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Analysis
The Byron beckons

The Byron beckons

Greece can pursue reforms at its own pace

by Meghnad Desai

Mon 6 Jul 2015

Many people think that by voting No, the Greeks have slit their throats. But they defied expectations and turned the tables on the creditors.

There is no answer to the 61%-39% referendum score. The margin is much larger than anyone expected. Alexis Tsipras and Yanis Varoufakis, the finance minister who has now resigned, played a weak hand superbly. And they won.

Syriza has done something that has not happened in Europe for many years. A left-wing party has won an election and a referendum on a left-progressive platform. It has defied Europe’s conservatives. This will inspire parties in Italy and Spain to flex their muscles. The French Socialists may rediscover their courage.

Greece will have two parallel currencies for a while. The experience will be painful but the citizens’ pain is of their own choosing. Greece may yet show the rest of the euro area that one currency does not fit all. We may witness the bifurcation of the euro: north against south.

So what next? Before the referendum, Merkel and Co were saying: ‘No negotiations until after the results.’ Technically Greece is still in the euro, but with one debt default already under the belt. It is now up to the European creditors whether they will go back to the position before the referendum announcement – or take into account the clumsy change of view by the IMF, which last week admitted the justice of Syriza's demands on debt relief.

The troika of creditor institutions must put up or shut up. The institutions will have to declare Greece in default, cutting it off from help from the European Central Bank and other sources – or deliver immediate relief.

The IMF turnaround, in theory, offers the easiest way for the creditors to capitulate gracefully. No repayments until 2055, postponement of debt servicing and €60bn in immediate help. Fat chance. Pigs can fly. The Maastricht treaty does not do kindness.

This is the first stage of a long divorce. The ECB will determine its pace. If Greek banks are cut off from emergency liquidity assistance, then the exit starts one minute afterwards: fast transition to Greece’s own currency.

As I wrote in a Commentary on 29 June, the new currency – the new drachma or perhaps the Byron, recalling the hero of the original freedom struggle – should begin at par to the euro. All government salaries should be paid in the new currency.

From here on Greece regains its macroeconomic policy tools. It has run a tight fiscal policy for the last five years but not tight enough for the impossible demands of the creditors.

Exit from the euro, whenever it comes, will not be easy. I have always maintained that Greece’s choice was either 40 years of dull excruciating pain or five to seven years of acute misery. Syria has to explain to the citizens the problems ahead but also show that the freedom they have won can create conditions for austerity with a human face.

The currency will depreciate. Inflation will follow. Syriza has to protect the vulnerable. It can choose which of its principles are conducive to humane austerity and which can be jettisoned. Since it will not be able to borrow for a while, it has to attract capital willing to take a punt on Greece.

The answer is to cut corporation tax, privatise what it can and encourage exports, which its depreciated currency will facilitate. To protect the weak, Syriza has to extend a hand to the powerful, especially foreign investors.

It has to run a tight fiscal policy and a loose monetary policy. Even here, fiscal policy can be a bit more relaxed than it has been for a while. Pensions can be protected in nominal drachma-Byron terms. Inflation will erode their value so there will have to be some partial indexation.

Greece can pursue structural reforms, but at its own pace, not that of its masters. With fortune and a fair wind, the arduous way forward can start here.

Prof. Lord (Meghnad) Desai is emeritus professor at the London School of Economics and Political Science and chairman of the OMFIF Advisory Board.

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