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THE MUSINGS OF A TRADITIONAL SOUTHERN DEMOCRAT

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Sid in his law office where he sits when meeting with clients. Observant eyes will notice the statuette of one of Sid's favorite Democrats.

Sunday, June 28, 2015

Greece’s European Identity Is at Stake - Greece’s history is filled with major disasters and impressive recoveries

From The Wall Street Journal:

The history of Greece is filled with major disasters and impressive recoveries. Even its birth in 1832 was a triumph over the odds, assisted by the decision of the U.K. and France to come to the rescue of an independence movement on the brink of defeat. Greece then spent half the years until 2006 in default, having had to restructure its debts six times. Yet despite its many setbacks and notwithstanding its present predicament, it is arguably the most successful state to emerge out of the ashes of the Ottoman Empire and has proved a beacon of prosperity and stability compared with the rest of the Balkans.

This success partly reflects the unique hold Greece has on the European imagination, which secured it vital support at critical moments in its history. For the rest of Europe, Greece is more than a country: it represents an idea, a reflection of the common roots of a shared civilization, a beacon of liberty, a symbol of resistance.

But Greece’s success is also due to the long-standing determination of Greeks to place their country firmly among the family of Western European nations, an unlikely ambition that dates from the earliest days of a Greek independence movement led by intellectual emigres in Western Europe and which extended to the bold decisions to join the European Economic Community soon after the collapse of the military regime in the 1970s and adopt the euro in 2001, a year after its launch.

It is Greece’s European identity that is at stake in the referendum that the government has decided to call for July 5. Although the question on the ballot will be whether voters want the government to accept or reject the terms of the bailout deal submitted by the creditors last week, the real question at stake is whether Greece wishes to remain a member of the eurozone.

That’s because a “no” vote would set in train a series of events including government default, bank collapses and non-payment of salaries and pensions that would force Athens to introduce a parallel currency. And since there is currently no legal way of exiting the eurozone without quitting the European Union too, a “no” vote in the referendum could also put at stake Greece’s membership in the EU.

With hindsight, Greece’s decision to join the euro was ambitious, perhaps recklessly so. Euro membership was a bet that the disciplines required to belong to the single currency would help bring about the modernization of the Greek state and the liberalization of its economy, said Stathis Kalyvas, a professor of political science at Yale University and author of a new book titled “Modern Greece”.

But this never happened during the boom years and despite the best efforts of Greece’s creditors, nor has it happened during five years of depression. Powerful vested interests have prevented the overhaul of Greece’s dysfunctional political and bureaucratic systems, forcing Athens to rely on poorly designed tax rises and spending cuts to balance its books. The result was the January election of the far-left Syriza party on a platform of opposition to austerity but which has in practice sought to defend the clientelist public sector.

If voters now follow the advice of Syriza and its allies in the neo-fascist Golden Dawn party in voting “no” in the referendum, Greece is likely to extend its series of disasters.

After a “no” vote, there would be no chance of any new eurozone funding deal for Athens, forcing it to default on its debts and leaving it unable to pay salaries and pensions. The banks, which have been forced to close after the European Central Bank refused to allow them access to further emergency funding, would soon be declared insolvent and would have to be recapitalized before they could open their doors again, which would in practice require the government to print its own currency.

Nothing that the government has done in the past five months suggests that Prime Minister Alexis Tsipras and his colleagues have the administrative skills to execute such a complex operation, let alone deliver the deep budget cuts and major overhauls that would be needed before Greece could once again expect to start borrowing from financial markets in its own currency.

In the interim, the damage inflicted on the economy is likely to be deep. Given the high levels of cash-based work in Greece’s black economy, particularly among vulnerable migrants, a political and economic crisis could quickly develop into a humanitarian crisis.

But even if Greek voters vote “yes,” then the way back for Greece will hardly be any easier.

Trust in Mr. Tsipras and his Finance Minister Yanis Varoufakis has collapsed: the president of the Eurogroup of finance ministers Jeroen Dijsselbloem made clear over the weekend that the eurozone would struggle now to sign any bailout deal with the current government since there could be little confidence any deal would be implemented. Given the composition of the current parliament, most likely new elections would be needed to deliver a government with which the eurozone could negotiate what would be an entire new program.

That risks extending the uncertainty further into the summer, during which time capital controls would likely remain in place and the economy would face major disruption. What is more, the damage to the banking system could by then be so great that it may need to be restructured before capital controls can be lifted, raising the possibility that some depositors will take losses.

Indeed, any future bailout is now likely be harsher than the one Mr. Tsipras just rejected, reflecting the further damage to the economy. Some eurozone policy makers talk privately of the need for an ambitious World Bank-style program to help overhaul Greece’s public administration and turn Greece into a modern European economy able to exist within a monetary union.

The risk is that this proves too demanding even for Greek citizens, meaning that even after a yes vote, the country may still drift out of the eurozone. But if Greek voters signal that they are once again prepared to endure such privations for the sake of their European dreams, they can be sure that Europe will again come to their aid, such is Greece’s continued hold over the European imagination.

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