Greece faces a future as Europe’s outcast – a yes vote is the only solution

http://www.theguardian.com/commentisfree/2015/jul/02/greece-referendum-yes

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Greece is going through difficult times and the eurozone is facing its biggest crisis since it was created 15 years ago. Both sides can be blamed for the current impasse. Greece ran big deficits before the financial crisis of 2008 to finance consumption that it could not afford. It failed to reform its economy to increase the productivity of its labour force and improve its international competitiveness.

Related: IMF tells Greece: no debt relief before reforms

The eurozone was wrong to force fiscal austerity on its members at a time of recession. The austerity forced on Greece has been detrimental and is probably the biggest factor behind its very high and long-lasting unemployment rates. The European Central Bank was slow to take action against the deflationary pressures in the eurozone and the eurogroup meetings of finance ministers have been totally oblivious to the plight of millions of unemployed Europeans.

Joseph Stiglitz and Paul Krugman have expressed support for a no vote in the 5 July Greek referendum because of the damage that austerity is doing to Greece. But is that good advice? I think not. A yes vote is still the best option, by a long shot.

I firmly believe that austerity in recession is the wrong policy, whatever the level of national debt. I spoke against it in several meetings, including ones at the German Central Bank and at the annual gatherings of European central bankers at Sintra last month. Austerity is bad for the future of the eurozone, not just for Greece. The way forward is to reform from within, not by running away from the problem. There are already signs that sentiments are changing: the ECB’s “unconventional measures” of last January are against austerity and in the right direction. With patience other changes will follow. It is clear to most politicians in Europe that austerity is dividing the continent and damaging the European project. Reforms will follow. Greece has a role to play in this agenda but only if it stays within the eurozone.

Voting no on Sunday will bring more hardships. Consider events in the aftermath of a no vote. If banks open, every sensible Greek will take their euros out of the banks. The ECB will not provide the liquidity assistance to fill the gaps and the Greek government will be forced to issue its own liquid assets to capitalise them. This will effectively be a parallel currency. It will soon be used to pay for public sector contracts and public sector wages. How much will it be worth? It is anybody’s guess. Suggestions that a Greek-government issued euro will be worth half of the ones that carry Mr Draghi’s signature are plausible. Effectively, Greeks who depend on the public sector for their incomes will find that half of the purchasing power of their income has been lost. Sooner or later everyone will be in the same position, as the ECB-backed euros leak out of the country.

Greece will have defaulted on its debts and access to international markets will be lost for many years

It is more likely that banks will stay closed until the dust of the no vote settles. Greeks will be able to withdraw very small amounts of cash, even less than Cypriots did after their banking crisis. Banks will still need the liquidity and the government could provide it with its own new euros. The same scenario as the one I have described emerges. But another option is now available. The use of deposits to recapitalise the banks, just as it happened in Cyprus two years ago. Is that what Greeks want? I have lived through the Cyprus crisis and I am sure this is not what Greeks will want to vote for.

Will things be better when the dust settles? Regretfully no. Greece will have defaulted on its debts and access to international markets will be lost for many years. Reforms to improve competitiveness, which have not been forthcoming, will be even more difficult to implement. Greece in Europe will be an outcast and continued membership of the European Union will be in doubt. The easy option for politicians will be to print more money and expand the public sector with more unproductive jobs and more pay raises that will be eroded by the new inflation. Is this the destiny that Greeks want? Previous governments tried it and it brought them to the point they are today. A YES vote will be the best safeguard against it.