Tuesday, June 30, 2015

The Grexit: The Politics

Well, the expected has happened.  Greece has defaulted on its payments.  And the unexpected -- Syriza may be ready to cave if only the Europeans will allow it.  This may be an early harbinger that the Greek people will also cave and vote to accept the bailout.  I do not have a sense of it.  Nor do I have a sense of whether events will force  everyone's hand and the Grexit take place even before the referendum.  My guess is no, the freeze on bank accounts can hold that long.  And if the vote is no and the Grexit follows, I do not have a sense whether Greece will bounce back or not, although given the record of other countries, there is grounds for hope.

Here is what I am reasonably confident of.

First, I don't think there is much doubt that the people understand very well what is at stake.  Yes, granted, Syriza leaders say the alternative is not Grexit but a better deal.  I don't think most people believe them.  Opposition leaders and European leaders have been shouting themselves hoarse that no means Grexit.  I think the message has gotten across.  It also helps clear up a potential bit of confusion.  Referendums can be confusing when yes means no and no means yes.  In this case, yes means to continue the status quo and no means a radical break.  That is a bit counter-intuitive.  But the Greeks are well aware of the implications of saying "No" to a foreign ultimatum.  And accounts of demonstrators and counter-demonstrators make clear that everyone understands what this is about.

Second, I am confident that regardless of the outcome, the Syriza government won't be around much longer.  If the vote is yes, then the government will fall.  No parliamentary government can survive such a humiliating defeat.  (What will follow is anyone's guess).

If the vote is no, the Grexit will follow.  The immediate impact will be traumatic -- skyrocketing import prices and foreign debts, widespread bankruptcy, a burst of inflation (around 80% if Russia and Argentina are any guide), plunging values of savings, etc.  If Greece is lucky (like Russia, Argentina, or Iceland) the crash will be followed by a rapid recovery.  But it will take time for most people to feel the benefits.  And in the meantime, the people held responsible for the crash will face the people's anger.  In the U.S., election tables are rigid and allow no exceptions.  If it ever came to that, a President might hope to engineer such a measure at the beginning of his term and have a strong enough recovery underway four years later to be reelected.  But most countries do not work that way.

In Russia, the economy declined and declined until the 1998 financial crisis.  The crisis forced a devaluation which was traumatic, but began a rapid recovery.  That recovery was underway two years later when the next election was held, but the Russian people (justifiably) blamed Boris Yeltsin for their misfortunes and elected Putin instead.

In Argentina it gets complicated.  Suffice it to say that Argentina under President Carlos Menem had finally curbed hyperinflation by pegging the peso to the dollar.  This made him popular throughout two terms, but shortly afterward, the peg became increasingly unsustainable and crisis began to build. Bank runs erupted everywhere as it became clear that the peg was unsupportable and devaluation was imminent.  The new president was forced to freeze everyone's bank account.  (Sound familiar?)  Mass riots broke out, and the president was forced to flee in a helicopter, and to resign.  A caretaker president took over who did the inevitable -- defaulted and devalued.  Huge economic trauma ensued, but conditions had stabilized and a recovery was beginning when he called elections a year later. Numerous candidates entered and splintered the vote.  Menem came in first (presumably on name recognition), but with only about a quarter of the vote.  A runoff was called for.  It became clear that voters still blamed Menem (correctly) for the crisis and that his share of the vote would not increase in the runoff, with everyone who had not voted for him converging in favor of the other candidate. That other candidate was Nestor Kirchner, who presided over the growing recovery and got credit for it.  How much credit he deserves is controversial.  But the caretaker who took the necessary but painful measures in defaulting, devaluing, and stabilizing the aftermath has not yet gotten the credit for it.

In Iceland things were simpler partly because the financial crisis was so extreme that default and devaluation were immediate, and in part because everyone knew the incumbent government was to blame.  Even in that tranquil and orderly Nordic country, riots broke out, forced the incumbent government out, and brought about new elections which (unsurprisingly) the opposition won.  The opposition oversaw a remarkably strong recovery, in the aftermath of the worst financial crisis of all time (relative to the size of the economy).  The people of Iceland nonetheless restored the old ruling party to power in the next election of 2013 when the new rulers sought to join the euro.  (To understand why that would be a really bad idea, imagine Greece on steroids, which is what Iceland would have been if it had belonged to the euro during the crisis -- the alternatives of devaluation or default cut off).

In short, in case of Grexit, Syriza will not last long.  How long will depend on how bad the riots are and how rigid Greece's electoral timetable is, and how long Syriza is able to rally nationalist fervor on their side.  (Hence my recommendation of a top-notch demagogue).  Years from now, Tsipras and Syriza may be seen as visionary statesmen who did what had to be done, but in the short run it won't be pretty.  Whether Syriza will be succeeded by the traditional parties, trying put the toothpaste back in the tube, or by Golden Dawn I could not say.

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