Flashlight Europe N°7–09 July 2015. Greece After the Referendum: Three Possible Scenarios for the Euro Area

About ten days ago Alexis Tsipras, the Greek prime minister, announced that there was going to be a referendum, and thus terminated the negotiations on a new rescue package unilaterally. Since then the euro area has been plunged into a wholly unprecedented political crisis. Whether or not Greece can re-main in the monetary union is more uncertain than ever, and decisions that can give a new twist to the political and financial situation are being made almost every day. The Greek banks have been closed for over a week. The economic data are deteriorating rapidly. And yet a solution is nowhere to be seen. The No vote in the Greek referendum has not exactly improved the chances of reaching an agree-ment. For the time being the positions seem to have become uncompromising. At the summit of the heads of state and government on 7 July the Greek government was given five days and a “final deadline” in order to come up with viable proposals for reform. Thus the next few days are of crucial im-portance. At the weekend the heads of state and government of all 28 EU member states are going to meet in order to decide the future of Greece. This flashlight europe provides an overview of the events of the last few days, outlines possible scenarios for what may happen in the near future, and identifies factors which may exert an influence in the short term. We are not trying to give an exact forecast or to formulate action recommendations. But we are trying to shed some light on a confusing situation by identifying important patterns and some of the salient factors.

The 2015 Greek Referendum. EPIN Commentary No. 24, 3 July 2015

The Greek government called a snap referendum on the proposals advanced by the EU partners and creditor, i.e. the draft Agreement submitted by the EU/IMF to the Eurogroup of 25 June 2015. There has been a major controversy among Greek constitutional lawyers about whether this referendum meets constitutional requirements. No doubt, the constitutional validity of this referendum could be challenged on pure normative terms (nature of the question, time limit); yet this shock call for a referendum appeared as the only political solution for the Greek government facing the dilemma of whether to take the plunge of having five-months of negotiations transformed into a negative-sum game.

Post-Summit Commentary – Greece on the brink. EPC Commentary, 29 June 2015

The developments of recent days have been dramatic – the saga of the Greek crisis has probably opened its decisive chapter. Negotiations between Athens and its creditors failed after the Greek government decided to leave the negotiating table and hold a referendum on 5 July. The future of the country in the common currency and the potential consequences for the EU and the euro are uncertain. There are clear signs of fatigue, everywhere. But there is still time to avert the worst, if there is the political will on all sides to work on a new perspective for Greece and for the future of the Economic and Monetary Union (EMU).

A Greek tragedy in the making. EPC Commentary, 6 July 2015

One thing is clear: the Greek people have emphatically voted ‘No’, providing a boost to Prime Minister Alexis Tsipras and plunging Greece and the Eurozone even more into uncertainty. But it might, at the end of the day, prove to be a hollow victory for the Greek Prime Minister: the vote cannot compel the rest of the Eurozone to open their coffers and provide the funds Greece so desperately needs. It is certainly not a victory for democracy: it is highly questionable whether the Greek people could form an informed opinion, given the short time frame, the unclear question relying on a proposal no longer on the table, and the high level of misinformation on the potential consequences of the vote. This is no victory, neither for Greece nor the EU and its members: in the end, it increases the danger of Greece leaving the Eurozone – and potentially even an eventual exit from the EU –, which the people of Greece clearly do not want, as 75-80 per cent of citizens firmly want the country to stay in the euro.

Restructuring the Greek banking sector with an empty purse. CEPS Commentary, 13 July 2015

Greek banks are close to collapse, even if a new bail-out programme is agreed soon. The deterioration of the economy means that their fragile capital position is deteriorating further. In this CEPS Commentary, Daniel Gros observes that any new programme needs to include recapitalisation, comprising possibly a bail-in and restructuring to get the banking system working again. With only a small part of the assets unencumbered and a government with empty pockets, the depositors might have to take a large part of the burden. As private investors are unlikely to participate in a recapitalisation, foreign official funds will be needed. A direct equity investment by the EIB or the EBRD could be used to transfer control rights, and special ESM bonds could be used to provide additional capital without entailing additional risk to the creditors

Poor Greeks or lazy Greeks? CEPS Commentary, 13 July 2015

Drawing on a wide array of statistical indicators reflecting economic activity, states of poverty, structural reform and governance in Greece, this Commentary by Ilaria Maselli provides substance to a debate that has become highly inflammatory and superficial in the latest episodes.

Reform momentum and its impact on Greek growth. Bruegel Policy Contribution 2015/12, July 2015

Greece has an imperfect track-record of structural reform implementation. However, the poor growth outcome of the Greek programmes is also a consequence of the timing and composition of reforms, which were not optimally geared towards a speedy transition to a new growth model based on the private sector. While the main responsibility for this lies with the Greek authorities, international institutions share the responsibility for the poor growth-enhancing effect of reforms. In the current context, further structural reform efforts should be mainly targeted at supporting Greece's speedy return to solid growth rates. This is not only because poverty and unemployment have reached very high levels, but also for political economy reasons: reforms must quickly be seen to be working in order to buttress the consensus in favour of reform. Further efforts should be made to improve Greece’s business environment and to liberalise product markets, in addition to shifting taxation away from labour and towards consumption. Reforms to improve the quality of institutions should continue and are very much needed in the Greek setting, while taking into account that their demanding implementation might use up administrative capacity and their impact on growth will only be seen over long time horizons.

