Memo of Understanding and other Red Herrings

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A red herring is a rhetoric ploy to divert attention from the issue at hand by introducing some irrelevant topic. The framing of the Greek election around the memorandum of understanding is such a red herring. There has been such deterioration of the economic conditions in Greece that the conditions and terms of its international assistance will have to be re-crafted in any event.

Consider Greece's two main sources of revenue. Shipping and tourism. The world's largest shipping fair opened in Athens yesterday. It is held every two years. Reports indicate there are some 1870 exhibitors from 87 countries. China is among the few countries that took a booth. China is squeezing Greece's shipping industry, which accounts for 16% for the global merchant fleet. It is the world's largest by tonnage. However, China's rise (and South Korea's prowess) has boosted global capacity at the same time that global economic weakness has lowered trade volumes.

This in turn is hurting profits. Greek shipowners reported an 8.6% decline in profits last year. The vast majority of the unionized Greek ship repair workers and builders are unemployed.

Tourism is the second largest Greek industry after shipping and it is getting decimated. There have been large scale cancellations since the mid-May crisis. The industry faces additional hardship. The tour bus drivers are set to strike shortly as negotiations are deadlocked. The owners seek to impose a 50% cut in pay and benefits on top of the 20% already agreed upon. 

Consider the intolerable human toll of the current austerity drive. The state-owned health care insurer has not paid pharmacists for several months and now owes about 540 mln euros, according to press reports. In turn, the pharmacists have refused to sell medications to insured patients unless they pay cash. Various shortages have been reported. 

Time is of the essence. Regardless of the outcome of the June 17 election, dramatic action will be required. Consider that the that state-owned Electricity Market Operator (LAGIE), a clearing house for electricity transactions. It has not paid independent power producers for the electricity it has purchased. 

The independent power producers have not paid their natural gas suppliers and the Public Gas Corp has not paid its supplier, Gazprom. Gazprom is reportedly threatening to cut Greece off if it does not receive payment by June 22. The scope for negotiations is not clear, but the trajectory of developments is worrisome.

These challenges for Greece would not be resolved by simply leaving monetary union. As it is not self-sufficient, in energy or pharmaceuticals, as in our examples, it will still require credit. As bad as inside the EMU may be, outside would even be worse.

Keeping Greece in EMU will require a new memorandum of understanding regardless of the configuration of the new government. It will require a longer adjustment period, more investment funds, and at some point debt forgiveness by at least part of the official sector, just as the private sector provided some forgiveness earlier this year. If Greece were to leave and default on its debt, the direct costs would be even greater for the euro zone members.