Greece’s Uncertain Fate

That’s the title of my latest piece in The National Interest.Teaser follows

Although much remains uncertain about future developments in Greece and beyond, one thing can be predicted with certainty: no Greek government will voluntarily abandon the euro. The only parties favoring such a move are the (old-style Stalinist) Communist Party of Greece and the neo-Nazi Golden Dawn, neither of which has any chance of being part of a government. It is almost equally certain that no Greek government will take any further steps to implement the austerity measures previously agreed with the “Troika” of the European Central Bank, the European Commission and the International Monetary Fund.

New elections to be held on June 17 are most likely to produce substantial gains for the Coalition of the Radical Left (Syriza) at the expense of both the traditional governing party of the Left, PASOK, and the rejectionists of the Communist Party. Syriza advocates rejection of the current austerity package but is equally opposed to withdrawal from the euro. Given large enough gains, Syriza could potentially put together a government with support, or at least tolerance, from PASOK and the conservative but anti-austerity Independent Greek Party.

But the election outcome may be indecisive, perhaps leading to a government of national unity. Such a government would have little power to do anything decisive one way or the other.

The least likely outcome is a swing back to the traditional parties, with PASOK and its conservative counterpart the New Democracy Party gaining enough seats to form a coalition government. Even such a coalition would be unlikely to have the political will to enforce further austerity measures. On the other hand, it would certainly not abandon the euro.

45 thoughts on “Greece’s Uncertain Fate

  1. The Communist Party of Greece is not a Stalinist entity. Such allusions are opportunistic and crass.

    Only Trots cry Stalinism, eg Hillel Ticktin in “MARKET SOCIALISM: THE DEBATE AMONG SOCIALISTS” Bertell Ollman, Ed. Routledge, 1998

  2. It is about time greece defaulted. these are common events.

    the parties likely to win, as suggested, in the Op, will increase the chances of this outcome. Syriza gets a 50 seat bonus in the greek parliament of about 300 if it wins the most votes

    If Greece defaults, it gets immediate relief from the crushing interest payments on its debt, leaving it with a relatively modest primary deficit.

  3. I wouldn’t agree that the KKE was Stalinist — you can’t really be a Stalinist without a socialist fatherland to relate to — but they certainly share many of the practices of Stalinists. This passage smells like old fashioned stalinist verbiage:

    The rejection of the blind alley of the so-called ‘unity of the Left’ implies for the KKE the preservation of an alliance policy that matches the interests of the working class, the toiling strata and the needs of the class struggle. We focus our attention on the socio-political alliance, based on common action, common interests, a common line of struggle of the working class, the urban self-employed workers and the peasants. An alliance that will enter into a conflict with the monopolies and imperialism and fight also for another path of development for our country, namely, people’s power and people’s economy in which the means of production will be socialised, with central planning of the economy and workers’ control

  4. @Fran Barlow

    What on earth is Stalinist about that?

    Every point made long pre-existed Stalinism and have nothing to do with Stalinism.

    Stalin also slept in beds and ate food off plates – this does not mean that beds and plates are stalinist.

    People should be allowed to propose whatever strategy they like without being provoked by the crude misconceptions of Australian bloggists.

    If Fran Barlow thinks she smells something, then she needs to have her own stink spread well noted.

  5. Greece should default because the costs are overstated, return of access to international markets is quicker than people think and would allow Greece to choose policies that encourage growth, rather than ones that shrink the budget deficit.

    Russia defaulted in 1918, 1947, 1957, 1991, and 1998. these recent defaults in 1991 and 1998 seem to have been forgotten.

    see for the casde fo default and leaving the euro.

    who cares about the greek communist pedigree? that are communists- that is enough

  6. Quite right regarding the basics of default. Russia being but one of many past examples. Greece should be regarded as equivalent to a state government defaulting., rather than a national government.

    However, there are two disconcerting problems in relation to Greece. First, people have built-up the consequences of default in their minds so the panic could do a lot of damage by itself. Second, there has been heavy betting with CDSs and they were an important part of markets freezing up in the GFC. The CDS exposure could bring a lot of financial institutions down.

    Gee, maybe they should have regulated CDSs after the GFC.

