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All quiet now, but can Greece really thrive inside the Euro?

24th February, 2015

In the end, the Greek government submitted a list of policy proposals that elicited a positive response from Brussels, which judged it to be ‘sufficiently comprehensive’ to permit the four month extension of the existing loan arrangements until June. The published letters from the IMF and the ECB to Jeroen Dijsselbloem, head of the Eurogroup, were rather more circumspect, indicating strongly that the next 4 months of negotiations to determine Greece’s relationship with the Eurosystem will be tough and most probably tense. The IMF noted that the Greek government’s ‘policy parameters’ didn’t go far or weren’t detailed enough, especially vis-a-vis VAT and pension reforms, privatisations, and policies to open up closed sectors, including the labour market. The ECB urged the Greek authorities to act swiftly to ‘stabilise the payments culture and refrain from any unilateral action to the contrary’.  If you know what that means, please shout, but it doesn’t sound good.

The proposals span

  • tax reform, collection and compliance, and a promise to reform VAT (but not acceding to demands for a rise)
  • public finance management, and a review of public spending – including the ‘astounding 56%’ accounted for by other than wages and pensions
  • broadly stated goals (but no details) to reform pensions (but not pulling back from promises to boost them), and achieve best practice in labour and product market arrangements
  • social security reform
  • public administration and corruption initiatives, including those to crack down on tax evasion
  • measures to address financial stability, banks and mortgage foreclosures
  • a review of privatisations that have not begun yet (but no reversal of those that have started)
  • and….the implementation of small parts of the first pillar of the Thessaloniki programme (see below) entailing humanitarian initiatives, though at no negative fiscal cost

What’s the big ‘deal’?

The ‘deal’ between Greece and its Eurogroup partners has been widely welcomed, and spun according to what people thought would or should happen. Your scribe was no exception. On election night on 25th January, I wrote an op column for the Financial Times in which I thought that in tough negotiations with its creditors, Greece would probably blink, but that whoever did and for whatever reason, Europe would face new threats to stability. I still think that’s the case, and that the current’ deal’ is just Act I in a play with an unpredictable, but very likely bad, ending, where ‘bad’ = Euro system fragmentation, or Grexit, if you prefer.

I think it’s fair to say that however people judge the deal and what they think is good or positive about it from Greece’s point of view is really about one thing only: relief that the integrity of the Eurosystem has been preserved when it looked as though it might not, and hope (rather than conviction) that the upcoming negotiations will see a realignment of interests and trust between Greece and its creditors. Well, who wouldn’t wish for such an outcome?

Frances Coppola, for example, thinks Greece got a lot more out of the early round of discussions than people think. It certainly looks as though Greece will be allowed to generate smaller primary fiscal surpluses as partial relief from austerity, and the balance between imposed and self-imposed constraints and policies looks to be shifting towards the latter. She also thinks that there is now time for trust to be rebuilt and for both Greece and its partners to use the next few months to formulate a mutually credible strategy.

Duncan Weldon of Newsnight, who also maintained throughout February that there would be some sort of arrangement in the end, thinks that even if the time bought by the ‘deal’ amounts to little more than kicking the proverbial can down the road, it’s worth every cent so to do. Since 80% of Greek debt is owed to official lenders, time can be used productively to lower the debt burden and to distance Europe from the prospect of ‘Grexit’ .

The problem though, as I see it, is that the economic and social policy agenda on which Syriza scored such a stunning electoral victory is entirely appropriate for Greece, but wholly incompatible with a Eurosystem that I call colloquially, Teutonia. In Teutonia, Germany doesn’t always win all the arguments, nor does it or can it impose a policy agenda by diktat. But in the absence of political and fiscal union – of which none of the major countries is in favour – the terms of the (narrow) monetary union will always reflect largely the interests of Germany and a relatively orthodox financial establishment viscerally opposed to the establishment of a genuine transfer, joint liability union. Fact. I can’t see this changing, no matter how mutual trust relations between Greece and Germany might heal after the early year impasse. And if it doesn’t change, then Syriza’s economic policy agenda will never really get off the ground. And if it doesn’t, then what next for Syriza and for Greece?

The political commentator, Gideon Rachman,  a bit of a eurosceptic hitherto by his own admission, has acknowledged that a collapse of the Eurozone would pose profound political questions for the EU that it can ill afford, especially in contemporary geopolitical circumstances. And yet he says, and I agree, that even though the Euro system has been shaken and survived before and is now enjoying another reprieve for a while, his concern is that it cannot be fixed.

And that’s my beef with the ‘deal’, and with what happens next. I have no doubt that Teutonia can accommodate a compliant and subservient Greece subject to the will of the latter’s citizens. But Syriza’s election victory was about not being compliant and subservient. So I’m not relieved or confident that the new status quo can hold.

Veteran Syriza politician Manolis Grezos for one thinks that Syriza has failed to live up to what it promised.  If you want a less colourful and more rigorous contrast, look no further than Syriza’s own Thessaloniki programme which is unequivocal in its demands, inter alia, for a substantial debt write-off, and growth-linked debt repayments after a grace period; exclusion of public investment from fiscal rules; and for four economic reconstruction pillars, starting with a €2 billion humanitarian programme, and moving on to growth, tax justice, employment creation, and political transformation.

Ok, there’s no question that the Eurogroup did cut Greece a little slack, but in terms of policy freedom, far less than is sometimes suggested. In the end, the ‘deal’ came down not so much to economic argument and reasoning, as the intervention of Angela Merkel and Francois Hollande who have much bigger fish to fry currently with Russia and the Ukraine, and closer to home, religious, ethnic and migrant tensions. The prospect of a Euro crisis with unpredictable knock-on effects following Greek capital controls, default and exit was a bridge too far. For the time being, at least, geopolitics trumps all else.

But reflecting on the last 4 weeks and looking ahead to the next 4 months, I return to the conclusion in my election night op ed, when I wrote that ‘The most we can say is that if Greece’s creditors blink, the significant demonstration effect to the rest of the eurozone will give rise to economic relief in the south and angst in the north, hardly furthering the cause of political unity. If Greece does, leaving its economic renewal programme toothless, the eurozone’s narrative of mistrust between north and south will intensify with dangerous political consequences. Syriza has won an important victory, but a new chapter of European instability is only just starting.’