Greece: June 30, 2015
The situation in Greece is spiraling out of control. I would hope that a last minute agreement is reached, but, if not, I would vote a resounding YES to the upcoming referendum on Sunday July 5th. I believe that both economically and geo-politically the Greek people and the nation's interests are best served in the euro and within the core of the European Union. So, YES to Sunday's referendum.
The term sheets circulated between the troika and the Greek government are not great and do not have much room for investment and short term relief to the economy. They do include reduced primary surplus targets for the next few years that were meant to be used to stimulate the economy, but the almost complete standoff of our economy in the past 7-8 months, coupled with the current crisis we are going through in the middle of the summer season, makes me believe that we will miss these reduced targets and not be able to use their slack to stimulate our economy. The term sheets also do not include some form of debt relief (in the form of changing maturity, interest rates, etc.), potentially conditional on the successful implementation of structural reforms.
The nature of the dialog over the past several months is devoid of any good faith and coherent direction. Strong and logical arguments made by one government official are constantly undermined by contradicting statements and actions made by other officials back in Athens. The execution risk for any reforms is unusually high, even by Greek standards. The discussions lasted too long. The end result is that structural reforms are almost absent from the term sheet, including addressing long term issues in the pension system, opening up closed professions (it is frustrating to see how now, and before, the interest of the few is placed above the interest of the many in our country), rightsizing and appropriately aligning the public sector, removing frictions in the labor market, and promoting competitiveness. Much of the emphasis are on tax increases, some countered with "one-off" tax schemes. The tax collection system should be made efficient and enforcement should be strict — there should not be a need for higher taxes, but a credible collection with enforcement of the appropriate taxes. Short of believing that a collectivization-style, centrally controlled economy is a credible path for Greece, even though it has failed everywhere else, the abovementioned reforms need to happen to create a long-term sustainable and competitive economy for the country, which is aligned with its strengths and strong labor skill set. Timid steps were taken in the past few years, but this effort needs to be accelerated and embraced.
The alternative path, predicated on a "no" vote, would lead to an exit of Greece from the functioning euro system (a parallel currency or a new currency altogether) and a marginalization (or even exit) from the EU. Near term this would be chaotic and painful, as people will see their day-to-day financials slashed by 30% to 50% or more. Long term economic prospects outside the euro and the EU also seem strictly inferior. I am judging from our peers inside and outside the EU in the past 30 years; the accelerated growth of Greece's economy experienced during that timeframe viz European countries outside the euro and possibly the EU over that period, or viz Greece's absolute and relative economic growth during the 1950s-1970s. The growth while Greece was part of the EU and later on the euro materialized despite the poor way in which funds were invested and allocated during that period. Medium term recovery may be faster outside the euro, as long as some structural reforms are enacted, the legal system and labor law are reformed to be pro-investment, and the regulatory framework stabilizes. But this medium term scenario is prefaced and ends by worse economic outcomes for the Greek people in its first 6-24 months, and in years 5 or 10 and onwards. [I am not discussing geo-political risks that are significant, and could trump purely economic reasoning, anyways, in support of staying the course within the EU.]
A "no" vote is not strengthening our negotiation position. Our counter parties in our negotiation understand the frictions and problems of the Greek society. They see a government that is unwilling to take hard decisions and stand up and confront the domestic problems, in part due to its beliefs and in part due to its pre-elections campaign promises. They see a government that is supporting a "no" vote, and hear a vocal portion of the government advocating openly for exiting the eurozone. Many of these people have been advocating for exiting the EU altogether over several decades of their political trajectories, so this should not stand as a surprise but instead it is entirely consistent with their views.
Finally, a "no" vote is not to be pursued as a grand economic experiment as has been suggested by some, possibly without a detailed and nuanced understanding and/or interest in the social fabric, history, and the complete contextualization of the country in its area, Europe and the world.
All said, I support a YES vote for a path for Greece within the euro and within the core of the EU.
Office hours: Mondays 5-6pm or by appointment
Costis Maglaras is the David and Lyn Silfen Professor of Business at Columbia University. He is on the faculty of the Graduate School of Business, in the division of Decision, Risk & Operations. He currently serves as the chair of the division, and as the director of the PhD program of the Business School. His research lies on the interface of stochastic modeling with operations management, with emphasis on stochastic networks, financial engineering, and quantitative pricing and revenue management. Some of his recent work has focused on: high-frequency market microstructure; the design of portfolio trading systems and algorithms; the interface between social learning and revenue optimization; the economics and control of queueing systems with strategic agents; and the application of quantitative pricing in the residential real-estate market.
Costis received his BS in Electrical Engineering from Imperial College, London, in 1990, and his MS and PhD in Electrical Engineering from Stanford University in 1991 and 1998, respectively. From 1991 to 1993 he served as a research scientist at Canon Research Center America. He joined Columbia Business School in 1998. He work has been recognized through several research awards, and he has also received the Dean's award at Columbia Business School for teaching excellence for the core course Managerial Statistics. He currently serves as the Department Editor for "Stochastic Models" for the journal of Operations Research.
During his sabbatical in 2007, he was involved in
starting Mismi Inc., a financial services broker-dealer firm that introduces innovative quantitative
portfolio trading tools to the marketplace.
He served as Mismi's Head of Research and part of its management team through 2014.
He has also been a frequent consultant to industry.
Costis is married to Niki Kouri and lives in Manhattan with their three daughters.