Economists Troll Germany, Telling It To Leave The Euro First

If one country should leave the eurozone, they argue, it's not Greece -- it's Germany.

The possibility of a “Grexit” -- or Greek exit from the eurozone -- has dominated headlines in recent months, as round-the-clock negotiations between Greece and its international creditors over a new bailout deal shed doubt on Greece’s future in the monetary union. Many eurozone leaders, particularly in Germany, welcomed the prospect. 

But some economists say proponents of a “Grexit” have it all wrong: If one country should leave the eurozone, they argue, it is Germany. 

These economists’ basic premise is that Europe’s depressed economies, which include not just Greece, but Spain, Portugal, Ireland and Italy, would benefit tremendously from a cheaper currency. Devaluing the euro would help boost their exports and even spur domestic spending, as moderate price inflation would prompt consumers to lock in deals at current prices. But currently these mostly southern European countries are stuck with a currency value that is boosted by the inclusion of Germany and other wealthier European countries. High investor demand for a currency that includes the German juggernaut keeps the euro’s value relatively high.

A German departure from the eurozone and return to the deutsche mark would reduce the euro’s value dramatically, providing Europe’s weaker economies with the cheaper currency they need to restore growth and competitiveness. Princeton economist Ashoka Modyimagines that other wealthy European nations like the Netherlands, Belgium, Austria and Finland would leave as well, possibly joining Germany in a new union. Their departures would lower the value of the euro even more, which would further benefit the continent’s weaker economies.

Germany stands to gain from an exit as well, since the new deutsche mark would be worth substantially more than the euro, enabling German consumers to benefit from cheaper consumer goods.

“The disruption from a German exit would be minor,” Mody wrote in Bloomberg on Friday. “Because a deutsche mark would buy more goods and services in Europe (and in the rest of the world) than does a euro today, the Germans would become richer in one stroke.”

A German exit from the euro would make German exports less competitive, but Mody says that by depressing German consumer demand, Germany’s current trade surplus has been damaging to the world economy.

Former Federal Reserve chair Ben Bernanke made a similar argument about Germany’s trade surplus in a Friday blog post on the website of the Brooking Institution, where he is now a resident economist. Bernanke said Germany’s trade surplus and accompanying tight fiscal policies had depressed economic growth in the rest of Europe. He called for new eurozone rules against trade imbalances in order to force Germany to lower its trade surplus.

Notwithstanding these economists’ recommendations, Greece is still the country most likely to leave the eurozone. The International Monetary Fund has called the latest bailout deal unworkable, since it fails to restructure Greece’s unsustainably high debts and is overly optimistic about the economic performance Greece will be able to achieve in order to pay down those debts. That means Greece will continue to need more loans just to meet its obligations to creditors, and will be back at the negotiating table in a matter of months, or years at most.

Eurozone leaders resisted aiding Greece until the end of negotiations, and proposed a Greek departure at the last minute. They were only willing to assist Greece in exchange for the deepest austerity measures yet, including a fire-sale privatization of some of Greece’s state-owned assets. It is unlikely that the eurozone will have a greater political appetite to lend to Greece if the current loans-for-austerity deal breaks down. Short of additional funding and liquidity support for its banks, Greece will once again face a Grexit.

“My guess is that euro exit will still prove necessary,” Nobel Prize-winning economist Paul Krugman wrote in The New York Times on Monday. “And in any case it will be essential to write down much of Greece’s debt.”

Source: The Huffington Post

Greece Orders Banks To Re-Open Monday

ATHENS, July 18 (Reuters) - The Greek government ordered banks to open on Monday, three weeks after they were shut down to prevent the system collapsing under a flood of withdrawals, as Prime Minister Alexis Tsipras looked to the start of new bailout talks next week.

The decree to re-open the banks came hours after new ministers were sworn in following a cabinet reshuffle in which Tsipras replaced dissident members of his ruling Syriza party following a revolt over the tough bailout terms.

In a move that marked a split with the main leftist faction in the ruling Syriza party, Tsipras sacked hardline former Energy Minister Panagiotis Lafazanis and two deputy ministers following a party rebellion in which 39 Syriza lawmakers withheld support from the government over the package.

Panos Skourletis, a close Tsipras ally who left the labor ministry to take over the vital energy portfolio, said the reshuffle marked "an adjustment by the government to a new reality."

