February 14, 2011

Dear Friends:

The impending vote in the Greek parliament on the austerity budget that we are told is necessary to save Greece from a disorderly default and eviction from the Eurozone, has provoked a number of thoughts--on which I would welcome your comments:

1) The "troika" (IMF, ECB and EC) and the financial institutions claim that if Greece accepts the austerity that they are demanding in return for debt relief, it will eventually be able to reduce its debt burden to 120% of GDP by 2020-- a level comparable to Italy's last year when it had its crisis --  is revealing. First, it suggests that the creditors do not really expect to resolve the Greek debt crisis any time soon (can they really know what Greek debt levels will be in 8 years time?) but they do recognize that the Greeks cannot pay the bulk of the debt and that they will have to take substantial losses. Second, their strategy seems to be to break their losses  into digestible pieces that they take piecemeal, and to hope that, over time, they can feed Greece just enough relief over time, in return for more Greek "reforms" (i.e. austerity and budget cuts) to keep their losses "digestible" and to avoid a default. Third, this suggests that this is unlikely to be the last round of cuts and austerity that Greeks will experience and that the end of their recession and trauma is at some relatively distant point in the future.

2) This raises the question of how much pressure, especially externally imposed, can a society take before it cracks? As I watch the scenes of protest on the streets of Athens, it seems to me Greece could be getting close to the point where what is being imposed on its population is so harsh and the potential for resolution so remote that Greece could be getting close to the point of cracking.  From history, especially European history, we know that the consequences that follow when society's, even small relatively insignificant ones, reach this point, can be tragic. 

3) Given the above,  I can't help wondering if Greece should not just call the troika's bluff and reject the deal she is being offered. If Greece does so, will the troika really let Greece fail and risk the consequences of a disorderly default for the other debtor countries (Portugal, Italy, the countries of Eastern Europe etc) or will they begin to look for a more sustainable and realistic solution for the Greek crisis? Of course there is a risk that the troika will let Greece fail and get ejected from the Eurozone-- no doubt this will be horrendous for the Greeks but would it be that much worse than what they are experiencing now? In the latter case at least, they would regain some autonomy and some ability (which they could squander) to adjust their economy and make it more resilient and more sustainable over time.

I welcome your responses.

Best wishes,

Danny

Daniel D. Bradlow
SARCHI Professor of International Development Law and African Economic Relations
Faculty of Law, University of Pretoria