The gravy train may have come to a halt, but Greek prime minister Alexis Tsipras is desperately attempting to refuel it.
Events this week which have ensued following Greece’s referendum on austerity measures have depicted the as an administration with a defiant stance, having defaulted on its 1.6 billion euro installment which was intended to signal the beginning of a repayment plan for its 345 trillion euro debt to the European Central Bank and International Monetary Fund.
In the advent of the default, investors rallied to remove as much as they could from banks creating an exodus of bank deposits from a nation which has low production output, a small 11 million population yet owes an amount which is now almost equal to the entire capitalization of the European Central Bank.
Maverick leftist Alexis Tsipras was elected largely as a result of his vehement anti-austerity and anti-repayment stance, therefore with the electorate behind him, he is able to now carry out some drastic measures, one of which is the extension of capital controls and bank closures into tomorrow.
German Chancellor Angela Merkel and French President Francois Hollande are due to meet other euro-region leaders tomorrow as the crisis escalates while the European Central Bank is also evaluating its next moves to prevent the country’s impending financial calamity.
“Time is running out and the window for a deal keeps narrowing,” Mujtaba Rahman, head of the Europe practice at Eurasia Group in London, wrote in a note to clients. “The euro leaders’ summit on Tuesday is likely to prove decisive for Greece’s euro membership.”
If Greece is forced out of the Eurozone and subsequently the European Union, there would be absolutely no hope of repayment of any of its commitments, exposing the European Central Bank to a vast loss which it can ill afford at a time when several other member states are reliant on state support as opposed to commercial output.
Greek Finance Minister Yanis Varoufakis said he was stepping down after more than five months of confrontation. He was replaced by Deputy Foreign Minister Euclid Tsakalotos, a trusted party hand who has been more involved in negotiations as Varoufakis took a back seat.
Varoufakis said his departure was intended to bolster Greece’s position after a larger-than-forecast 61 percent of voters rejected further austerity. The motorbike-riding economics professor had sparred openly with counterparts including Wolfgang Schaeuble of Germany.
With banks closed across Greece and the future of the Euro currency and its issuer, the European Central Bank somewhat uncertain, it is entirely possible that a Cyprus-style bail-in of up to 30% of investors’ deposits could be applied, as a precedent was set in 2013 when Bank of Cyprus and Laiki Bank went insolvent and closed their doors, locking in the depositors’ funds until a haircut was applied.
When looking at other member states of the European Union, Italy has a debt to GDP ratio of 127%, whereas France has a debt to GDP ratio of 250%. Compared to non-european, Western nations, this is extremely high as the United States, even post economic crisis, has a debt to GDP ratio of only 99% and it is decreasing all the time, and highly productive Mexico only has a debt to GDP ratio of 5%.
Mexico owes this to independence, a young and industrious population and its close proximity to the United States. The nation has a strong manufacturing sector, including vehicle assembly for Ford and General Motors, as well as a very significant high technology and telecommunications industry.
This example is poignant because, in North America, there is no federal union of the three seperate nations – US, Canada and Mexico are responsible for their own economies, and although are continentally joined, are different in many ways from eachother economically.
China, arguably the most productive nation on earth, only has a debt to GDP ratio of 1% and is totally self-sufficient.
By joining the entire European continent in a single governmental and economic/fiscal union aligns Germany and the United Kingdom with Portugal and Greece, and to a large extent has allowed socialist nations with high debts and low productivity to be able to draw from the productive member states.
In 2010, the Conservative party formed a coalition with the Liberal Democrats and succeeded the socialist Labour Party in Britain. When David Laws, the Conservative Treasury Chief Secretary assumed his office, he found a note addressed to him on his desk from outgoing Labour Treasury Chief Secretary Liam Byrne which stated “There is no money left” demonstrating very candidly the legacy of 13 years of socialism.
That was five years ago in Britain, however today across the European Union, the content of that note resounds clearly.