Greek Austerity or Greek Default?

Greek Austerity or Greek Default?

Greece, a country with the longest democratic tradition in the world, announced a referendum. The Greek people are called to decide, whether they accept a new austerity program or not. The decision is a difficult one, not least because most of the population does not hold a PhD in economics. Well I do! And I can assure you that I also find the longwinded documents perplexing.

Let me see what evidence I have in my hands.

The new austerity measures follow the same recipe that created the Greek crisis as we know it today. Specifically,

Public debt reached 175% of the GDP. Bearing in mind that 99% is the psychological point before an increased risk of default, the number is astonishing.

The debt reached 320 million EUR. So, each Greek citizen should pay back 32,000 EUR. Unfortunately, more 30% of the Greek population live below the poverty line. Even 32 EUR would be a large amount.

Public deficit was reduced. The numbers indicate a 20% adjustment!

Public servants were reduced by 30%!

Salaries were reduced by 37%!

Pensions were reduced by 48%!

Unemployment reached 27%, while it is around 60% for young people!

On the whole, the economy contracted by 27%. A similar contraction was achieved during the Second World War, when 10% of the Greek population died of hunger!

The destruction of the Greek economy is almost complete. In view of this situation, the EU, ECB and IMF decided that they should finish the job they started. So, they recommended more of the same austerity measures. Among them, admittedly, there are some measures that will foster a competitive economy. For example, a decrease in bureaucratic process is badly needed!

There is no doubt that the Greek economy is in need of reforms; reforms that should have taken place in the last three years. Clientelism needed to be eradicated. The oligarch needed to lose their power. And so forth. Unfortunately, previous governments that profited from the status quo did not take the necessary decisions. And they left us with an economy that contracted by 27%, instead of the predicted 5-10%.

The necessary reforms, though, should not involve further cuts in pensions. After all, the Highest Administrative Court of Greece declared this practice unconstitutional, since the pensioners have already paid their contributions. Salaries have already been squeezed to the point that the average household has cut down the consumption of food by about 20%! General taxes that affect businesses reached almost 70%. Existing property taxes ruined what was left of the middle classes.

I can go on and on but I will spare you the pain! After all, it does not matter what numbers say. Numbers can be presented in contradictory ways to achieve contradictory results. Statistics can be manipulated to create one or another effect. The technical reports we are asked to vote on are nothing but a fiction of numbers that may or may prove to be true. They are based on fictitious projections on how the Greek economy will perform! Well, it is not the first time the IMF made a deadly mistake!

I will tell you also another secret. Economics is more akin to astrology than science! Economists are called to predict the future. So, they study different parameters and they come up with educated guesses. If one parameter is missing, the prediction collapses like a tower of cards. In the Greek case, many parameters were not included. These involved primarily but not exclusively the psyche of the Greek people, consumerist behaviours, the political cultural and many others.

Of course, such parameters can not always be quantified; a fact that the technical groups prefer to ignore.  This is one of the main problems we face in macroeconomics. We may worship neoclassical or institutional economics but we do not take into account the more important behavioural economics. I will not go into the theoretical details of how this impacts modern economic decision making. Suffice to say that the same measures should not be applied in every situation. Each country is different, economically, politically, geopolitically, culturally, traditionally, environmentally etc.

So, where do we go from here? We obviously have to take a very difficult decision. I have already taken mine, based on the evidence I have at hand. Let me explain how I reached that decision. You never know, it may help people clarify their own thinking.

First of all, I am convinced that a YES in the referendum will be as catastrophic for the Greek economy, as previous decisions were, for all the reasons I outlined. Same measures will only bring similar outcomes. The current economic policies failed and should not be re-implemented at all costs. We cannot afford more impoverishment, especially if this kind of situation continues for the next two decades or so.

What happens, though, if we vote NO? The Troika, individual European countries, the world is warning Greeks that a default and a Grexit will follow. Of course, nobody can be certain that this is the only outcome. After all, who can really predict the future? Especially since the outcome will not be just the result of economic policies; instead, it will be the combination of political aspirations, geopolitical decisions, national ideologies and conflicting power struggles within the European Union.

Based on the evidence I have in my hands, I could predict how a radical left Greek government would react in a possible NO. First of all, they would not leave the euro and certainly not Europe. For as long as they are part of the current institutional European system, they have certain advantages (as well as disadvantages). Hence, their steps will be very careful.

And yet, they will still have to face a possible default. I know I am oversimplifying the situation but defaults are usually divided in ‘structured’ and ‘unstructured’ ones. Such a structured default took place in Greece in 2012. Of course, they did not call it as such. Instead, they preferred to call it a ‘haircut’ in order to avoid the harsh reaction of the markets. This type of default took place with the full consent of the creditors. Unfortunately, it was of limited nature. At that point, it should have ‘cut’ at least 70% of the debt. It didn’t, with disastrous results.

After a NO vote negotiations will start that will determine the nature of the next default; either structured with the consent of the EU, ECB and IMF (these are the creditors today), or unstructured without their consent. I would assume that the European Union would not like to rock the boat too much. We are literally travelling in unchartered waters today. A false move can bring down several European parties.

And yet, stupidity reigns, as recent negotiations with the Greek government indicated. And I cannot exclude the possibility of an unstructured default. Even such a default will not happen overnight. Bear in mind that this is a process. We will not wake up one morning being bankrupt.

The results of a possible default, especially if it is unstructured, should be divided into short, medium and long term ones. This way we will understand better what awaits us and for how long. To be absolutely clear, I have the Argentinean model in my mind, because it was the latest state bankruptcy that assimilates the Greek one. After all, the Argentineans also had their currency pegged to the dollar, in a similar fashion as we use the euros. There are, of course, differences. Among them the scale of the Argentinean economy is much larger than the tiny Greek one, while their currency was freed from the dollar almost immediately.

