such a move on the rest of the embattled Eurozone.  What is certain is that, whatever the outcome, all sides involved in this modern Greek tragedy will emerge from this crisis as the losers, regardless of what anyone in Athens, Frankfurt or Brussels says.

 

The biggest loser in this crisis, without a doubt, has been Greece itself.  For Greece, this debt crisis has been nothing short of a Great Depression, with economic output having contracted by more than 25% since the crisis began and with the country’s unemployment rate soaring to more than 26% (despite the exodus of working-age Greeks in recent years).  In particular, young Greeks have lost, as their future has been compromised by the sins of the previous generations of Greeks, whose mismanagement of the country’s political system and its economy have made life so difficult for the majority of younger Greeks and have driven so many of them to seek a brighter future outside of Greece.  Moreover, the country’s reputation has been battered, as the country has become synonymous with corruption, tax evasion, early retirement and labor unrest and, as a result, Greece’s ability to attract investment has been severely damaged for the foreseeable future.

Now, Greece faces the choice between the lesser of two evils.  On one hand, it can break off negotiations with its international lenders and default on its debts.  This will certainly force Greece to drop the euro as its currency, leading to a new sharp recession and a major decline in the value of whatever currency Greece adopts to replace the euro.  However, it does offer the long-term hope of restoring Greece’s lowly export (and tourism-related) competitiveness, something that could, one day, return the country to growth.  The other choice would be for Greece to reach a deal with its international lenders, allowing it to continue to pay off its debts (or at least a percentage of them) and to remain in the Eurozone.  While this will help to prevent a new deep recession in Greece, it will do little to restore the country’s economic competitiveness and this will lead to long-term stagnation and decline.  Either way, the illusion that Greece was a dynamic and developed economy has been shattered by this crisis and the long-term prospects for the Greek economy are poor without a complete overhaul of the country’s economy and the Greek’s government’s management of the economy. 

Greece’s international lenders have also emerged as major losers in the wake of this crisis.  First, the European Union’s efforts to push ahead with further economic and political integration have been severely damaged by the deep divisions over how to deal with Greece.  Even within the Eurozone, where integration was much further ahead than in the EU as a whole, these divisions have caused a great deal of harm to the cause of integration.  Now, either Germany and its austerity-supporting partners will have to back down and make concessions to Greece at the risk of losing support at home, or they will have to continue to take a hard line with Greece, damaging their relations with southern European countries such as France and Italy.  

Meanwhile, the International Monetary Fund (IMF) has also emerged from this crisis as a severely weakened organization, despite the fact that it was originally brought in to play a peripheral role in handling Greece’s debt problems.  This is due largely to the fact that many emerging markets resented the fact that the IMF was involved in a project that was aimed at rescuing what then was perceived to be a developed economy.  This resentment has added to the perception among emerging markets that the IMF is a club for wealthy countries alone and that it plays a largely patronizing role in the developing world.  The recent creation of the Asian Infrastructure Investment Bank (AIIB) is just one of what will be a number of steps taken by emerging markets to break their dependency on the IMF and the World Bank, and the Greek debt crisis has played a major role in the acceleration of this trend.

As this crisis is far from being resolved, it is not yet possible to establish what the crisis’ exact long-term impact on Greece and the European Union will be.  However, a number of long-term trends are likely to develop.  First, Greece’s economic future is anything but bright, as it will not be able to generate significant economic growth rates at any time in the coming years and this will result in Greece falling further behind the wealth and development levels of the world’s developed economies.  Second, Greece’s relations with the European Union have been severely damaged and this will open the door for Greece to strengthen ties with outside powers such as Russia (Orthodox ties) or China (pockets full of cash), much to the consternation of other EU member states.  Third, the European Union will have to realize that it must either go all the way with economic and political integration (even if it loses a number of member states in the process) or it must abandon its dream of becoming a more unified region.  Increasingly, the latter is more likely as the haphazard way in which the EU has both expanded (such as Romania and Bulgaria) and centralized (the poorly-conceived euro) has caused great pain for many in the EU, nowhere more so than in Greece.