Tag Archives | Grexit

Where India got it right

EU is trying to do what India did in 1947, but it has been trying to do so since 1958 – Varun Ramachandra(_quale)

It appears that the Eurozone leaders have decided to halt the crisis that they have been in recently. They have agreed to provide a third bailout to Greece, subject to certain conditions that the Greek government has to meet by 15th July 2015.

A lack of political union is being cited as a primary reason for the current crisis in Europe. In this context, some of my colleagues have attempted to compare the Indian Union and the European Union and contend that the EU is aspiring to do what India did in 1947.


Although initially I did not agree, with time and more reading I partly agree with the hypothesis. EU is indeed trying to do what India did in 1947, but it has been trying to do so since 1958. At the time of independence, India faced a problem of political unity; a common currency across most of (today’s) India already existed. The Euro Zone, on the other hand, comprises of several states with independent governments that have agreed to be a part of a monetary union — ie., an adopted common currency.

In this context the words of the  English Economist Nicholas Kaldor sound prophetic

… Some day the nations of Europe may be ready to merge their national identities and create a new European Union – the United States of Europe. If and when they do, a European Government will take over all the functions which the Federal government now provides in the U.S., or in Canada or Australia. This will involve the creation of a “full economic and monetary union”. But it is a dangerous error to believe that monetary and economic union can precede a political union or that it will act (in the words of the Werner report) “as a leaven for the evolvement of a political union which in the long run it will in any case be unable to do without”. For if the creation of a monetary union and Community control over national budgets generates pressures which lead to a breakdown of the whole system it will prevent the development of a political union, not promote it.

Another important difference between the EU and India is that the individual Indian state derive its legitimacy from the Union. This is sorely lacking in Europe, where the Union draws its legitimacy from the individual members.

It is therefore safe to contend that the Indian experiment is actually a success, at least when compared to the ongoing European experiment, whose results are not yet out.

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The aftermath of the Greek ‘No’ in referendum

By Anita van den Brandhof

The EU is failing to offer a strong answer to the Greek debt crisis, due to divergent interests between member states.

How did it all start?

When Greece joined the Euro in 2002, the economy and government structures were much weaker than other EU countries. This all changed when the Euro was introduced. Suddenly cheap loans became available, because the Euro offered more liability and lenders thought that the EU would repay the debts if Greece was unable to pay. Greece borrowed money on the international market and the economy grew fast. The borrowed money was not only used to support structural growth, but also for higher social benefits and the Athens Olympics.

The global financial crisis in 2008 hit hard on Greece. In 2009 the country admitted that the low deficit figures reported in 2002 were false. This ruined the Greek financial reputation: the deposits in Greek banks shrank and new loans from the international market became hard to obtain. In 2010 Greece had to accept the first bailout from the EU to prevent a complete bankruptcy. The loan of 110 billion euro came with a list of conditions that included reforms in the revenue collection system and significant budget cuts to bring down government spending. A second bailout of 109 billion euro was needed in 2011. The Greek government implemented most reforms and budget cuts, but it didn’t result in a healthier economy. The cuts in government spending increased unemployment, decreased consumer spending and also tax revenues went down. Since 2008, the economy has declined 25 percent and more than a quarter of the population became unemployed.


The economic crisis resulted in a humanitarian crisis and political unrest. The Greek population is fed up with the conditions that came with the loans and are protesting against the European oppression. The leading leftish political party Syriza promised the Greek population that they will not accept new restriction from the EU. When the package deal for a new bail out scheme was finalized at the end of June 2015, Syriza decided to hold a referendum among its population. The majority of the Greek population voted against the new bailout program, to show their discontent to the EU. Without a new bailout, Greece would have to default. So what are the scenarios after the Greek rejection?

What could happen next?

In a sovereign country there are two methods to combat an economic crisis, but these measures are not available for Greece. Monetary measures, such as devaluing the Euro is not possible, are not supported because it will harm the stronger EU economies. Fiscal measures contain an increase in government spending, to bring about more investment. Greece cannot use fiscal measures, because the conditions of the loans stipulate that the Greek government has to cut its spending.

