ODYSSEUS would recognise the dilemma faced by today's Greeks
as they must choose either the pain of sticking with the euro or the chaos of
bringing back the drachma.
The Homeric hero had to steer his ship between the
six-headed sea monster, Scylla, and the whirlpool, Charybdis. Avoiding both was
Odysseus chose the sea monster, each of whose heads gobbled
up a member of his crew. He judged it was not as bad as having the whole ship
sucked into the whirlpool.
As Greece heads to the polls on June 17 for the second time
in just over a month, none of the options it faces are attractive.
The economy has shrunk about 15% from its 2008 peak,
unemployment stands at 22% and further austerity and reform are required as
part of the eurozone/International Monetary Fund (IMF) bailout. But the lesser
of two evils is staying the course.
Some of this misery was inevitable. Greece's current account
and fiscal deficits each reached around 15% of gross domestic product (GDP) in
2008 and 2009, and had to be cut.
But successive Greek governments have managed to make the
situation worse than it needed to be.
When Odysseus had to pass by the sea monster, he told his
crew to row as fast as possible and not stop. That way, each of Scylla's heads
only had time to munch one man.
By contrast, today's Greeks have dawdled. Confidence in the
country and its political class is shot to bits, both at home and abroad.
Capital is fleeing, investment has vanished and tax-dodging has become even
worse than it was – which is saying a lot.
The government isn't paying its bills, nor are many
companies. As a result, Scylla keeps gobbling up more men.
Terrible as things are, the current situation is not
hopeless. The budget deficit, before interest payments, declined by 9
percentage points of GDP in 2010-2011.
The economy is also getting more competitive: unit labour
costs, which shot up vis-a-vis Greece's eurozone partners in the first decade
of the single currency, had by the end of last year recouped half the lost
ground. They will have fallen further since the minimum wage was slashed
earlier this year.
What is now needed is a strong government. It should embark
on three main tasks. First, continue the reform programme, and get serious at
last on fighting tax evasion.
Second, negotiate with the eurozone/IMF a longer period to
eliminate its budget deficit and secure investment to boost short-term growth.
Third, negotiate another debt reduction plan.
If such a government were formed, confidence could gradually
return and the economy could stop shrinking. The experience of the Baltic
countries - Latvia, Lithuania and Estonia - shows such reforms can work.
After the credit crunch crisis, GDP in the three countries
fell by between 15 and 21% but has since partly recovered.
But wouldn't going back to the drachma be better? Some
commentators point to countries like Iceland, which restored its
competitiveness by a massive devaluation following the credit crunch and only
suffered an 11% fall in GDP.
Wouldn't devaluation be a quicker and less painful way for
Greece to get back in shape?
The answer is no – for two reasons. First, the dislocation
caused by bringing in a new currency would be much more severe than devaluing a
currency that already exists.
The banks would temporarily run out of cash and there would
be multiple legal disputes over who owes what, which could gum up the economy
Second, Greece is receiving an extraordinary amount of cheap
money as part of its second bailout plan: €130bn, or 88% of GDP. This gives it
time to cut its twin deficits.
If Athens left the euro, it would be lucky to get a fraction
of that cash. The country would then have to balance its books immediately.
An even harsher fiscal squeeze would exacerbate the vicious
spiral. The alternative would be to print drachmas to fill the hole in the
But such monetary financing would lead to rapidly rising
inflation, which would already have been given a boost by the devaluation.
Lucas Papademos, the country’s former technocratic prime minister, predicted
last week that inflation could reach 30-50% in such a scenario.
Meanwhile, Greece is hugely dependent on imports not just
for final consumption but also to keep its economy going. It imports oil,
If it had to slash imports suddenly, industry would grind to
a halt. Even tourism, the mainstay of its economy, which accounts for 16.5% of
GDP, could suffer if hotels promising a five-star experience delivered a
three-star one. GDP might fall another 20%, according to Papademos.
Social unrest would worsen, with street battles, attacks on
immigrants, vigilante law enforcement and major strikes. That would further
deter the tourists. It would also make it harder to put together a sensible
The field would be open for populists and extremists. This
way leads to Charybdis.
To avoid this menace, the electorate will need to give a
strong leader the mandate to pursue the current course more vigorously.
Unfortunately, neither of the front runners in next Sunday’s election –
conservative Antonis Samaras and radical leftist Alexis Tsipras – is a
And neither looks able to secure a decisive win. Unless a
third election can produce a better outcome, the drachma will probably return,
and the Greeks will get sucked into the whirlpool.
*Hugo Dixon is the founder and editor of Reuters Breakingviews.
Opinions expressed are his own.