Graham Bishop's Blog: Greece - This is NOT the moment to default

14 April 2014

Greece has just made a major step forward in its recovery by obtaining a modest amount of funding from the international capital markets. Achieving durable primary and current account surpluses have always been the prerequisite for Greece to contemplate default. But doing it now/soon?

Greece has just made a major step forward in its recovery by obtaining  a modest amount of funding from the international capital markets. The improved economic fundamentals provided the springboard and the FT's Munchau is right that achieving durable primary and current account surpluses have always been the prerequisite for Greece to contemplate default. (link to FT article) But doing it now/soon???

The calculus is far more complex than basic economics in the modern world of the European Union, a less predictable Turkey and a flexing of Russian muscles:

• The EU would be entitled to feel betrayed by a default explicitly targeted at the help that it has given. There could be no co-operation on `leaving the euro but staying in the EU itself’ via legal gymnastics as the Treaty formally does not allow a state to exit the euro – except by leaving the EU.  An EU exit would incur massive costs from the loss of structural funds and other subsidies, quite part from the difficulties for the tourist trade of passport formalities for the 85% of travellers returning to the EU. Moreover, the EU would hardly regard such a state as a reliable partner as a transit route for natural gas supplies from the Middle East.

• The recent difficulties in Turkey might historically have triggered enhanced Greek defence expenditures but these excesses have been trimmed massively by the bail-out conditions and an immediate build up would simply return the country to financial difficulties again. Part of the calculus has been that Turkey’s EU membership aspirations would act as a brake on aggression towards Greece. Outside the EU and in disgrace, that constraint would be removed.

• Russian actions in Crimea have triggered a great deal of nervousness in many of its neighbours to its west. Several states have suddenly reviewed plans to join the euro as a mechanism to bind themselves ever more closely into the inner core of the EU.

On all counts, it would be short-sighted indeed for Greece to seize the first plausible opportunity to go in the opposite direction.

Rolling blog

Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary

© Graham Bishop