One way to get Greece out of the crisis is to waive the debts or postpone the payment, in order to give Greece space for investment and economic recovery. Waiving the debts would cost billions to the rest of the EU and is not popular among the stronger EU economies. In 2010 the Greek crisis was seen as a European crisis, because other Southern European countries also needed a bail out. However, the other countries have recovered and solidarity of the other EU members states towards Greece has evaporated. Especially the Dutch and Germans view Greece in terms of lazy, unreliable and incompetent. To raise public support in these countries for a new bailout plan is almost impossible.

A Greek exit of the Euro, “Grexit”, became a realistic possibility. Initially, the costs of introducing the old currency would be high, but it would give Greece the possibility to use monetary measures. The cost for the EU would be high as well, because it would hurt their reputation as a reliable financial partner and might cause a plunge in the stock market.

Most likely, the EU and Greece will come up with a temporary solution this week and postpone a Grexit. But the EU will not be able to find a sustainable solution for the crisis, due to its fragmented decision making procedures and divergent interests between the member states. It is possible that the EU will slightly increase the loans, to keep the Greek economy alive, but not enough to keep it from collapsing in the long run. In the long run a Grexit seems inevitable. Important for a Greek recovery after the Grexit is that it remains part of the single market economy of the EU, so that trade barriers are avoided and exports as well as tourism can be increased.

Anita van den Brandhof is a research scholar at Takshashila Institution.

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Snippets from the Greek Crisis

The Greeks are holding a referendum and the consequences from the vote is an event horizon

It is alarmingly close to a Greece exit from the Euro as the deadline for Greece repaying the €6.74 billion to the Troika is approaching. The Syriza government refuses to accept the bailout package with the conditionality of excessive austerity measures and the Troika is unwilling to back down and extend the deadline or give fresh bailout money without imposing conditions. This post last week explained the exact conundrum that Europe finds itself in.

As predicted, stock markets across Europe have plummeted. Capital controls have been imposed in Greece. A bank run is on the way, with hundreds of people queuing outside ATM kiosks across Greece. In order to counter the bank run, all commercial banks will be shut for a week and there is a cap of €60 withdrawal.

As discussions between the Greek government and the Troika have broken down, the choice of accepting the austerity measures lies with the people of Greece.

Greece calls for referendum (Greferendum):

Prime Minister Alexis Tsirpas, in a surprising move, decided to hold a referendum to ask the Greek people if they should accept the bailout money with the conditions of further austerity. He claims that it is the “sovereign democratic right of the Greek people, necessary to ensure ownership over the financial assistance programme that will be eventually agreed with the institutions”. Needless to say, the EU, ECB, IMF and the private creditors did not take to the idea.

Wording of the Greek Referendum Ballots:

The exact wording of the referendum is highly unclear and it would make Greek voters more confused than they already are.


This is what it translates to (supposedly in English):

Should the plan of agreement be accepted, which was submitted by the European Commission, the European Central Bank, and the International Monetary Fund in the Eurogroup of 25.06.2015 and comprises of two parts, which constitute their unified proposal? The first document is entitled ‘Reforms for the completion of the current program and beyond’ and the second ‘Preliminary debt sustainability analysis’.”

Not Accepted/NO


One can readily imagine that the two documents outlined in the ballot are not any clearer than the wordings of the ballot.

Positioning the choices – Government nudge?: There has been quite a bit of criticism against the positioning of the choices in the ballot paper. The format for the ballot paper is quite unusual as the government has decided to present the ‘No’ choice, which is what the present Syriza government wants, above the ‘Yes’ choice.

Logistical Issues: In a slightly ironic development, the Greek government may not have the money to conduct the bailout. The referendum will cost around 110 million Euros, which the Greek government cannot afford. Further, the Athens Chamber of Commerce added there is no paper to print some 20 million required ballots!

Significance of the Yes/No Vote: The Troika and the Greek opposition party are emphasising that a No vote would essentially result in Grexit. The European Commission Chief Jean-Claude Juncker passionately pleaded for the Greeks to vote ‘Yes’, so that Greece need not exit the Euro.

However, Mr. Tsirpas clearly believes that a No vote does not imply that Greece has to exit. He is calling the Troika’s bluff on the basis that a Greek exit would be too costly for them and thus, they have no choice but to relent on the push for austerity measures.

