This time last week, we were reliably informed by sources in the know that a deal to keep Greece in the Euro was around 90% of the way there. Apparently, there was broad agreement on the measures that would need to be implemented in order for Greece to remain in the single currency region and that, while nothing had been signed, formal agreement would come in only a matter of time.
As a result, the stock market rose by a couple of per cent and investors began to wish that they had taken the opportunity to buy in at a relatively low level. Today, though, it feels as though we are back at square one, with talks between Greece and its creditors apparently stalled.
Of course, Eurosceptics will say that the current predicament is inevitable. They will say that the Euro was a disaster waiting to happen, with the ambitious project being undertaken for political, rather than economic, reasons.
And, with the performance of the Eurozone having being so poor in recent years, there may be some truth in this view. Whilst the US and UK have seen their economies come through a challenging recession, the Eurozone has barely been able to register positive growth.
Clearly, the Greek debt predicament is about more than weak economic growth. Greece’s peers have, with hindsight, been too tough with their dose of austerity, with the country’s economy shrinking by 25% since the start of the global financial crisis.
That’s roughly the same as the US economy declined by during the 1930s and, as a result, it is little wonder that Greeks have voted in a party, Syriza, that has promised to put an end to the misery that austerity has brought.
However, Greece’s creditors continue to push for further austerity and, as such, Syriza appears to be unable to accept the terms. In other words, they were voted in on an anti-austerity manifesto and so are finding it difficult to agree to the terms being offered. This seems to be a reason for the surprising announcement of a referendum, as Syriza seeks to put the best terms they are able to negotiate to the Greek people for them to decide.
Of course, Syriza is also pressing for policies that are unlikely to help Greece’s economic outlook. Policies such as increasing corporation tax and tax on higher earners are likely to disincentive risk-taking and enterprise in a country where confidence is already in short supply. And, put simply, taxing corporate profits more heavily means less investment, fewer jobs and, in the long run, reduced tax receipts.
Clearly, both sides have much to lose from there being no deal. Creditors risk losing €billions and Greece risks yet more economic turmoil. And, if Greece does leave the Euro, then it could act as a stimulus for anti-austerity movements in other countries across Europe to win votes and seek to exit the single currency region, too. As such, and while the outcome of the referendum is impossible to forecast, the outlook for the Euro remains bleak.