Following the Argentinean example, we should expect a steep contraction of the Greek economy as a whole in the first six months. Economists estimate it to another 10% on top of the 27% we already experienced. This is actually better than I thought. If we vote yes and we accept the new program, the contraction of the economy will probably reach another 5-6%. What does this mean for the people? I think that capital controls are unavoidable. The government may restrict withdrawals from the bank to 300 euros per week, that is 1200 euros a month. To tell you the truth, I know very few people who make 1200 euros a month. I even know a lot less people who have any money in the bank! So, I do not think that the measure will affect the majority of the population.

Problems, though, will arise in the energy sector, food and medication. I think that we import 40% (if I remember correctly) of our energy consumption mostly from Bulgaria and Turkey. If credit is altogether cut, we should expect power cuts that will affect up to 40% of our day. Our habits in terms of cooking, reading, watching tv etc. will have to change. Similarly, gasoline and gas will be affected.

We also import a large amount of our foodstuff. I am afraid I do not have the statistics for that. I suspect that some items will altogether eclipse from the markets. My biggest fear have always been that chocolate will be found nowhere! The existing government despite entering harsh negotiations has not taken any measures to increase local production. I suspect that part of this reason was because it did not want to upset the Central Agricultural Policies of Europe.  Food consumption will be reduced, the black market will flourish and Greek people will suffer. Rationing is expected.

We will face the same situation with medications. I suspect that the lowest incomes will be hit the hardest as they will not be able to find medicines in the local market. I have friends who already stocked up in antibiotics and painkillers for the kids… just in case. However, I suspect that these may be found and bought from online pharmacies. The humanitarian crisis will become more pronounced in the cases of cancer patients. It will be very difficult to treat them on Greek soil.

When this situation is realised a large package for help will be voted in the European Union. Unfortunately, we will have to rely on external help to face the problems creditors as well as previous Greek governments created. The help will be substantial and short lived. I cannot possibly believe that the EU will face a humanitarian crisis of these proportions in the heart of Europe without reacting. Such an omission would trigger social unrest and geopolitical shifts that would be best avoided.

These short lived effects will last around 6-8 months. Then we will notice a stability in the system. The country will start recuperating slowly but steadily. The people will settle in a new normal, the budget will become more balanced (although now we are very close to primary surplus), more jobs will be created, stability will start attracting foreign investment. This will be 1-2 year period, depending on the mood of the Greek population. If they keep positive, they will recuperate faster.

The true growth will come afterwards. Two years beyond the default may see growth of around 8%! Greece has not seen such growth since for ever. The economy will be vastly more competitive, entrepreneurship will be modus vivendi with a lot more businesses opening up, the power of the state will be reduced and, hopefully, the oligarchs will lose part of their hold on political affairs.

No we will not leave Europe! Only sick minds can suggest such an outcome. And it is highly unlikely that we will leave NATO. Greece is a very small country of people with loud voices but no real power. It would be best for everyone, if we kept our existing alliances. We have been part of European processes since the 1950s. We officially joined the European Community in 1981 (the same year as Ireland did). Traditionally, we are very much part of Europe, long before we adopted the same coin.

I cannot say the same about keeping the euro, though. In fact, I am not even sure the euro will survive this pan-European crisis. There is certainly strong political will from the vast majority of the countries to keep it in place. For now! However, if austerity in Europe continues, the people may start voting for the ‘wrong’ governments. I am looking forward to see how the Podemos in Spain will fare in the next elections, for example.

No matter how loudly some Greek parties shout for keeping the Euro, I am not entirely certain this is feasible. If Europe decides to ‘punish’ the Greek government and decreases the liquidity of the banks, SYRIZA will be left only with one option. If there is a default of any kind, euros will stop flowing into the country. In fact, they stopped flowing almost a year ago. The government will have to issue IOUs. Effectively, this is additional credit. Legally speaking, it is not currency. So they do not break any European laws. So, Greece will remain in the Eurozone.

In my opinion, staying the eurozone in the long run is not a good idea. The competitiveness of the Greek economy does not lie in the deflationary policies the Troika imposed in the past 5 years. I have already stated that these policies failed. The only way forward is to create, or rather recreate, our own coin. This coin may be the drachma or something else. We should not expect it, though, to happen overnight. It will be long process before we see the ATMs in Greece spitting out drachmas. Do you remember how long it took before we adopted the euro? We are probably looking into a similar process.

So, now that I have a fair idea of what is going to happen, I need to take a decision. My decision will be based not on what is best for me today but what is best for my children in the future. I am fully aware that in the short run myself, my family and my wealth will suffer if we vote NO. In the long run, though, the Greek economy will grow. My children will be able to live, study and work in the most beautiful country in the world. Or at least, they will have the choice to do so.

For these reasons, as an economist and as a Greek I recommend NO for the impending referendum. I am voting for Hope!


Economic historian and numismatic consultant


  1. Very interesting and convincing. I hope you will “win” against this Europe” and help us all to build another.
    A french who love Greece and admire your courage

  2. “Hope, danger’s comforter…” (Thucydides). Largely I agree, but I fear you underestimate the likelihood of an exit from the European Union as a direct consequence of an exit from the EURO. After all, no mechanism exists for such a disentanglement, and all members of the EU are expected to move towards Eurozone membership unless, like the UK, they have an explicit opt-out agreement. Not sure how this will work – but then the alternative is equally uncertain, as you say.

  3. It is true. No mechanisms exists for leaving the euro. Politicians make the rules and people break them, though. Leaving the European Union will not happen. Greece is a sensitive area and the Greeks are aware of the political and geopolitical implications of such a move.

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