Opinion Still fearing Greece

Sunday’s Greek national election did not reflect the public will. A make-or-break election which would determine if Greece dumps the euro,it should have seen a huge turnout but over one-third of voters kept away. Those who voted angrily rejected the austerities conditional to the EU bailout package to bring fringe parties into parliament. They include extremists like the neo-Nazi Golden Dawn and the radical left Syriza,which has Maoists and Trotskyites in its ranks. Focused on citizen rights,national interest and welfare rather than obligations to Europe,they have eaten into the voter base of the old mainstream parties,conservative New Democracy and socialist PASOK. The latter have run Greece for four decades since the collapse of the military regime,are pro-Europe,and will probably join hands to form the government and hold off Greece’s exit from the eurozone.

But the mandate is grudgingly given and the public will is clearly against them. The very presence of extreme sentiment in parliament — Syriza has almost as much heft as the winner,New Democracy — will bring pressures to bear on the government to reject austerity in the long term. The question is no longer whether Greece will quit the eurozone but when it will do so,and by what route.

The exit is not imminent and will take weeks if not months to negotiate. Only Greek voters have spoken so far. Now,their representatives and international creditors will want to have their say. But one can expect the street rhetoric to turn increasingly shrill and unreasonable — stuff your austerities,show us the money.

Greek austerity measures don’t amount to much. Despite them,the country cannot service its loans. The electorate is desperate because,as in other bailed-out countries,conditionalities have slowed national growth,slashed welfare,produced joblessness and impoverished the lower middle class. They will force Greece to default eventually,but multiple factors will determine how and when it does so,how debt is restructured and how it is paid.

The government could declare bankruptcy as it loses public support amidst a clamour daring Europe to fork over or do its worst. This would be the smart route. European institutions and politicians who have invested in the idea of Europe could be startled into doing a fresh deal. If not,primitive justice would be done. Those who had risked their money on Greece would lose their deposit,discouraging profligates and those who coddle them. Greece would default quickly,loudly,messily and return to the drachma.

But Greece could ask for more and also reject austerities on the plea that they reduce the ability to pay back by checking growth. Lenders would be tempted to risk it. Every loan gives them more say in Greece. Being able to influence the policy of another nation has benefits of its own,financial,political and strategic. But Greece would default even in this scenario,since the excess money supply would trigger inflation,which would again bring down growth and the ability to pay back. Greece would only linger on as the new sick man of Europe for a longer period.

Either way,loans will have to be restructured,in drachmas or euros. Greece would prefer drachmas,since it could simply run the presses in its mint till the rollers throw sparks and print off as much fiat currency as it needs. Loans would be paid off but in severely devalued drachmas. Greece’s hands are tied if it must pay back in euros,but Frankfurt could be tempted to print currency to finance further loans to prime Greece so that it can pay back. The result of this circular logic,again,would be inflation.

Two things seem certain,therefore — that Greece will exit in a few months,and that it will leave behind an inflationary wake,hampering Europe’s search for competitiveness. This would be a second blow to the world economy as it tries to pull out of the recession,the first being the US rewarding Wall Street’s profligacy by hiking the federal debt ceiling. Investor sentiment could turn conservative globally,fuelling the international market for gold,which offers stability. So Pranab Mukherjee was perhaps being prescient when he disparaged gold as an investment days before the Greek election. The fear of a flight of retail investment from the markets to gold is very real.

pratik.kanjilal@expressindia.com