  7. Yanis Varoufakis has put forward what he calls “A Modest Proposal” for resolving the eurozone crisis. Involves Greece defaulting, but no withdrawal from euro. Addresses sectoral imbalances. Suggests a workaround for ECB debt monetisation that JQ calls for in the TNI article. No treaty changes, using existing institutions. It’s definitely the most convincing solution I’ve seen. And I used to be of the opinion that Greece must exit euro.

    Link below:

    Click to access modest-proposal-3-0-may-2012-without-rebalancing-mechanism.pdf

  8. there is a literature on sovereign debt and the break-ups of empires, and the end of colonial independence and monetary unions such as after world war 1 and 2.

    See for Sovereign Defaults and Debt Restructurings

    During 1919 and early 1920, Yugoslavia, Czechoslovakia, Austria, Romania and Hungary stamped the Austro-Hungarian Bank banknotes in circulation in their new territories with their national emblem thus converting the notes into national currencies.

    hyperinflation currency reforms are quick too. the West German currency reform in 1948 was a 93 per cent contraction in the money supply. every German first received 40 Deutschmarks and further 20 Deutschmarks one month later. the old notes were plain cancelled.

  9. I was shocked, shocked I tell you, to find a Nobel laureate shamelessly pirating the term ‘zombie’:

    SPIEGEL: You call austerity a “zombie” economic policy.

    Krugman: Yes, the whole point about zombies is that they just keep on champing forward no matter how many times you think you have killed them. We’ve got really almost two and a half years of experience with how these policies actually work, and the fact that this is still the recipe that is being preached despite all the evidence that they are not working.

    Not even so much as a hat-tip!

  10. I am still waiting for an announcement from Merkel that Germany recognises that it must do its part to help its troubled partners in the European project, and so to help them restore their current account balances she is banning exports of German manufactures to the Schengen area with immediate effect.

    Why are you laughing? It’s as realistic as any other proposal involving German compromise.

  11. I think Germany will compromise but under a different chancellor. German voters, as shown in the Schleswig-Holstein and North Rhine-Westphalia results, are about as enthusiastic about zombie economics as British, French and Greek voters. Dutch voters may add their voices in September.

  12. what does staying in the euro mean? many countries use the currencies of others.

    should greece dollarise but with the euro after their inevitable default.

  13. I – and many others – don’t think that leaving the euro is a Good idea for Greece.

    Varoufakis is convincing on this:

    To extensively quote his arguments:

    Greece would benefit enormously from a devaluation of its currency. Argentina provides a brilliant example of how a massive devaluation can help a country escape a debt-deflationary cycle. As, for that matter, does Iceland.

    However, it is one thing to break a peg linking your currency to some other hard currency (as in the case of Argentina), or to devalue your floating currency (as did Iceland), and quite another to have no currency but to have to create one from scratch.

    In the case of Argentina the peso was in existence. All it took to devalue it was to announce that the 1:1 peg with the dollar was over. Suddenly ALL incomes and ALL savings were devalued by the same percentage. Overnight. End of story. It was not pleasant but it could be done.

    In the case of Greece it simply cannot. And this makes a world of a difference. Why? Because of two important reasons. First, because of the crushing delay in introducing a new currency. Secondly, because of the bifurcation between the stock of savings and the flow of incomes.

    Delay: Bank of Greece colleagues tell me that it will take months before ATMs are stocked with new drachmas once they get the go ahead to print them. Even if it takes weeks, an economy cannot remain un-monetised for so long, especially when already on the canvass of a deep crisis, without major civil unrest and an almost terminal effect on economic activity.

    Bifurcation: Even ignoring the crippling effects of the delay, the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes). This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas.

    So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter.

    Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average personon the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).

    In short, even if we neglect the devastation caused by the delay in the introduction of the new currency (something Argentina did not have to worry about), the new currency will be debased ever so quickly due to this bifurcation, leading to hyperinflation and the loss of most of the competitive gains we might have hoped for from the devaluation.

  14. peter, do currency reforms after hyperinflation take months? dollarisations?

    how long was the dollarisation process in zimbabwe? overnight?

  15. @Alan
    Actually, I got the term “zombie ideas” from Krugman in the first place, and he has been very kind in giving me credit for the use of it

  16. peter, dollarise with the euro.

    argentina tried a currency board after hyperinflation albeit with many escape clauses, which they soon used.