The reshuffle allowed Tsipras to replace cabinet rebels with allies of his own or from his junior coalition partners, the right-wing Independent Greeks party.

The first action of the new cabinet was to sign off on a decree to reopen banks on Monday with slightly more flexible withdrawal limits that allow a maximum of 420 euros a week in place of the strict limit of 60 euros a day currently in place.

But restrictions on transfers abroad and other capital controls remain in place.

The move had been widely expected after the European Central Bank agreed to re-open the emergency credit lines which the tottering Greek banking sector needs to survive.

Tsipras now intends to seal the bailout accord with European partners over the next few weeks before likely new elections which Interior Minister Nikos Voutsis said this week could happen in September or October.

"Our aim is to negotiate hard for the terms of the agreement, not just to seal it, but on how it will be implemented. There are many vague terms in the text," said newly-appointed Labor Minister George Katrougalos.

He said the government, elected in January on an anti-austerity platform, would fight for an agreement that was "socially just" and dismissed suggestions that it would have to take on the powerful labor unions and risk street protests.

"The Left is with demonstrations. The Left wants the people on the streets," he said.

TOUGH BAILOUT TERMS

The deal, approved with the support of opposition parties on Thursday after 39 Syriza rebels withheld their backing, agrees a painful mix of tax hikes, spending curbs and pension cuts as well as a rollback of collective bargaining agreements.

In addition, 50 billion euros ($54.14 billion) in public assets are to be placed in a special privatization fund as collateral for loans of up to 86 billion euros that must be agreed with European partners.

Acceptance of the tough bailout terms marked a turnaround for Tsipras after months of acrimonious talks and a referendum that resoundingly rejected a less stringent deal proposed by the lenders. But opinion polls suggest the prime minister's popularity remains high.

A poll published on Saturday in the leftwing Efimerida Ton Syntaknon newspaper suggested Syriza would get 42.5 percent of the vote if an election were held now, almost double conservative New Democracy's 21.5 percent.

In addition, 70 percent said they would prefer to accept the bailout deal if it kept Greece in the euro.

($1 = 0.9236 euros) (Writing by James Mackenzie; Editing by Tom Heneghan and Louise Heavens)

Source: The Huffington Post

Greece's Prime Minister Tsipras Reshuffles Cabinet

ATHENS, Greece (AP) — Greece's proposed bailout cleared further key hurdles Friday after German lawmakers overwhelmingly gave their backing to another financial rescue and the European Union said it would release a short-term loan to ensure Athens avoids a debt default.

The developments, along with the Greek parliament's approval early Thursday of creditor-demanded austerity measures, contributed to a positive initial assessment from Europe's bailout fund. In a statement, the European Stability Mechanism said it approved a "decision to grant, in principle, stability support to Greece in the form of a loan program."

Prime Minister Alexis Tsipras, meanwhile, reshuffled his cabinet after a rebellion earlier this week in his party's ranks over the austerity measures, replacing two ministers who voted against him and changing another eight ministers and deputy ministers.

Though the broad outlines of the Greek bailout were agreed Monday by the eurozone's 19 leaders, the ESM's decision formally kick-starts the process by which Greece begins negotiating the details.

The discussions, which are expected to last four weeks, will include economic targets and reforms deemed necessary in return for an anticipated 85 billion euros ($93 billion) over three years.

"This agreement offers a chance to put the Greek economy back on track," said Jeroen Dijsselbloem, the eurozone's top official who also chairs the ESM board. "It's not going to be easy. We are certain to encounter problems in the years to come. But I believe we will be able to resolve them."

In recent weeks the Greek economy, which is around a quarter smaller than it was back in 2008 following a brutal recession, has suffered a number of shocks with the country's euro future on the line.

The hope now is that the banks, which have been shut for the past three weeks, will reopen soon — possibly as early as Monday — and that the paltry 60-euros a day withdrawal limit at ATMs will be raised.

The first big development Friday was the news that German lawmakers, in the wake of their Austrian counterparts, voted 439-119 in favor of opening detailed discussions on the bailout package. Chancellor Angela Merkel had warned them Greece would face chaos without a deal.

That was later followed by confirmation that the 28-country EU will release a loan of 7.16 billion ($7.7 billion) in short-term cash by Monday, when it has a 4.2 billion-euro debt repayment due to the European Central Bank.

