By HUGO DIXON
Published: June 28, 2011 The Greek Parliament is prepared to vote on austerity measures on Wednesday, and its people have been gathering in demonstrations and strikes to protest the cuts. Here is an open letter explaining why members of Parliament would be crazy to vote no:
Dear Greeks,
The anger you feel about your plight is understandable. You are staring at several unpalatable options, all of which will involve big cuts in living standards for years to come. But the choices are not equally bad. You must avoid an emotional reaction that leaves you in an even worse state. And you should ostracize those who resort to violence.
One option is to persuade your politicians to say no to the austerity plan set forth by the euro zone and the International Monetary Fund. That proposal is not perfect. But rejecting it outright would be childish.
If there is no agreed plan, you will get no money. The consequence wouldn’t be just that the government defaults on the loans it took out on your behalf. There would be a run on your banks and an even deeper recession. You would probably also lose your remaining friends in Europe.
That’s not to say you should repay all your debts. Even with Herculean efforts, that won’t be possible. But you can probably negotiate an orderly default some time in the next year. An orderly default would cut your debts, say in half, but in the context of an agreed broader program that provided you with enough money to survive until you are healthier.
You might ask why you can’t have an “orderly” default now. Wouldn’t that be better than waiting? Yes, if an orderly default could be agreed on now. Unfortunately, the rest of Europe isn’t yet ready for your default. So it won’t agree on one; and that, by definition, means a default now would be disorderly.
Fast forward a few months, though, and the rest of Europe might be in better shape to withstand a Greek debt restructuring, particularly if the Continent used the time well and shored up its banks. You, too, might be in better position to negotiate a new package — provided that you recapitalize your own banks and squeeze your budget deficit so you are less dependent on external financing.
There’s no denying this would be painful. Your challenge isn’t just to cut the deficit but also to restore your economic competitiveness. That means further cuts in living standards.
Is there a shortcut to avoid this pain? Wouldn’t bringing back the drachma restore competitiveness? Probably not. It’s true you should never have joined the euro. But nobody has yet come up with a way of putting this particular toothpaste back in the tube without creating a giant mess.
Again, the weak link is your banks. If your compatriots thought the drachma was about to return, at what would be a much lower rate, they would be crazy to keep their money in a Greek bank. There would be a panic before the new drachmas were even minted.
All this may seem terribly unfair, and to an extent it is. Politicians of both major parties have let you down for decades. They presided over a monstrously inefficient public sector, often staffed by friends and clients. They spent too much money and then cheated on the figures so Greece could get into the euro. Corruption and tax evasion have been rampant and have gone largely unpunished.
You can also blame foreigners for your plight. Foreign banks were among those that lent you all that money. Some also helped you fiddle with your figures. And the rest of the euro zone turned a blind eye when you ran up astronomical debts. But remember: your creditors, both banks and governments, won’t get off scot-free. When you default, they will pay a hefty price.
You should also realize you are not blameless. Many of you were evading taxes and enjoying those highly paid public-sector jobs; most of you were consuming more than you produced and retiring too early. You also voted for your useless politicians.
By all means, protest. But focus on the right goals. Don’t spite yourself by turning away foreign help. What’s more, keep it peaceful.
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