No happy ending in sight for the Greek tragedy

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One way or another, the end is nigh for Greece.

In a surprise announcement on Friday night, Greek prime minister Alexis Tsipras said Greece will hold a national referendum on July 5 on whether his country should accept the new bailout terms demanded by its international creditors. If the vote is "No," Greece will almost certainly default, putting in on a fast track exit from the euro zone. If the vote is "Yes," Greece will accept creditors' demands for more austerity in exchange for more emergency loans that it will never be able to repay. The former would trigger a quick economic collapse; the latter would grind it down for years – a slow-motion suicide.

The odds still seem in favour of a deal between Greece and its creditors – the European Union, the European Central Bank and the International Monetary Fund. That's because the polls show that most Greeks want their country to stay in the euro zone, implying they probably will accept more austerity for the privilege of not having to reprint the disgraced old drachma.

But Greece faces a damned-if-you-do-damned-if-you-don't choice. Let's assume that the referendum goes in favour of accepting the creditors' demands. A deal of some sort would get done, one that would allow Greece to pay its debts this summer to the IMF and the ECB – it owes the IMF €1.6-billion on June 30 – stabilize its banks and stay in the euro zone. Then what? The answer isn't pretty because the new austerity measure would suck €7.9-billion out of the economy this year and in 2016, according to Greece's estimate earlier this week (the final estimate, depending on the deal struck, could be higher). Pension cuts, higher corporate taxes, an extension of the value-added tax (VAT), a wealth tax and less defence spending are the main ingredients in the new austerity soup. How can this not hurt growth?

Lest we forgot, the Greece's creditors wholly miscalculated the damage austerity would inflict on Greece five years ago, when the country became the poster child for the debt crisis that nearly shattered the euro zone. The IMF's staff report from May, 2010, when Greece found itself shut out of the debt markets and received its first bailout, made some fairly optimistic predictions about Greece's recovery. It said that real GDP growth would return in 2012 and reach 3.8 per cent in 2015; that employment growth would resume in 2013; and that the jobless rate would peak out at 14.8 per cent in 2012, then fall to 13.4 per cent in 2015. Greece, in other words, would use growth to bury its problems and shrink its debt, albeit slowly.

The IMF projections were dead wrong. Unemployment rose to more than 27 per cent (the latest figure is 26.6 per cent). Youth unemployment is a staggering 52 per cent. Greece's GDP has shrunk by more than 25 per cent – an outright depression. After flirting briefly with growth last year, the economy is contracting again. The debt-to-GDP ratio, which was supposed to be 140 per cent by now, is an obscene 180 per cent, the highest in the Western world. Absent a debt writeoff, a new bailout program will ensure the figure does not come down any time soon.

So what is the creditors' fix-it plan for Greece? More austerity. Privately, the creditors will say that Greece is its own worst enemy; had it worked harder to implement genuine economic reforms, from privatizations and freeing up the job market to fighting corruption and breaking business cartels, Greece's economy would be in far better shape. Because Greece failed to implement many, perhaps most, of the reforms, the creditors have no choice but to insist instead on another round of austerity.

To be sure, there is some truth to the creditors' argument, but only some. The inconvenient truth (for them) is that Greece has done a credible job in shifting from a primary budget deficit to a primary budget surplus (the measures exclude debt payments). On a cyclically adjusted basis, that is, adjusted for what it would be at full employment, Greece's primary surplus would be more than 5 per cent, the highest in Europe, according to the IMF.

You can see where this is heading. When the new tax demands and spending cuts hit in a few months, Greece's recession will deepen and the jobless rate, which is actually ratcheting up again, will remain at gruesome levels. Greece will require another bailout, ensuring it will remain a ward of the IMF, the ECB and the EU for many more years. The price of keeping the euro zone intact is keeping Greece in austerity hell.