The funds, which will come from a long-dormant EU program called the European Financial Stabilization Mechanism, will also help Greece clear arrears with the International Monetary Fund, and with the Bank of Greece.

The loan will be for three months and disbursed over two instalments, and comes a day after the ECB raised emergency liquidity assistance to Greek banks.

"What we're witnessing is European solidarity in action," said Valdis Dombrovskis, the EU Commission's vice president for the euro.

"Politicians across 27 countries have invested their own political capital to speed through national decisions to shoulder Greece at this difficult time for the country," he added.

Germany is likely to continue playing a key role in Greece's future as it is the largest single bailout contributor. It has taken a hard line, insisting on stringent spending cuts, tax hikes and wide-ranging economic reforms in return.

"The principle ... of responsibility and solidarity that has guided us since the beginning of the European debt crisis marks the entire result from Monday," Merkel told the special session of Parliament. The alternative to an agreement, she added, "would not be a time-out from the euro that would be orderly ... but predictable chaos." 

Merkel will have to return to Parliament to seek approval for the final deal when the negotiations are concluded.

"I know that many have doubts and concerns about whether this road will be successful, about whether Greece will have the strength to take it in the long term, and no one can brush aside these concerns," she said. "But I am firmly convinced of one thing: we would be grossly negligent, even irresponsible, if we did not at least try."

Bailing out Greece hasn't been popular in Merkel's conservative bloc and 60 of its lawmakers failed to back her Friday, with another five abstaining.

In Athens, Tsipras made changes to his government in the wake of this week's revolt which saw nearly a quarter of the lawmakers from his radical left Syriza party vote against him.

The austerity measures, which include consumer tax increases and pension cuts, passed with a large majority thanks to the support of three pro-European opposition parties, but left his party and his government wounded ahead of another parliamentary vote on further measures next Wednesday.

Among the changes announced, Tsipras replaced Energy Minister Panagiotis Lafazanis and Alternate Finance Minister Nadia Valavani, and ousted Alternate Social Security Minister Dimitris Stratoulis, all of whom had voted against him on the austerity bill. Valavani had announced her resignation immediately before the vote.

The bill outraged many within Syriza and its junior governing coalition partner, Independent Greeks, for insisting on the very austerity the government was elected to repeal after five years of belt-tightening demanded in return for two international bailouts. Greeks also voted to reject milder creditor reform proposals in a hastily called referendum July 5.

Tsipras has acknowledged the package he signed up to went against his election promises but insists he had no other choice, as the alternative would have seen Greece forced out of the euro — a development that most experts say would have caused massive short-term damage to the Greek economy.

Greece has relied on bailout cash for five years after it was locked out of international bond markets amid concerns over its ability to repay its debts.

Though the austerity implemented by successive governments in return for 240 billion euros worth of rescue loans reduced the annual budget deficit, Greece's debt burden has swelled to around 180 percent of annual GDP because of the economic contraction.

____

Moulson reported from Berlin. John-Thor Dahlburg contributed from Brussels.

Source: The Huffington Post

Greece Lawmakers Approve Bailout Proposal

Credit: ANDREAS SOLARO/AFP/Getty Images)

ATHENS, Greece (AP) — Greek lawmakers voted overwhelmingly early Thursday to approve a harsh austerity bill demanded by bailout creditors, despite significant dissent from members of Prime Minister Alexis Tsipras' own left-wing party.

The bill, which imposes sweeping tax hikes and spending cuts, fueled anger in the governing Syriza party and led to a revolt against Tsipras, who has insisted the deal forged after a marathon weekend eurozone summit was the best he could do to prevent Greece from catastrophically crashing out of the euro, Europe's joint currency.

The legislation was approved with 229 votes in favor, 64 against and six abstentions — and won the support of three pro-European opposition parties.

Among Syriza's 38 dissenters were prominent party members, including Energy Minister Panagiotis Lafazanis and former finance minister Yanis Varoufakis, who many blame for exacerbating tensions with Greece's creditors with his abrasive style during five months of tortured negotiations.

The post-midnight vote might not pose an immediate threat to Tsipras' government, but it raised more doubts over whether it could implement the harsh new austerity program demanded by rescue lenders.

The vote came after an anti-austerity demonstration by about 12,000 protesters outside parliament degenerated into violence as the debate was getting underway Wednesday night. Riot police battled youths who hurled petrol bombs for about an hour before the clashes died down.