  17. Jim

    What do you mean “dollarise with the Euro”? Dollarisation either means that you start using the US dollar as your currency or you peg your currency to the dollar.

    The Greeks can’t fix the exchange rate of the Euro to the dollar, since it is not their currency to fix – the rest of Europe have a say in this.

    If the idea is that they gradually start using US dollars instead of euros you have the problem that they will need rather a lot of US dollars in a short period of time (about $25 billion a month) to run their economy – where do these come from and how do the Greeks pay for them?

  18. At the doomer blog Zero Hedge they have started “POMO for the rest of us”

    encouraging Americans to suggest to the Fed (via twitter) what other “assets” they might want to monetize… This is a joke made by people who believe that central banks are ruinously debauching their currencies through electronic printing in a worldwide race to the bottom, etc.

    But since a lot of the European anger is about how there is austerity for the masses and bailouts for the banks, it makes me wonder, what other permutations of policy are possible, that would combine what’s going on at the high end and the low end of society in previously unthinkable ways? Caricatured, the left position is that the welfare state should be preserved and the banking bailout stopped, and the right position is that both welfare and Keynes are unsustainable thievery. The latter is not about to happen, but I am curious about what would happen if the masses were somehow given access to the same generous assistance that has been made available to the financial sector. Greece is almost a prototype of this, because (everyone tells me) they’ve been living on euro loans for years – not even investing, just spending – and now the whole nation is being asked to endure austerity. It’s as if what is being asked is, can you bail out a people rather than a company? And even if you wanted to do so, how would you do it?

  19. peter, use the euro as their own currency, but have no relationship with the ECB.

    the following use the euro as sole legal tender, and ceased issuing a domestic currency.

    Andorra (formerly French franc and Spanish peseta since 1278)
    Kosovo (formerly German mark and Yugoslav dinar)
    Monaco (formerly French franc since 1865; issues its own euro coins)
    Montenegro (formerly German mark and Yugoslav dinar)
    San Marino (formerly Italian lira; issues its own euro coins)
    Vatican City (formerly Italian lira; issues its own euro coins)

    some countries peg to the Euro.

  20. Andorra, Monaco, San Marino and the Vatican all follow eurozone rules because they have customs unions with an EU member state. Montenegro follows eurozone rules as part of its EU accession process. Kosovo is a bit chaotic.

  21. Greece’s main strategy has to be to agressively mobilise production and tourism in order to improve their position. I would also be inclined to apply a global low flat rate tariff on all non Eurozone imports of goods and services for a fixed period.

    Probably one of the Greek government’s biggest assets are its unpaid taxes.

    These can be back calculated and called in as debts. But how I would handle that is to create a tax bond which is applied against the property of those owing the tax. So rather than apply penalties, offer flexibility of repayment. By linking the bonds to to physical property the bonds become an equity backed tradeable real asset. These bonds then have the status of a second mortgage. It would also be possible to apply a negative dividend equivalent to an interest rate to the bonds.

    So with that as an available strategy I would see a new socialist government as being a positive development for Greece as it would be more likely for such a party to implement such a system against tax defaulters. The unpaid taxes could very well be a very substantial figure as these defaults could go back many years, and therefore be a significant game changer for that country. By applying the debt in the form of tax bonds which have to be bought back by property owners in order to gain clear title this gives tax defaulters time and incentive to “work off” their debt.

  22. alan, my general point is a country can adopt another’s currency as legal tender. It does not have be under the other’s central bank. most adopt the US dollar.

  23. The problem is that many ‘experts’ suggest that Greece has to have its own currency so it can devalue. Whether devaluation after leaving the euro will achieve Nirvana, not so clear.Toughing it out with the euro might be less painful.

    With all the QE that has happened in the US, although worrying about inflation at the moment when banks are too scared to lend,and every one else too scared to spend, if the US economy ever recovers there could be cause for concern. Will be interesting to see if the Fed can soak up all that liquidity without allowing either inflation to take off, or without crunching credit and sending interest rates up and kicking their economy back into recession or worse.

    If the unwinding can not be done without a lot of pain, Bernanke will have a worse legacy than Greenspam.

