Monday, June 18, 2012

An assessment of Greek election results by a Greek economist



Yanis Varoufakis is an economist at the University of Athens. For more about Varoufakis see this site.. Varoufakis points out that in spite of the New Democracy party coming first more Greeks, 55 per cent in fact, actually voted for parties that were against the bailout terms and conditions.

The unusual Greek electoral system gives the first place party 50 extra seats in the 300 seat assembly. Varoufakis thinks that many voted for New Democracy just to keep Syriza from winning and bringing down the wrath of EU institutions and Germany upon the hapless Greeks.

First off PASOK the Socialist party that has lost much of its support will need to invent some narrative to explain why it is willing to join with New Democracy. Next there will be a meeting of the EU Council that will draft a Greek bailout. Mk3. The last bailout Mk2 will not work in spite of what Germany may think. The EU will be forced to change the bailout terms because the earlier terms would make the Greek economy even worse. There will be some relaxation of the terms as an incentive for New Democracy to agree to the new bailout.

Varoufakis thinks that Greece will be given 3 to 5 years to bring its deficit to the 3 per cent mark. Under Mk2 the new government would have to cut 11.5 billion more from public spending. The new Mk3 provisions will cut less perhaps 5 billion. Some funding of projects may also be announced. Varoufakis thinks that this new bailout will nevertheless be a disaster both for Greece and Europe.

According to Varoufakis the credit circuits in the Greek financial system are broken. Even efficient and profitable Greek companies are not able to access capital markets. The new arrangements do nothing to heal this broken credit system. Also even reduced spending cuts will have the effect of ensuring the recession continues with revenues declining. At most he thinks the new terms simply prolong Greeks agony while testing the patience of taxpayers in Germany, Finland and other European countries. For Varoufakis the bailout throws good money again after the bad.

Varoufakis recommends three steps be taken. First Greek banks should be recapitalized through the EFSF (European Financial Stability Facility) Secondly, a shift of Greek (and other peripheral countries debt) to the European Central Bank. This would be financed by the issuance of Euro bonds. Thirdly a recovery program to be financed by the European Investment Bank and European Central Bank. For more details see the full article. Of course as of this writing Greece does not even have a coalition government. The steps that Varoufakis suggests will probably not be approved by key countries such as Germany.

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