The recent bailout package arranged by the ECB and agreed to by the funding parties will be voted on by a Greek referendum. No word on when or how the ballot will take place, however from an outsider’s perspective with some understanding of the problems Greece faces, a referendum sounds like a good idea.
Problems in Greece Are Ingrained into Their Way of Life
Most of my readers, I’m sure, are familiar with the recon work Michael Lewis did in Greece and published in Vanity Fair. Their way of life has in many ways been defined by a culture of “I do whatever I can get away with.” Unfortunately this has terrible consequences when the day of reckoning comes… and that day is drawing very near. For those not familiar with the stories Michael accumulated on his time in Greece, I can sum it up fairly quickly: Nobody pays taxes, everyone is trying to hood-wink everyone else, and nobody (if they’re smart) lends to anybody from there – because they don’t pay the money back. This was all well and good when (if the country needed more money) they could simply print more drachmas. Problem is now all their debts are in euros, and they don’t own a euro printing press.
Greek Solution Requires Fundamental Change in Behavior of the Populace
In order for Greece to continue to have an economy, a great deal of behavioral changes must take place. First among those is becoming credit-worthy by paying taxes. Problem is, nobody dares to be first – and with good reason. Government officials have been pretty much blind as to what and how much economic activity goes on in their country, because everybody lies about what they buy, spend, and earn. It will take an amazing leap of faith in the populace of Greece to change a very understandably distrustful culture. The Greek debt problem has been built over decades, and the culture is far older than that (even the modern one).
Any Greek Austerity Plan Must Include Buy in from the People
The people of Greece are getting a pretty good deal here, to my eyes. The idea of austerity sounds harsh on the average person but it would not have to be as bad for everyone if there was a high level of buy in from the top business leaders in the country. I believe that something along the line of a “don’t look back” policy would be the shortest solution that political leaders could offer business leaders to get buy in. Start reporting today full revenues and taxes owed and float the tax rate monthly for the first year based on actual receipts of the prior month. Alternatively ask business leaders to confidentially share projected expected earnings and set rates based on better more realistic numbers. Without honest reporting and collection Greek businesses need to see the writing on the wall that they are done for without better tax compliance.
The point is that if Greek political and business leaders can buy in to a reporting, taxation, and collection regime that is more accountable then there is hope for buy in from the general populace of Greece – who will suffer the most in any socio-economic change. With the business, political, and general populace aligned Greece can benefit greatly from the support of the ECB and EMU. Without it the situation will likely be quite severe.
The Alternative Solution Is Not Palatable
The alternative I see to taking the austerity package / bank loan haircut is Greek default and withdrawal from the European monetary union. The consequences of doing so would be near term bad for the banks and governments that lent Greece money – but I think ultimately they would get help from global central banks and survive. The Greek people would get an initial holiday free from debt repayment but that would fade fast as their government turned on the drachma printer to fund operations. The resulting hyper-inflation would be a repeat of situations in the past like in Brazil and Argentina (and Zimbabwe presently). Imagine violence and riots of Greek people – burning buildings and ash-covered faces.
And then…. when the smoke clears the people would STILL have to re-build a responsible economic and taxation system just like they should be doing today.
Personnally – if it were me deciding… I’d skip the violence phase and go right to the building a responsible economic model with honest reporting and taxation with the support of the ECB and EMU… but hey, that’s just me. I hope the Greek people get their opportunity to vote, and choose the shorter path to economic stability. It’s better for everyone… long term.