The bill was the first step Greece must take in order to begin negotiations with creditors on a new bailout — its third in five years — of about 85 billion euros ($93 billion) in loans over three years.

Dissenters argued that Greeks could not face any further cuts after six years of recession that saw poverty and unemployment skyrocket and wiped out a quarter of the country's economy.

Tsipras has been battling all week to persuade party hard-liners to back the deal. He has acknowledged the agreement reached with creditors was far from what he wanted and trampled on his pre-election promises of repealing austerity, but insisted the alternative would have been far worse for the country.

"We had a very specific choice: A deal we largely disagreed with, or a chaotic default," he told parliament ahead of the vote.

Tsipras had urged Syriza members to back the bill despite having urged voters to reject earlier, milder creditor demands in a July 5 referendum. Greeks voted overwhelmingly to reject those proposals.

Finance Minister Euclid Tsakalotos, who took over from Varoufakis the day after the referendum, said the deal Greece reached with its creditors on Monday was the only possible choice.

"I must tell you, that Monday morning at 9:30, it was the most difficult day of my life. It was a decision that will weigh on me for the rest of my life," Tsakalotos said.

"I don't know if we did the right thing. But I know we did something with the sense that we had no choice. Nothing was certain and nothing is," he told parliament.

High-ranking dissenters included Alternate Finance Minister Nadia Valavani, who resigned from her post earlier Wednesday, saying she could not vote in favor of the bill.

In a letter sent to Tsipras on Monday and released by the finance ministry Wednesday, Valavani said she believed "dominant circles in Germany" were intent on "the full humiliation of the government and the country."

The economy ministry's secretary general, Manos Manousakis, also resigned over the measures.

Parliament speaker Zoe Konstantopoulou, a prominent Syriza member, slammed the deal as a product of blackmail, calling it a "crime against humanity" and "social genocide."

Thursday's vote came after more than two weeks of capital controls, with Greek banks and the stock exchange shut since June 29 and ATM cash withdrawals limited to 60 euros per day.

With its banks dangerously low on liquidity and the state practically out of cash, Greece desperately needs funds. It faces a Monday deadline to repay 4.2 billion euros ($4.6 billion) to the European Central Bank, and is also in arrears on 2 billion euros to the IMF.

Negotiations on the new bailout will take an estimated four weeks, leaving European finance ministers scrambling to find ways to get Athens some money sooner.

The European Commission has proposed giving Greece 7 billion euros in loans from a special fund overseen by all 28 EU nations so it can meet its upcoming debts. The loan would be made pending the start of a full bailout program, but faces resistance from Britain, a non-euro member of the EU.

Germany argued one way for Greece to meet its financing obligations was for it to issue IOUs for domestic needs.

ASSOCIATED PRESS

____

Raf Casert in Brussels and Frank Jordans in Berlin contributed to this report.

Source: The Huffington Post

Prime Minister Alexis Tsipras Must Now Sell Rescue Deal To Greece, Introduce Punishing Austerity

BRUSSELS (AP) -- With members of his own party openly denouncing a preliminary rescue deal struck with Greece's European creditors, Prime Minister Alexis Tsipras must fight to cling to his government's majority after he was forced to shred election promises and introduce punishing austerity measures in exchange for the bailout.

Tsipras, who flew home Monday from grueling night-long negotiations with European leaders, will chair an executive meeting of his Syriza party early Tuesday before lawmakers begin a two-day debate on the deal - set to heap more tax hikes and spending cuts on a country already suffering through six years of recession.

The deal ensures that Greece avoids an imminent financial catastrophe and an exit from the Eurozone. But Panos Kammenos, leader of the junior partner in Tsipras' coalition government, called the bailout plan a German-led "coup."

"This deal introduced many new issues ... we cannot agree with it," Kammenos said after meeting with Tsipras.

Other Greeks rallied Monday night outside Parliament in Athens, urging lawmakers to reject the new demands.

Around 30 out of Syriza's 149 lawmakers are likely to vote against the government. Many held private meetings late Monday.

Tsipras had to consent to a raft of austerity measures, including sales tax hikes and pension and labor reforms - measures he had campaigned vociferously against over the last five years of Greece's financial crisis.

Since his election in January, the youthful Tsipras has faced intense pressure to backpedal on many of his promises to Greece's exhausted electorate. Finally, faced Sunday by the leaders of the 18 other nations that share the euro and the knowledge that Greek banks were just days away from running out of money, the moment came when he couldn't resist any more.

