Greek Euro Exit Won’t Save the Country

Two decades ago, when the members of the European Communities signed the Maastricht Treaty and formalized the European Union, there was no end to the europhoria. Everything was going to be better in eternity; more prosperity, more jobs, better health care, safe and secured retirement benefits, more sunshine… Today we know better: the EU and the “European project” is reminiscent of M/S Titanic in more ways than one: not only did its architects and project leaders vastly overstate the merits and abilities of their project, but the European integration project has run into its own iceberg.

The welfare state. The currency union – the epitome of European integration – is unraveling not because of some mega-disastrous financial crisis, but because of government spending promises. Too much government spending has led to too much government borrowing, not only in Greece. Too much borrowing has put too much stress on the currency: when one country stretches its credit line to the limit, it hurts the credit of other countries with the same currency. As a result, the euro zone must either expel its excessive spenders or see more well-behaved countries exit to avoid being pulled down to the second or third tier credit where Greece is today.

More and more signs indicate that the solution to all this is a Greek exit. The EU Observer reports:

German member of the ECB board, Joerg Asmussen has told Frankfurter Rundschau that he prefers Greece to stay in the eurozone but its exit would be “manageable”. A Greek exit would be “associated with a loss of growth and higher unemployment and it would be very expensive,” he said.

For those who are proficient in German, the full interview with Mr. Asmussen is available in the Frankfurter Rundschau. Essentially, he says that the Greeks have themselves to blame, that they should pay the price and that the euro zone will come out stronger. Regardless of whether or not that last statement is true, it is a fact that the remaining euro countries will get some time to stabilize after a Greek exit. However, the underlying problem will remain: too much entitlement spending, too high taxes and too little growth.

The most important question right now, though, is not what the euro zone countries will do once they have gotten rid of their most reckless spenders. The question is what those recklessly spending nations will do once they have re-established their own currencies. They, too, just like the remaining euro nations, are still saddled with the costly, inefficient and economically destructive welfare state. Once Greece has returned to the drachma, all that will happen is that its government debt will be denominated in the national currency instead of the euro; government will pay out entitlements and paychecks in drachma instead of euro; taxes will be paid in drachma, not euro.

Government will still be there. Its budget crisis will still be there. What are the Greeks going to do then? Another note from the EU Observer gives us a hint:

The EU Commission Monday said it was “too early” to say if Greece needed to undertake more reforms to fill a reported €2.5bn greater-than-expected gap in its finances. A next decision on Greece will be taken by the eurogroup only after the troika has completed a progress report, due September.

A likely scenario is that the Greek government will declare austerity cease-fire. There is enormous resistance in Greece to more austerity. The country is already pushed to the brink by two years of higher taxes and harsh spending cuts.

Yes, harsh spending cuts. The no-austerity-here pundits who claim that Greece has not at all made any spending cuts simply have not done their homework. Austerity is unfolding full force in Greece, with devastating effects. A recent story from The Guardian gives us yet another view of its effects on the daily lives of the Greek people:

Adonis Kostakos is unemployed and diabetic. Aged 50, he last worked regularly four years ago in the port of Piraeus. Back then he used Greece’s public hospital system to have his blood sugar checked and get his medication. These days, receiving no unemployment benefit, he cannot afford to pay for his drugs or the new €5 hospital fee introduced as part of Greece’s austerity measures. So today Kostakos has come to a free clinic in the shipbuilding town of Perama, where he lives, to pick up his medication. The drop-in surgery run by the global charity Médecins du Monde was originally set up to cater for illegal immigrants. But today, there are only native Greeks.

It is very important that we take this ground view of what is going on in Greece. It helps us understand what will happen once Greece exits the euro.

Given how the Greek health care system has been hit very hard by austerity spending cuts, the disaster now unfolding should come as no surprise.

The Guardian refers in passing to the “financial meltdown” as the cause of this crisis. That is of course not at all what happened – this is a welfare state crisis, nothing else – but the blame game does not change the facts on the ground:

Posters on the wall show war and famine, but the solitary doctor, George Padakis, 30, is dealing with a different kind of catastrophe – victims of the financial meltdown, which has pushed Greece’s health system to the brink. “I have no insurance and I’m unemployed,” says Kostakos. “I heard about this clinic from a friend. I was going to the public hospital, but nowadays I can’t afford to do even that. I know lots of people in this town who are in the same situation as me, 10 of them personally.”

