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15 July

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KATHIMERINI: Four scenarios for Greece tomorrow

A new JJN report that examines employment impact of debt crises has been featured by Kathimerini, the largest Greek daily newspaper. Ahead of the Greek Parliament’s vote on new bailout terms, JustJobs Network released a report on the ways in which sovereign debt crises – and the measures countries implement to tackle them – affect the employment landscape. This post is an unofficial machine-generated translation of the original article by Katerina Sokou.

WASHINGTON – Four scenarios for Greece tomorrow and three lessons from the Greek crisis have been presented in an analysis by the JustJobs Network, an American institute that focuses on employment.

According to the author of the analysis, Abhijnan Rej, the first lesson of the Greek crisis is that the real economy must be freed from the financial sector. Second, that currency unions must also be fiscal, with integrated public spending and revenue collection. As he notes, without fiscal union, a monetary union is not stable. Third, when a country is in a debt trap, where any surplus merely finances the repayment of debt, it is difficult to invest in economic reconstruction. According to Mr. Rej, public debt should not be an obstacle to job creation, noting that this was the rationale behind the forgiveness of World War II loans. As stated by the report, “what Europe needs now is a coherent and pragmatic approach to debt, especially since indebted countries are part of the same monetary union.” It predicts that these lessons will guide choices in Spain, Portugal and Italy in the coming years, as well as in other economies that will face the same problems of Greece in the future. The report thus suggests pathways to create jobs as countries pull themselves out of debt.

The first scenario is that Greece exits the Eurozone and the European Union and becomes financially independent as a result of a failure to reach an agreement. In such a case, the Bank of Greece will initially issue vouchers to pay for civil servants and pensioners, and then introduce a new devalued drachma. New financial rules would be needed to limit imports, promote exports and strengthen small businesses. Greece will also need a fixed exchange rate system in order to reduce volatility in prices for key imports such as fuel, which in any case will become very expensive. As the report notes, historically a fixed rate is better for employment, and it proposes a return to the original rate: 340.75 drachmas to one euro. However, to facilitate an increase in foreign investment, Greece would need to loosen the fixed exchange rate in the long term.

A cheap drachma would mean higher inflation, and any attempt to increase revenue through simply printing money would lead to hyperinflation. However, considering that manageable short-term inflation would be positive for the labor market, output should focus on SMEs while capital inflows are limited. One way of achieving this is to offer lower tax rates for small businesses and industries that replace imported products.

The second scenario is a repetition of the model of Cyprus, in which Greece will remain in the eurozone but with lengthy capital controls and a large haircut on deposits. Apart from the damage to banks, limiting capital outflow has hit imports and private consumption very severely. However, capital controls can be a valuable tool for an economy in crisis, says the report, as reducing the flow of funds into a country with inelastic nominal wages such as Greece will increase employment. Cyprus successfully adopted this measure, like the haircut on deposits, and has made a remarkable recovery, writes the researcher, with a slight decrease in unemployment. However, in the case of Greece the losers in a haircut will be domestic. In itself, moreover, this measure may not lead to economic development, as it limits the influx of valuable investment. It should be accompanied by measures for creation of jobs.

The third scenario is that Greece remains in the euro by debt restructuring, although it comes at a cost. Three options include haircuts, an extension of maturities at lower interest rates, or even the transfer of new loans to service existing debt investments. The political mood in Germany will not allow for this, while the extension of maturities would further increase the already high prices and will reduce the value of loans given to Greece. According to the report, the only politically feasible solution is the third option. A reduction in interest rates by 1 percentage point would release 2.5 billion euros, which could be turned into investments to improve the value of Greek exports in areas such as information technology. And despite the demographic challenge, the workforce would be able to find employment, including those laid off from the public service.

The fourth scenario is an exit from the euro and the EU, and subsequent acceptance of foreign aid from a country like Russia. This has the greatest geopolitical effects although much like the first – the difference in this scenario is that it allows for outside players to have long-term interests in Greece. If Europeans reject the agreement or if the government falls, extreme anti-European elements may prevail. This scenario could also be triggered if Greece fails to pay the ECB on 20 July, or if a premature lifting of capital controls causes a massive outflow of deposits. If the Kremlin supports Greece, either through its BRICS development bank with China or by itself, the most likely help will be in the form of an agreement to trade their national currencies (currency swap), allowing the country to pay in drachmas for imports and protect its foreign reserve holdings. This scenario is considered functional, as 14.1% of Greek imports are from Russia, while another 4.6% are from China. But the report notes that it would have significant political and economic costs to Greece as the EU could respond with strategic penalties, making the country sensitive on the security front.

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