The framework of the agreement between Greece and its creditors is very tough on Greece because it was signed at the worst possible moment for Greece — after a five-month erratic negotiation, after the disaster of the referendum, with closed banks, capital controls, and very low withdrawal limits. But since the negotiation will continue through August, there is an opportunity for improvements that can be achieved by a much stronger Greek government that would include all pro-European parties (including the pro-Europe part of Syriza).
Here are six myths about the current situation in Greece and the reality in each case:
Myth 1: A 'Grexit' is better than the agreement with creditors.
If a "Grexit" (Greece leaving the euro zone) happened, Greece would face a long-term closure of banks with capital controls and withdrawal limits, and depositors would lose at least 50 percent of their deposits for two reasons: First, under a Grexit, the Greek banks would go bankrupt and a de facto haircut (loss) on deposits will be imposed. Second, depositors would face further losses in the conversion to the new currency and inevitable subsequent devaluation. Unemployment would skyrocket. Importers would face huge hurdles and there will be significant shortages. The new drachma would be a heavily devalued weak currency resulting in inflation and widespread poverty as Greeks would afford only half or one-third of their present purchases. Greek politicians would print large amounts of new drachmas, further increasing inflation, and nullifying any benefit to exports from the devalued new drachma.
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Greece would shift from being part of Europe to a weak poor country at the mercy of the big powers of the region — especially Turkey. Its territorial integrity would be challenged.
Myth 2: The EU program leads to a Grexit.
If the program is implemented correctly, Greece will grow and re-enter the financial markets in 2017. In 2014, despite many errors by previous governments, and despite the ruthless and misleading opposition of Syriza, Greece had the fastest growth in the euro zone. Moreover, Greece succeeded in issuing new bonds at a yield of 3.5 percent only two years since it imposed a haircut of 74 percent to its bonds in 2012! These achievements occurred without structural reforms and despite the increasing political uncertainty because of the ascent of Syriza.
Now, if there is a national salvation government and the uncertainty is eliminated, Greece can do better. Of course a prerequisite is to reduce the size of the state sector, to open entry and increase competition in closed sectors of the economy, do the privatizations, reduce bureaucracy, reduce business taxes, and create friendly conditions for investment.
Myth 3: The ECB closed the banks, imposed capital controls and withdrawal limits.
This propaganda is untrue. Banks closed in Greece because Greeks withdrew their deposits facing political and economic uncertainty created by the erratic negotiation tactics of the present Greek government. Not only did the European Central Bank not cause the closing of the banks and capital controls, but instead, the ECB helped Greece to avoid them for months by providing Greece with emergency liquidity.
Myth 4: The program will create a recession in Greece.
Not true at all. The Europeans want Greece to achieve a small budget surplus. There are two ways to achieve this: The first is to increase taxes and create a recession — the method used so far. The second is to reduce the size of the state and increase its efficiency, without horizontal cuts in wages. If this path is followed, there is no need to increase taxes. Greece can, in fact, reduce state expenditure and simultaneously decrease taxes, resulting in higher economic growth.
Myth 5: Greece does not need structural reforms.
Large parts of the Greek economy are controlled by unions and guilds. Structural reforms that open the closed sectors to competition will bring very substantial benefits that will be reflected in lower prices and higher exports.
Myth 6. Greece needs immediate reduction of its debt.
There is no immediate need. Greece has a long grace period (interest recapitalized) for many years in its debt to Europe. Therefore, in the short run, the size of the debt does not matter. However, it does matter in the long run. Thus, in the next 2-3 years, the Europeans need to agree on a restructuring based on three points: First, an elongation of the maturities of the debt. Two years ago, I had proposed an elongation to 75 years, and the Europeans had signaled that they accepted this approach. Now, with the additional debt of the new program and the much worse condition of the Greek economy, the debt should be elongated to 100 years. Second, the grace period should be increased to 20 years. Third, the present (very low) variable interest rates should be converted to fixed and stay low. If these are done, Greece will be able to grow and service its debt.
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Commentary by Nicholas Economides, a professor of economics at the NYU Stern School of Business. He also has advised the Greek government and Bank of Greece.