The “no insurance” reference refers to the complex cost reimbursement system that the Greek welfare state offers for health care. These reimbursement rates have taken a hit under the two-year long austerity bombardment. For more on the Greek entitlement systems, see this article.

Back to The Guardian and a glimpse of how the Greek equivalent to Medicaid leaves people in a vacuum:

Next in line is Nikos Famalis. He is 72 and has multiple health problems. “I’ve been coming here since it opened,” he says, when he emerges clutching a handful of boxes of medicine. “I used to have insurance when I was younger, but I don’t have the right papers now. I’m trying to get papers for free treatment in the public hospital but it takes time.” The Greek system is a bureaucratic nightmare, with endless paperwork to fill in and hoops to jump through. Those without resources of any kind can qualify for free healthcare, but even then the state will only pay for some medicines. And even those entitled to reduced or free medication often cannot find pharmacists to provide them and are instead asked to pay the cost up front and seek reimbursement.

As I explained in June, part of the austerity program for 2012 has been to cut subsidies for prescription drugs. It is a safe bet that once Greece leaves the euro, the vast majority of the people will demand an immediate end to austerity.

Others come into the clinic. A middle-aged man with swollen legs from heart disease needs diuretics; a younger man, who once worked in the nearby shipyards, comes in to be treated for high blood pressure. “When I came here,” says Padakis, “I didn’t expect to be treating Greeks. I had no idea so many Greeks had these problems. I thought I would be working with illegal immigrants. On a typical day the clinic sees around 20 people. “The problems are never simple. Sometimes people don’t have the correct insurance or it takes time for the right papers to come through. Sometimes it is as simple as the fact that they don’t have a few euros for the bus to go to the hospital for an appointment, so they come here. “These people are often new poor … and an additional problem is that the hospitals are now charging each time someone visits.

Also a result of austerity. The Greeks still pay the same high taxes as they have always done – higher, in fact, if you count all the new fees that are added on for tax-paid services such as government-provided health care.

This is the very face of austerity: people have to pay more to get less from government. Their ability to take care of themselves and to replace what government is taking away, is actually weakening. They now have to take money away from other spending items, such as food, to pay for what has already been funded through taxes. This depresses the economy further and erodes the tax base even more.

As tax revenues dry up even more, a new deficit opens up, prompting calls for even more austerity. And, presumably, more images of a crumbling welfare state, like the one The Guardian reports from Greece:

If the clinic in Perama is an example of how bad things have got for those at the bottom of Greece’s ruined economy, elsewhere doctors and patients have their own horror stories to tell in a corrupt health system where paying bribes to doctors is commonplace. As a result of the crisis, doctors’ wages in the public system have been cut in line with other government workers, while hospitals fear being merged and face regular shortages of materials. Most damaging is how an already unequal health system has become more unequal still – a three-tier affair that discriminates systematically against those most vulnerable and least able to afford health care, marginalising them still further in society.

In the June elections Greek voters sent a clear signal to their political leaders that the country cannot take more austerity. Once the country is out of the euro, austerity will in all likelihood end. The upside of that is that the political leadership will buy itself some time and some of the social unrest will probably subside. It might even lead to a temporary decline in support for the totalitarian parties that have gained a lot of ground by exploiting the social and economic crisis in the country.

Long term, though, nothing will have changed. The Greek economy will be at least as weak as it was before the crisis broke out in full force; the government budget will be in as big of a mess as it was before the austerity measures started; and there will be even louder calls for more government spending to “restore” the welfare state. Nothing will have changed for the better.

Once that dawns on the Greeks – once they realize that returning to the drachma has made no difference in their lives – what will they do? Here is my forecast:

1. The incumbent coalition will panic and start printing money to pay for the welfare-state spending programs. This will lead to a rapid deterioration of the drachma and inject very harmful levels of inflation into the Greek economy.

2. People will blame the coalition and provoke a new election. Support for totalitarian parties will surge.

3. After an interim period of posturing, the democratic parties will lose power to either the Stalinist or the Nazi parties, probably the latter as it has strong support among Greek police and ostensibly among high-ranking military officers.

4.  The Nazis will declare a national emergency by means of military power. The free economy will be suspended together with individual liberty. The Nazis will try and save the welfare state by means of economic dictates, which is precisely what austerity is, minus the military enforcement part. This will of course fail and the country will enter a downward spiral of oppression.

I will pray that I am proven wrong. But nothing in my experience and scholarship tells me that those prayers will be answered.

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