Greece: The Costs of Crisis

We’re going to be hearing a lot about Greece this week, about capital controls, referendums and defaults. Greeks will have to decide on Sunday whether to accept a deal with international creditors that may or may not still be on the table.

For lots of complex political and financial reasons, this vote will essentially determine Greece’s membership in the EU. It’s worth taking stock of what it cost to get even to this point.

The deal being voted on is the product of five months of aggressive negotiations by Prime Minister Alexis Tsipras with the EU. But Tspiras is campaigning for Greeks to reject the proposal he himself hammered out. Tsipras and his Syriza party argue that five years of Brussels-backed austerity has driven Greece to the brink, and it’s hard to disagree with that point.

In the past five years, the country’s GDP has plummeted 26 percent while wages have fallen 14 percent. The unemployment rate remains north of 26 percent, and 75 percent of those who are unemployed have been out of work for over a year. Nearly 20 percent of Greeks cannot afford a proper meal. Suicide rates have skyrocketed 40 percent.

But while Tsipras and Co. may be right about the destructiveness of austerity, the way they’ve gone about negotiating with their creditors has also cost Greece dearly. For five months now, Greece and the EU have been locked in fierce negotiations, filled with recrimination and distrust, and the Greek economy has ground to a halt.

Since January 2015, 59 Greek businesses have closed down each day on average. Banks have hemorrhaged cash; since mid-December 2014, when elections were announced, more than €40 billion has been withdrawn by depositors. That includes more than €5 billion last week alone, and that was before Tsipras’ surprise announcement of a referendum announcement and subsequent capital controls.

The true cost of shutting down Greek banks for a week are still too difficult to calculate, but it’s safe to assume it will cost Greece at least hundreds of millions of euros in lost economic activity.

All of which to say, these negotiations have cost the Greek people a lot already. But Tsipras is right about at least one thing—this referendum will be momentous.

Greeks will get a chance to decide whether to accept a deal with creditors that is much harsher than anyone else in Europe has faced. In the process, they will be deciding on whether to stay in the euro, with full knowledge of the costs that decision entails.

If Greeks vote resoundingly for the deal with their creditors, it may be the EU’s greatest victory in its near 20-year existence. Recent polls suggest that’s more likely than not. But a failure may also be the beginning of the end of Brussels. A lot is riding on this result—now the trick is just getting to Sunday.

Sources:

Time, Telegraph, Telegraph, CNBC, FT