Addressing the immediate needs of the Greek banks. CEPS Commentary, 31 July 2015

Based on a detailed calculation of the recapitalisation requirements of the Greek banks, we find that the sector needs an infusion of capital, but that the level largely depends on the stringency of the capital requirements applied. An expedient quick fix to comply with the minimum capital requirements could be achieved by a bail-in of existing creditors under the EU Bank Recovery and Resolution Directive of around €5 billion, leaving only €6 billion needed for re-capitalisation. If the ‘Cypriot’ standard is applied, however, the required re-capitalisation would be €15 billion. A ‘generous’ approach, which takes into account the phasing in of the new more-stringent capital requirements until 2018, would imply a re-capitalisation of €29 billion (or more bailing-in of creditors). The re-capitalisation should be undertaken preferably by the EIB, the EBRD or the new Greek investment fund, rather than via loans from the ESM to the Greek government.

spotlight europe #2015/03 — August 2015: Money or Democracy? Greece and the Euro Dilemma

The negotiations on the third bailout package for Greece are still going on, but the euro area has already paid a high price for it. The compromise on which it is based is clearly very controversial. Some of its critics believe that it does not make sense in economic terms, whereas others point out that it may have an adverse political effect. But what in fact is Greece actually supposed to be doing, and what does all this mean with regard to sovereignty and democracy?

Why Greece declined a euro holiday. CEPS Commentary, 6 August 2015

In a new CEPS Commentary, Daniel Gros speculates on why the Greek government suddenly turned an about-face on July 13th and conceded to terms that not only controverted its own promises, but also closely resembled those that voters had overwhelmingly rejected in a popular referendum barely a week earlier?

The grand divergence: global and European current account surpluses. Bruegel Working Paper 2015/08, 13 August 2015

Global current account imbalances widened before the 2007/2008 crisis and have narrowed since. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. Generally, the gap between the actual current account and its fitted value in the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses.

Greece’s poor growth prospects. CEPS Commentary, 21 August 2015

Four years ago – almost to the day – when the question of Greece’s debt sustainability was being intensely debated, these same authors argued that Greece would face strong headwinds in its effort to ‘grow solvent’. With the third rescue package dealing with the immediate liquidity issues in the works, and concerns being voiced by the IMF as well as other actors, they find in this CEPS Commentary that the issue is once again pertinent.

The globalization of angel investments. Bruegel Working Paper 2015/09, 1 September 2015

The last decade has seen a rapid expansion and deepening of the types of vehicles that fund start-up firms in the U.S. and worldwide. In particular, we have seen a growing role of angel groups and other more “individualistic” funding options for start-ups, such as super angels or crowd sourcing platforms. Authors seek to understand the nature and consequences of angel investments across a variety of geographies with varying levels of venture capital markets and other forms of risk capital. They ask whether angel investors improve the outcomes and performance of the start-ups they invest in. Furthermore we want to understand whether and how the types of firms that seek angel funding vary with the overall entrepreneurial ecosystem in a country. Authors examine the records of 13 angel investment groups based in 12 nations and with applicants for financing transactions from 21 nations, examining both the applicants that were considered and rejected and those that were funded. Key findings from the analysis are two-fold. First, angel investors have a positive impact on the growth of the firms they fund, their performance, and survival. Second, they find that the selection of firms that apply for angel funding is different across countries.

Can the eurozone’s economic governance combine political accountability, legitimacy and effectiveness? EPC Discussion Paper, 1 September 2015

After years of economic crisis, resulting in significant changes to economic governance at EU level, especially for the eurozone, the time has come to consider the longer term political and economic implications of this new situation for the economic integration process. Not only to determine how well the system is likely to function but also what more needs to be done to ensure long-term stability and to provide the EU institutions with sufficient political legitimacy to carry out this new role. This article does not consider abolishing the euro, based on the conviction that introducing the euro created a path dependency that makes trying to unpick the seams of the process extremely costly. While, economically, the exit of one eurozone member state might conceivably be manageable (but costly, especially for that country), the long term political costs might end up unravelling the whole European integration process, with the potential for a bankrupt and politically unstable state outside the euro but still within the EU. However, the status quo situation is still unstable, politically and economically, and needs further policy reforms.

Saving the Banks: The Political Economy of Bailouts. CES Papers - Open Forum #8, 2012

How much leeway did governments have in designing bank bailouts and deciding on the height of intervention during the 2007-2009 financial crisis? This paper analyzes comparatively what explains government responses to banking crises. Why does the type of intervention during financial crises vary to such a great extent across countries? By analyzing the variety of bailouts in Europe and North America, we will show that the strategies governments use to cope with the instability of financial markets does not depend on economic conditions alone. Rather, they take root in the institutional and political setting of each country and vary in particular according to the different types of business-government relations banks were able to entertain with public decision-makers. Still, “crony capitalism” accounts overstate the role of bank lobbying. With four case studies of the Irish, Danish, British and French bank bailout, we show that countries with close one-on-one relationships between policy-makers and bank management tended to develop unbalanced bailout packages, while countries where banks have strong interbank ties and collective negotiation capacity were able to develop solutions with a greater burden sharing from private institutions.