A Return to the Drachma? The Day of Reckoning is Near

Varoufakis

Yanis Varoufakis , Luca Locatelli/Institute, for The New York Times

Greek officials made it known this weekend that the country will not be able to make its scheduled loan payment to the IMF in June unless a deal is made with creditors, a prospect that is appearing increasingly unlikely by the day. The Syriza government says it is willing to negotiate on almost everything, but will not back off on two issues: it won’t reduce even further the already tiny pension payments it makes to retirees and it won’t lay off even more government employees. Eurozone officials, meanwhile, insist that these steps be taken or there will be no further aid.

I have heard and read mixed information about the issue of public employee layoffs—some say they have already gone too far, while others say that most “layoffs” have been done by attrition with few people having actually lost their jobs. So I can’t really comment on that. But I do know, from my mother-in-law’s experience, that the pensions that the elderly receive here were tiny to begin with and have already been substantially cut. My mother-in-law is fortunate enough to have other resources to fall back on, but I pity the old folks out there who have to try to survive on the pittance that a Greek government pension provides. And the Eurozone technocrats say that the Greek government should simply make those old folks tighten their belts another few notches– bread and water diet anyone?

The profile of Finance Minister Yanis Varoufakis in yesterday’s New York Times (the most fair and objective portrayal of Varoufakis I have seen in the non-Greek media) made it clearer to me than ever  how impossible the Syriza government’s situation is. Regardless of what you may think of their style of negotiation, it is undeniable that they are trying to preserve some measure of dignity and autonomy for the Greek people and to defend to at least a small extent the principles they were elected on. But their Eurozone partners are refusing to budge an inch on their demands for even more crushing austerity.

For the first time, it is looking to me like a “Grexit” may well become a reality, the consequences of which are completely unpredictable, but which could only be disastrous for the Greek people in the short- to medium-term. Let’s hope we don’t see it come to that.

 

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8 comments

  1. Public service pensions are not tiny. In addition, they have been getting them at obscenely young ages. I know people who have retired in their 40s (ask Foti about his wife).
    Have they done anything about those pensions?

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    1. Very good point, Greg, about the early pensions. I was told by a friend here that there is a loophole that allows people to start drawing pensions early if they have a child under 18 at home and it seems like too many people take advantage of this. So, yea, they need to do something about that–the country is not in a position to start paying pensions to people in their 40s or 50s. Whether or not the pensions are “tiny” I guess is relative. Greek professional salaries are certainly tiny in comparison to North America and northern Europe (and relative to the cost of living in Greece which is not nearly as low as those salaries would suggest) and the pensions are correspondingly small and have gotten progressively smaller in previous rounds of cuts in the last couple years…

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    1. Yea, pretty darn funny to think of that now, how hard we had to work to set up an account here to put money in a Greek bank…Oh well, at least it wasn’t that much!

      On Tuesday, May 26, 2015, Greece Observer wrote:

      >

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  2. I remember a successful Greek woman in Wilmington who owned a restaurant. She showed me a paycheck from her first and only week working in Greece when she was 21 years old. She assured me that this would allow her to return to Greece and get a pension when she retired. I lost touch with that family, so have no idea if she was able to do it.

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  3. Hi Tom – enjoy your reports.
    Maybe you could explain why it would be disastrous for Greece to go back to the drachma. It seems like they are in a pretty awful position as it is. Would dropping the Euro make it all that much worse?

    Also, judging from last Sunday’s elections, it looks like Spain is set to follow in Greece’s footsteps by electing leftwingers to power. Are there relations between Syriza and the Podemos party that you see evidence of?

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    1. Geez, I thought writing a blog was just about spouting unsubstantiated opinions and impressions–now you’re telling me I have to back up what I’m saying with actual facts? Seriously, I am no economist, but what I gather from what I’ve read from the more sensible wing of Syriza leadership is that all scenarios leading to a Grexit would be disastrous at least for a pretty lengthy period because of the chaos it would cause in the banking sector and, thus, in Greeks’ daily life. Varoufakis explains it on his blog much better than I could:

      Why should Greece not exit the Eurozone?

      The main reason is that there are no Greek banknotes either in circulation or in storage. Any decision to exit from the Eurozone will be accompanied by a weeklong bank closure during which euro notes will be marked manually (e.g. with indelible ink) to differentiate them from euros and brand them as New Drachmas (NDs), until freshly minted NDs circulate many months later.

      Even before the prolonged ‘bank holiday’ begins, the ATMs will have run dry and will remain so for a while (as the banks will not have the authority to dispense euros any more). In the meantime, Greeks with hoarded cash will try to take it out of the country, to prevent their stamping and devaluation. Liquidity will thus disappear. Meanwhile, strict capital controls will re-appear and the Schengen Treaty provisions will be suspended indefinitely, since every bag and every suitcase leaving an airport, a port, or a land border will have to be checked by armed police. And when the banks re-open, long queues of angry depositors will form outside seeking to withdraw their stamped euro notes with a view to trading them as soon as possible for unstamped ones (or for other currencies) based on a self-confirming expectation that the NDs’ exchange rate will fall and fall and fall…

      In summary, a Greek exit from the Eurozone will trigger a week-long bank closure, the rapid loss of liquidity for the already fragile private sector, a subsequent bank run upon the banks’ re-opening, an instant exodus of cash savings, and Greece’s loss of one of the European Union’s few achievements: unimpeded movement within the EU. (Read the whole piece at http://yanisvaroufakis.eu/2014/03/10/if-scotland-why-not-greece/)

      And yes, Syriza and Podemos are very close. They have had mutual visits to support one another and this is, I have to think, the real reason the European bigwigs fear Syriza–because of the potential “domino effect” among the bigger players in Europe.

      Thanks for reading, Peter.

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