  24. I do not see that a greek currency would help anyone.

    who would want it? the euro would become the de factor currency

  25. That’s worrying is premature. It won’t happen overnight, but it may happen.

  26. @BilB

    Those proposals would be significant palliatives. According to the New York Times’ LANDON THOMAS Jr. and ELENI VARVITSIOTI, many economists and the Greek Left (and the IMF) are trending the same way.

    Many economists say the oligarchs are a big part of Greece’s economic problem, because they have capitalized on the insular, quasi-monopolistic approach to business that is one reason their nation has long lagged the far more competitive economies of many other euro zone nations. The moneyed elite in Greece have always been secretive in nature, especially when it comes to their fortunes. Assessing the ultimate value of Greek private sector wealth is a nearly impossible task, because much of the money exists offshore, secreted away in Swiss bank accounts or invested in real estate in London and Monaco.

    Now, with the country’s top vote-getter, the leftist firebrand Alexis Tsipras, talking more and more about nationalizing companies and industries and, in the words of his top economic adviser, “taxing the rich,” there is even more incentive to lie low.

    Of course, the left is not alone in this view.

    “Let’s be frank — the well-off need to pay their fair share of taxes,” Bob Traa, the International Monetary Fund’s representative in Greece, said in a speech last year in Athens.

    Last year alone, an estimated 8 billion euros ($10.2 billion) in collectible taxes were in arrears — nearly half of the country’s budget deficit.

    The nation’s tycoons have every incentive to keep their country in the euro currency union. The question is, are they willing to bear the cost of doing so?

    “The oligarchs want to keep the euro — largely because of the banks which are so deeply integrated in the euro system,” said Costas Lapavitsas, an economist at the University of London. “But they are keeping quiet about it.”

    But as children go hungry in Greek schools because their parents have no money with which to feed them, and the streets of Athens become home to growing numbers of desperate, jobless people, pressure is mounting on the country’s rich to do what the state can no longer effectively do: write checks.

  27. @Peter Whiteford

    I am very uncomfortable with arguments which implicitly invoke the false analogy that you can’t unscramble the omelette. It is a standard tactic of the neoliberal right to do something regressive (introduce a flat tax like GST, privatise public utilities, reduce welfare, destroy the Commonwealth Employment Service etc. etc.) and then say it’s done now and it would be disruptive/inefficient/impossible to change it back. That’s always their mantra, “You can’t change it back”, usually uttered with smirking glee as they make off with money bags of common wealth transferred from the many to the few.

    It is nonsense to argue that Greece cannot go back to its own currency, Sure, there are practical obstacles just as there were practical obstacles to going to the Euro. Either way, the obstacles are never insurmountable. There is also pain in both paths. However, given the dysfunctionality of the Euro system and the loss of sovereignty and policy flexibility in not being able to issue one’s one fiat currency, the best course for Greece would be to go back the drachma or a New Drachma. Whilst changing to the Euro, European countries each ran a two currency system and changeover protocols. A two currency system could be run while changing back to the drachma. The technical and practical obstacles in changing back to the drachma are likely to be of roughly the same order as the orginal “Euroising” process.

    The bottom line is that a nation which does not possess its own currency and thus does not possess access to the full gamut of fiscal policy possibilities (self-determining its budget deficit/surplus position) is a nation hamstrung. Where it is a democracy it is democracy hamstrung and now partly run by the neoliberal technocrats of international finance. Iceland’s response and successful ongoing recovery from the GFC and its banking bubble collapse illustrate the importance not of only of better regulation in the first place but also of a nation state retaining currency sovereignty at all times.

    The key question is why would anyone want to hamstring democracy. The answer is of course that plutocrats hate democracy. It gets in the way of stealing all the wealth from the workers who generate it.

  28. @Jim Rose
    the 50 seat bonus to the leading party in Greece is an important point. Some news sites claim wrongly that a combined ND & PASOK vote beats a first placed SYRIZA.

  29. John, yes, a common source of error, and the greek constitution is strict on a new election.

    each of the three biggest parties is, in turn, giving three days to form a government and then there a new election. will the next election be decisive? will there be a furthur election?

    the government formation period is 45 days in israel. the dutch are close to a year into to their government formation talks, I think.

  30. @Chris Warren
    I too agree that the communist party of Greece (KKE) is its own thing. That is why they have survived for many decades and are still relevant. Labeling the KKE Stalinist is incorrect.