A series of supposed red lines vanished, including objections to tight international oversight of Greece's economy, continued involvement by the International Monetary Fund in Greece's bailout program and cuts to pensions.

The result of marathon negotiations emerged Monday: about 85 billion euros ($95.1 billion) in loans and financial support for Greece over three years that will preserve its membership in the euro, shore up its banks and allow a modicum of stability to return to the battered Greek economy.

Creditors have also dangled the carrot of a possible future debt restructuring in the event of a smooth bailout.

"We managed to avoid the most extreme measures," Tsipras said.

But in many cases, ordinary Greeks now face tougher measures than those they voted down in a nationwide referendum a little over a week ago.

Syriza's Left Platform, a group of traditionalists in Tsipras' own party, swiftly denounced the agreement as the "worst deal possible ... (one) that maintains the country's status: a debt colony under a German-run European Union."

Experts were divided over the result.

"It was the best deal the Greeks could get," says Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. "They did not do too badly given the terrible, terrible, disastrous starting point the current government put them in."

But Ashoka Mody, visiting professor of international finance at Princeton University, says the deal just repeats policies that have already failed.

"The economics of this program have been set up for failure," he told The Associated Press. "In three years, if this program is implemented, the Greek economy will be 10 percent smaller than it was and the debt burden will be higher."

In many ways, Tsipras' hard work begins now. As part of the deal, his government has to get the Greek Parliament to back a series of economic measures by Wednesday that creditors are demanding. And in the weeks to come, Greece will have to make further changes to its economy, such as opening to competition industries like energy that have long been protected.

"Trust needs to be rebuilt," said German Chancellor Angela Merkel, adding that with the deal "Greece has a chance to return to the path of growth."

Passage of the new measures appears assured, since Greece's opposition parties have pledged to support Tsipras' deal. But dissent within the ruling Syriza party is threatening his coalition, raising the prospect of some sort of national unity government or an early election later this year.

Greece needs another bailout, its third in five years, to cope with its mountain of debt and get its economy back on track after a six-year retreat that evokes memories of the 1930s' Great Depression in the U.S. The Greek economy has been pushed to the brink of collapse - banks have been shut down for two weeks, and restrictions limit withdrawals to a paltry 60 euros ($67) per day and normal business has almost ground to a halt.

When the Greek banks eventually reopen, they will most likely have to depend on more emergency credit from the European Central Bank.

Indications are that the ECB won't sanction further help until the Greek parliament passes the first set of creditor demands on Wednesday. And even if the ECB does start raising its emergency liquidity allowance, Greek capital controls are expected to remain for many months more.

"This agreement pulls Greece back from the brink of economic chaos but remains far from ensuring its long-term economic viability within the eurozone," says Eswar Prasad, a professor of trade policy at Cornell University.

Greece has other financing needs beyond its banks. On July 20, it has to make a 4.2 billion-euro ($4.6 billion) debt repayment to the ECB. It's also in arrears on about 1.5 billion euros owed to the IMF. Since its bailout program is not going to be in place by then - Jeroen Dijsselbloem, the eurozone's top official, estimated that would take about four weeks - Greece will need some further help.

Dijsselbloem said finance ministers were trying to figure out how to get Athens some bridge financing but warned they had "yet to find the golden key to solve this issue."

If Greece meets all of the requirements spelled out in Monday's agreement, the country will get a three-year rescue program and the commitment to restructure its debt, which is unsustainably high at around 320 billion euros ($352 billion), or around 180 percent of its annual GDP.

Since 2010, Greece has received two bailouts totaling 240 billion euros ($268 billion) in return for deep spending cuts, tax increases and reforms agreed to by successive Greek governments. Although the country's budget deficit has fallen sharply, its public debt burden has increased as the Greek economy has shrunk by a quarter.

Ordinary Greeks seemed relieved their country was not facing a chaotic exit from the euro.

Kostas Lambos, a retiree in Athens, said things would be "difficult in the beginning" but people had to understand the severity of the situation.

"This was a necessary step for the country to emerge from the dead ends that had been created in the last few years," he said.

---

Elena Becatoros and Derek Gatopoulos in Athens, Greece; Raf Casert and Menelaos Hadjicostis in Brussels, and Paul Wiseman in Washington contributed to this story.

Source: The Huffington Post