Ultimately, the events after the 30th of June, 2015 remain an event horizon.

Anupam Manur is a Policy Analyst at Takshashila Institution. He tweets @anupammanur

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The Economic Consequences of Debt Repayment

If either the troika or the Greek government does not blink, a Greek default on its loans and exit from the Euro (Grexit) is a very real possibility.

With about €320 billion involved, the standoff between the left wing Syriza Government in Greece on one side and the IMF, ECB and the European Union (collectively known as the Troika) on the other makes it the most glorified and high risk game of chicken played. Monday, the 22nd June, presents one of the last opportunities for a deal to be brokered between the two sides and neither side is willing to back down and give in to the other’s requests.

In short, the situation reads thus: Greece has an outstanding debt of about €320 billion to various creditors. Recognising its inability to pay the amount, in 2010 and again in 2012, the IMF, the EU and the ECB decided to formulate a bailout package totally amounting to €240 billion. However, this money would be given to Greece only on the condition that it makes wide sweeping reforms and introduces a severe austerity drive. Further, 9 out 10 Euros from this bailout package will be used to pay back the creditors and not for Greek citizens. In June, Greece owes about €6.74 billion as part of its monthly debt repayment schedule (about €1.5bn to the IMF) and it does not have the resources to pay for that, while the last tranche of the bailout package worth €7.2 billion is also due to be given to Greece. While this situation is complicated enough, throw in a bit of political economy to the mix and there exists a true conundrum for everyone involved. The present government came into power in the last election in 2014 on a strict anti-austerity platform. It refused to prioritize repaying the creditors by cutting back on government expenses towards citizens’ welfare.

The IMF refuses to hand out the last €7.2 billion of the bailout package unless Greece undertakes severe austerity measures and also pays back the €6.74 billion that is due by the end of the month. The Greek government, with tremendous support from the citizens, refuses to take either action.

If one of the sides does not blink – the IMF extending the deadline for Greece to pursue fiscal consolidation and debt repayment or the Greek government undertaking reforms and paying part of the bailout money to its creditors – a Greek default on its loans and exit from the Euro (Grexit) is a very real possibility.

The IMF and Germany would do well to revisit Keynes’ classic work “The Economic Consequences of Peace” (1919), where he hinted at the possible consequences of the Allied countries extracting huge sums of money as reparations for the war (WWI) damages from Germany. He had rightfully explained that Germany will have no means to pay back the sums demanded by the Allied countries, especially given the economic downturn they were facing, except by resorting to the printing press. The predictions came true later on as Germany printed large sums of money in an expansionary monetary policy, which later resulted in hyperinflation, political upheaval, economic chaos, etc. The consequences of this are well known.

In this game of who blinks first, if neither of them blink by the looming deadline, everybody loses.


There is a chilling parallel here. If Greece defaults and exits the Euro, there will firstly be a bank run, where depositors will rush to withdraw their savings from the banks. This will result in a loss of liquidity. In the past few days, hundreds of Greeks are queuing up outside the cash points, in order to withdraw their money, in anticipation of a financial crisis. This will only worsen as the deadline approaches. Further, there will be a new, deep and prolonged recession. It would also be forced to go back to printing its own currency, the Drachma, or some other variant of it. Its financial system will collapse in the wake of a liquidity crunch and loss of access to the ECB. The Independent explains: “To prevent these institutions collapsing Athens would have impose controls on the movement of money out of the country. The international value of the new Greek currency would inevitably be much lower than the euro. That would mean an instant drop in living standards for Greeks as import prices spike. And if Greeks have foreign debts which they have to pay back in euros they will also be instantly worse off. There could be a cascade of defaults”.

This will obviously have a contagion effect, where banks, financial institutions and governments who are over exposed to Greek debt will lose their principal amount. The Euro currency and Euro stocks will crash, which can have renewed negative consequences for a world economy just recovering from the previous recession.

Thus, in this game of who blinks first, there is a unique scenario, where if neither of them blink by the looming deadline, everybody loses.

Anupam Manur is a Policy Analyst at Takshashila Institution. He tweets @anupammanur


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