  31. btw, having greek election after election seems to be a good way of stringing out the drip-feed from germany etc. Sooner or later it will be cut-off, but elections seem to delay this.

  32. @Jim Rose
    In reality only the first placed party can practically form a coalition government because it holds so many seats (50 bonus seats). There is no chance of a SYRIZA and ND government, because they have totally different in how to deal with the dept crisis.

    The KKE also believes that the next government will be weak and not last long.
    The Greek public seem confused (with too much opinion rather than facts) and divided. They voted 7 parties into parliament ranging from very far right and left, some of these are new to the parliament.
    What is troubling is that the very far right probably have police and possibly military backing. Lets not hope history repeats itself there with a coup. Will the police obey SYRIZA’s orders?

    But Greece is also on the verge of possibly voting in SYRIZA, into government a party that has never ruled before, is not part of the dinosaur clans that have ruled Greece since time began and would be a new government. Unfortunately people only contemplate new governments when things go very bad.

  33. I was trying to figure out why printing money is inflationary, finally figured it out.


    have just found


    You will have to download their player to view the proliferation of visualisations.

    Here is a YouTube example

    You all may well have been down this road, but it is new for me.

  34. I was just watching the greek news there on SBS. These people need to learn how to smile. There’re all so serious.

  35. @Jim Rose

    It is Belgium that has trouble forming governments. The 2010 Dutch government formation took 126 days or about a quarter of a year. Minority governments like the Ritte cabinet are actually very rare there. It collapsed when the nativist/populist PVV refused to support the fiscal pact initiated by Merkel. The austerity parties are expected to get a drubbing at the general election in September.

    As I understand it the three-day rule in Greece is not for the whole government formation but to determine if a party will accept the position of formateur and go on to attempt forming a government. The Greek electoral law awards the 50 bonus seats differently for coalitions and single parties. At the last election the austerity parties got 149 seats of 300 on just under 1/3 of the popular vote.

    If Syriza remains a coalition it may be denied the bonus seats and the austerity parties, John’s ‘dinosaur clans’, may again get enough seats to block a Syriza government while unable to form one themselves. That electoral system is a recipe for chaos.

  36. alan, I hope I do not run into a belgin who knwos i counfsed them with the dutch.

    from greek constitution article 37

    “2. The leader of the party having the absolute majority of seats in Parliament shall be appointed Prime Minister.

    If no party has the absolute majority, the President of the Republic shall give the leader of the party with a relative majority an exploratory mandate in order to ascertain the possibility of forming a Government enjoying the confidence of the Parliament.

    3. If this possibility cannot be ascertained, the President of the Republic shall give the exploratory mandate to the leader of the second largest party in Parliament, and if this proves to be unsuccessful, to the leader of the third largest party in Parliament.

    Each exploratory mandate shall be in force for three days.

    If all exploratory mandates prove to be unsuccessful, the President of the Republic summons all party leaders, and if the impossibility to form a Cabinet enjoying the confidence of the Parliament is confirmed, he shall attempt to form a Cabinet composed of all parties in Parliament for the purpose of holding parliamentary elections.

    If this fails, he shall entrust the President of the Supreme Administrative Court or of the Supreme Civil and Criminal Court or of the Court of Auditors to form a Cabinet as widely accepted as possible to carry out elections and dissolves Parliament.”

  37. the current greek electoral law, which was used for the first time in the election in 2012, reserves 50 parliamentary seats for the party or coalition of parties that is supported by a plurality of votes cast, and apportions the remaining 250 seats proportionally according to each party’s total valid vote percentage

    for more confusion on this point see

  38. Sorry Jim you are simply wrong.

    For a coalition to get the bonus the members of the coalition must average a strength greater than the largest single party. I am aware that distinction is not picked up by the Wikipedia article.

    The 2008 electoral reform increased the reinforcement bonus to 50 (from 40) out of 300 and included the new rule denying the bonus to coalitions unless the average result obtained by the coalition is greater than the result of the biggest party.

    See the discussion at

    The dinosaur clans in Greece badly need a meteor to come along.

  39. the wiki is confusing, and I am not sure if there is one party list with a 3% rule or many districts and a national minimum of 3%

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