Euro zone’s needlessly punitive deal for Greece threatens a repeat of debt crisis

The Greek prime minister Alexis Tsipras on Monday signed over his country’s fiscal sovereignty to its creditors.

That is in exchange for enough cash to keep the Greek state solvent for up to – but probably less than – three years.

The deal is punitive. For loans of up to €86 billion, Greece must further raise taxes, launch a fire sale of state assets, limit union rights, cut pensions, appoint overseers to ensure that its budgets passed by the Greek parliament please its creditors, and legislate for automatic spending cuts in case its budgets are too large.

Unelected monitors from the European Central Bank, the European Commission and the IMF will again be involved in forming and making recommendations on Greek legislation. And €50bn of state assets will be sequestrated – for privatisation, bank recapitalisation and debt repayment – and put into a special fund based in Athens.

In what has been billed as a “concession”, the Greek government will get to keep the revenues from the sale of €12.5bn of its assets.

Without credible plans to exit the euro and reintroduce the drachma, Mr Tsipras did not have an alternative to accepting the largely German proposals.

The former Greek finance minister Yanis Varoufakis appeared to regard reverting to the drachma as a non-starter. “To exit, we would have to create a new currency from scratch,” he wrote in The Guardian newspaper. “In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks.”

Mr Varoufakis, who was formerly responsible for overseeing the digital economies of online multiplayer games at the US software developer Valve, had toyed with introducing digital alternatives to the euro, including electronic scrip, IOUs, and a parallel currency based on Bitcoin.

This was never a practical alternative – the infrastructure needed to make a parallel digital currency a viable replacement for cash would be expensive and complicated to administer even in normal times.

But in the absence of Plan B – Greece’s exit from the euro zone, followed by a new paper currency, a dramatic devaluation, and major central bank interventions – Mr Tsipras could either accept the creditors’ proposals or see his country collapse.

And collapse it would have. Greek banks would have gone bankrupt, deposits evaporated, trade broken down and poverty, already massive, would have grown further. One economist estimated that Greece’s departure from the euro would shave 40 per cent off the country’s GDP in a year.

So Mr Tsipras opted for the “least catastrophic deal”, according to the Greek labour minister Panos Skourletis.

The deal is nonetheless unconscionable. It inflicts unnecessary suffering on the Greek people, it does nothing to help Greece recover, and it will only increase Greece’s debt burden.

Austerity has destroyed more than a fifth of Greece’s economy. Higher taxes will stifle demand further, and the deal’s mandatory slash-and-burn approach to asset sales is no way to maximise a balance sheet’s net present value.

Recession has taken an axe to Greek incomes, and the country faces a humanitarian crisis. As hospital infrastructure collapses, HIV is on the rise – just one medical ill that rises as society disintegrates.

An open letter from the French economist Thomas Piketty and a group of macroeconomists to the German chancellor Angela Merkel, published in several major European newspapers, said: “The financial demands made by Europe have crushed the Greek economy, led to mass unemployment, a collapse of the banking system, made the external debt crisis far worse. The economy now lies broken.”

The Nobel economics laureate Paul Krugman puts it more colourfully: “Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients – and when their treatment made the patients sicker, demanded even more bleeding.”

Greek public debt, after five years of European policy medicine, has increased to 174 per cent of GDP from 113 per cent of GDP. This is a consequence of Greek borrowing increasing by 6 per cent – and GDP falling by more than 20 per cent.

Sooner or later, Greece will run out of cash again. Added time has been bought at the price of more pointless suffering.

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