Greece after the vote: A country still on the brink

Editor's note: Graham Bishop is an independent analyst of European Union financial affairs and provides commentary and educational services on its financial regulation at www.thenobrainer.eu. He was chief European economist at investment bank Salomon Brothers at the time of the design of the euro.

(CNN) -- The Greek Parliament has voted, protesters have protested, buildings are burning: What next? The tranche of funding Greece needs will probably be disbursed and default -- at least in March -- will be avoided.

But, but, but...the feeling has changed. The media focuses on austerity and cuts so misses the central change in attitudes in the rest of the European Union, as trust in the ability of the Greek political class to deliver on their promises sinks ever lower.

November's International Monetary Fund report commented that "technical delays prevented any privatization sales during the third quarter... structural reforms have not yet delivered the expected results, in part due to a disconnect between legislation and implementation."

Graham Bishop

As foreign officials probe deeper into the mechanics of the Greek state, the scales seem to be falling from their eyes and they see that there is not a functioning public administration. It may not even be possible to spend the unspent EU structural funds -- even when there is a drastic cut in the requirement for matching funds from Greece. This is now the core of the problem and explains the insistence of Ecofin (the European Union's economic and finance ministers) on public commitments by all political leaders to the program.

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The EU has now been forced to recognize that the Greek political system seems to be based on a "clientelism" arrangement that offers employment in the public sector or publicly controlled companies. So it is well understood that meeting the demands for a reduction in the number of civil servants and privatization is really code for requiring a major change in the political system. If the Greek political class is unable -- or, more realistically, unwilling -- to deliver on its promises, then it can only be a matter of time before patience in the EU runs out entirely and the funding stops. What then?

• The Greek crisis has been going on for long enough that non-Greek lenders have had the time to make adjustments. Negotiations on private sector losses have underlined that bank loans to the Greek government are impaired. Bank balance sheets will have to reflect the new reality -- but adjustments must have been made already so there should not be a new shock.

• The drying up of external credit will have other effects. Exports may be surging but they still only cover half the values of imports. Worldwide television pictures of burning buildings may not encourage tourists to book for their next summer holiday in Greece, so the current account deficit may have to shrink even more quickly.

• Many in the EU have been shaken to see the statistical agency Eurostat's map of minimum wages in the EU. At €877 per month, Greek minimum wages are more than 50% above those in Portugal and nearly 20% higher than Spanish. Hence the demands in the new program for a 22% cut so that Greece prices itself back into the international markets. In effect, this will be the equivalent of a major devaluation -- but via the domestic cost base rather than formal currency devaluation.

Should Greece leave the euro? If the cuts in wages can achieve the same result, then there may not be much point because the risks remain huge. No-one has yet shown a simple legal route for Greece to leave the euro and remain within the EU. Any convoluted route that requires legislative -- or even treaty -- change would court economic disaster. Already Greek banks are seeing major deposit outflows, although much of that can still be explained by the drawdown of savings to protect living standards. Nonetheless, London is alive with anecdotal evidence of Greek property purchases.

Loose, and now widespread, talk about leaving the euro must surely have sensitized Greek citizens to the possibility, and the risk. Any overt moves toward departure should be expected to trigger a major exodus of capital. But this talk is very damaging for the rest of the euro area. Euro area states should make clear Greece cannot leave the euro without leaving the EU itself.

That will leave the Greek political class to contemplate how they can change their system quickly into one that the rest of Europe is willing to fund, while a painful transition to a more competitive economy takes place in the next few years.