Wednesday, July 8, 2015

Paul de Grauwe: "I suspect they want to tumble the Greek government"

Paul de Grauwe
I just read an 'old' interview with Paul de Grauwe originally published in the Spanish journal La Vanguardia of 17 May 2015 and republished on 22 May 2015 by the Italian oneuro, a think tank of eunews, "Lenders want to push Greece into default. Now everything depends on the ECB". The interview still is highly relevant today given the dangerous path taken by the Eurogroup and the ECB threatening to kick Greece out of the eurozone.

Here is a google-based translation of the Italian version of the interview with Paul de Grauwe:

Paul De Grauwe: "Lenders want to push Greece into default. Now everything depends on the ECB"
The Belgian economist Paul De Grauwe, a professor at the London School of Economics, has been one of the analysts that better than anyone else, in 2009, anticipated the crisis that was about to fall on the eurozone when Greece revealed its true financial situation. Since then he has also been one of the most implacable critics of the way in which the crisis has been handled. 
The Eurogroup accuses Greece of being irrational in refusing to give in to its demands. 
It is pure propaganda. It is obvious for years that austerity imposed on Greece has devastated the country's economy and has not done anything to reduce the debt / GDP ratio, but despite this the creditors insist that Greece must continue on the same road. This is irrational, and when the Greek government refuses to do so, they accuse it of being irrational. It's the world upside down. Some of the reforms asked to Greece, such as the reform of the tax system, are sensible. But others, such as insisting on privatization in the middle of an economic depression, are absurd. 
The European negotiators complain that when the Greek government proves willing to negotiate on a point then is not able to present alternative proposals, in part because they do not have their own experts and do not trust the experts of the [former] administration. 
It could be. It is a new government with little experience behind it, I can not deny it. But this is not a good reason to asphyxiate it. Yanis Varoufakis did not help much in this sense, I am afraid. But if I look at the contents of the rescue program, I understand the resistance of the Greek government. Following the restructuring that was done, I believe that today the Greek debt is sustainable, but only if you allow the country to return to growth. Today Greece has a liquidity problem, but the creditor nations are not going to give liquidity. They want to impose their conditions, which are very ideological. I suspect they want to tumble the government. 
Are they pushing Greece into default? 
It seems obvious. I would say that there are those who are trying to push the country out of the eurozone. The ECB's role will be crucial. Eventually it will decide whether a Greek default inside the euro will lead to an exit of the country from the eurozone, which is a terrifying prospect. It remains to be seen whether the ECB will be willing to provide the necessary liquidity to the Greek banking system so that it is not overwhelmed by a Greek default. If it does, Greece may refuse to pay, without this necessarily being a drama. The crux of the matter is totally political, the economy has nothing to do with it. It is clear that a debt restructuring, much broader than what has been done, should have been done because what happened is also the responsibility of the creditor countries, of European banks that have flooded Greece with liquidity. This restructuring did not happen and now the creditors want to impose on Greece the political conditions that have no economic foundation. 
The eurozone is now more prepared for an eventual default than it was a few years ago? 
In short, yes. There is no reason that a default or an exit of Greece from the euro should have important implications for countries like Portugal, Ireland or Spain, because today there are enough financial guarantees. The problem is in the long term. There will be more crises, another country will have difficulties ... and if it is clear that monetary union is not permanent, speculation will start.
If a Greek default does not lead to its exit from the eurozone, as happens in other monetary unions, would it not be a sign of maturity and strength of the project? 
Everything depends on the ability of the eurozone to circumscribe what is happening in Greece. If the State of California declares bankruptcy, it is manageable because it will have an impact on the banking system of California, who enjoys the guarantees of the federal system. Why in the US there is no risk of a domino effect, namely that a sovereign crisis from turning into a banking crisis. The question is whether this can be avoided in Greece or not. If you can not, Greece will have no choice but to exit from the eurozone. The country can not afford to allow its banks to fail, because this would drag down the rest of the economy, producing higher unemployment and political instability. The crux of the matter, therefore, is whether the ECB will be ready to support the Greek banking system in case of default on the public debt of the state.

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