The Greek Tragedy


Well, you might have wondered why I haven’t yet commented on the most important topical issue of the Greek exit from the European Union (“Grexit”).

It is now increasingly looking inevitable, given the intransigence of the Prime Minister, Alexis Tsipras, and his Finance Minister, Yanis Varoufakis. It is now certain that tough conditions set by the creditors would not be accepted by the Greek Government. The Prime Minister has called for a public referendum on the new bailout terms, which is an obvious ploy to get all the new terms completely rejected by Greek citizens.

Greece has lived beyond its means for several decades now. Borrowed money has been helping Greece survive tough economic conditions. Greece has a porous tax collection system and a welfare economy, both of which cannot be sustained at the current rate. It is only natural that its creditors, especially the International Monetary Fund and the European Central Bank, would call for sweeping reforms to be implemented.

But the real fact is that the creditors are only asking for incremental reforms. For instance, they are asking for increase in Value Added Tax that a consumer pays in a restaurant. They also want reduction in pension payments. When the Greek Government wanted to increase the corporate income tax rate to 28% (from 26%), the creditors actually said no to that proposal, as such a hike would affect economic recovery of the business situation. I am sure there are some tough terms and demands by the creditors who have been giving billions of Euros in credit to Greece – it is only to be expected, especially when they see a strong move away from financial obligations by the new Leftist Government, led by Mr. Alexis Tsipras.

It is hard to understand the rationale for not compromising and settling on mutually acceptable terms. The situation looks very bad for the European Union as Greece could become the first member of the Union to exit, with the attendant exit from Euro currency. That would lead to worldwide impact, as a Greece exit would become a precursor to an Italian or Spanish exit as the economic situation in those two countries are getting worse as well.

Germany has taken a hardline approach towards Greece, for the above reasons. However, it appears such a tough approach has not worked, and Greece is now inching towards a “Grexit” from the European Union. This is not good for Greece, and not good for Europe. It would also have political impact of the negative variety, with Greece moving closer to Russia.

The time to compromise is now – over this weekend. If this opportunity is missed, then all hell is likely to break lose, and the Greek Tragedy could be enacted for a worldwide audience. Such a drama would see the Greek banking system shuttering, with the deposits of Greek citizens evaporating – this is not a joke, it is now becoming a reality.

Cheers,

Vijay Srinivasan

27th June 2015

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