The denouement in the issue of greece remaining in eurozone will be played out today
The tussle between Greece and other EU member countries is becoming more complex by the day as Greek MPs’ backed a new austerity plan. In a referendum last Sunday (July 5) over 60 percent of Greeks (61.3 percent) categorically voted against the country accepting a draft agreement prepared by the EU, ECB and IMF during a meeting of the three organisations on June 25. While the Greek PM, Alexis Tsipras, sought to use his victory in the referendum as a means of leveraging lenders, the EU, ECB and the IMF, none of the organisations have really buckled under pressure.
On Tuesday, EU gave five days to Greece to accept the terms and conditions of a bail out offer, and on Sunday members of other countries will decide whether Greece should be part of the European Union or not. Tsipras, who leads the ruling Syriza coalition, submitted a plan on Thursday to the EU for seeking a bail-out plan. Some of the important measures in this austerity plan are:
(1) $300 million defence spending cuts by 2016
(2) Introduction of a uniform Vat rate for restaurants
(3) Increasing the taxation on shipping companies
On Saturday, Greece’s Parliament voted in favor of a motion, which sought approval of these reform proposals as a basis of negotiation for a bailout package. In lieu of these reforms, Greece has sought E53.5 billion from the European stability mechanism.
The current situation where Greece has a total debt of E320 billion with the country’s debt to GDP ratio estimated at 177 percent and unemployment at 26 percent has roots not just in the post-2008 crisis, which led to an increase in public borrowing, but also decades of fiscal profligacy by the Greek government. In fact, Greek entry into the Eurozone in 2001 surprised many, and a former Finance Minister, George Alogoskoufis himself confessed that its budget figures were fudged in order to make it eligible for becoming part of the Euro. It was only in 2009, with the election of George Papendrou as Prime Minister that there was a genuine acknowledgement of the fact that successive governments had been understating the public debt. In 2014, the Greek economy had begun to show some improvement, but the results of the elections held last year have reversed it.
If one were to analyse the possible ramifications of the current crisis, there are a few issues which need to be examined. The first is the likely impact of Greece’s exit from the EU on the organisation.
There are two schools of thought. While some are of the view that the European Project itself will come under threat with the exit of Greece, the Greek Prime Minister himself stated, “The famous Grexit cannot be an option either for the Greeks or the European Union,” in an Austrian newspaper interview. The point that he has adopted a more conciliatory approach in the aftermath of Tuesday’s meeting between EU leaders also shows that he realises the impact of a Greek exit.
It has also been argued, that other countries with massive deficits like Spain and Portugal may go along a similar path as Greece and exit from the EU.
There are those on the other hand, who are of the view that Greece’s exit from Europe will in no way result in any massive impact for EU. One of the reasons for this is not many countries are holding significant Greek debt. It is also argued by some that with the exit of Greece the Euro will strengthen. Those who are not sceptical about a Grexit also point out that unlike Greece countries like Spain, Ireland and Portugal have also improved their fiscal position through prudent policies.
Grexit beyond EU
There are other important ramifications of the whole crisis. If one were to look at the issue geo-politically, it could also pave the way for closeness between Moscow and Athens, something which the EU will keep a close watch upon and, of course, there has even been talk of Greece being the first European country to join BRICS. Were Greece to exit the EU on Sunday, and were such an event to occur this could actually be an interesting situation. impact on India
Indian policy makers like Arvind Subramaniam, Chief Economic Advisor, are sanguine about the larger impact on India, thanks to stable macro-economic fundamentals, and the fact that India is emerging as an important investment destination.
In conclusion, the Greece issue has brought to the fore many conventional issues, and it is unlikely to result in a 2008 financial meltdown situation for now, but it has raised some fundamental questions with regard to fiscal prudence and the issue of a single currency. The EU could look at the functioning of federations like the USA and India, which handle political and economic contradictions between different states relatively smoothly. (The writer is a New Delhi-based policy analyst associated with The Jindal School of International Affairs, OP Jindal Global University, Sonepat)
