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Greece and its creditors: takes two to tango, and it’s not all about austerity

First published: 10th June 2015

One of the strongest and best written critiques of the austerity debate was written by Amartya Sen here  last week. It really is a ‘must read’. It’s constructive and not in the remotest way self-righteous – a description that doesn’t sit comfortably with much of the discussion surrounding Greece and its torturous negotiations with the Eurogroup. I suppose soapboxes are inevitable in a debate that’s fundamentally existential for both Europe and the economic tragedy that is Greece. Polonius’ advice in Hamlet….

Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry….

may resonate morally for individual behaviour, but has never counted for much among sovereign states, where the interests of creditors and debtors have often clashed. Sen cites one of the most celebrated examples, namely the economic treatment of Germany at the Treaty of Versailles, and Simon Wren-Lewis has seized on this to argue that Europe is now confronting its own Versailles moment with respect to Greece here:

He acknowledges at the outset that the negotiations between Greece and the Troika is more than just a fight over resources, i.e. how much of Greece’s national income to transfer to creditors over what period of time. It certainly is – in much the same way that suing for divorce entails an argument about who gets what, but is fundamentally about a dysfunctional relationship. He argues, one-sidedly in my view, that in the Eurozone’s case, the Troika institutions are acting foolishly and against the interests of the people they represent. This may well be true, but the Syriza makes for a worthy bedfellow.

It is easy to see, literally if you visit Greece, that the country faces a humanitarian crisis, resolution of which was the first goal set out in Syriza’s 2014 Thessaloniki programme. We can all agree that austerity, per se, will make Greece’s economic position worse. But Greece’s economic plight, as Simon and others insist, is not simply a morality case of the baddies versus the goodies. This would suggest that THE solution to Greece’s predicament is debt relief and economic stimulus – which is Noddynomics, not economics.

First, this isn’t about pure unadulterated economics, rather it’s complex political economy. There is no political union in Europe, and so the automatic transfer and joint liability mechanisms that underpin successful monetary unions, such as the US, the Federal Republic of Germany, and the UK don’t exist. It’s worth remembering that there is no precedent for a successful monetary union that wasn’t preceded by political union. In this sense, Europe is trying to pull off a remarkable feat and we shouldn’t assume it’s a ‘gimme’. The reality is that the creditors, who must act unanimously (itself a problem for Greece’s negotiating stance), could switch economic tack but not to the extent imagined. They would argue they have already.

Second, the argument about resources and austerity, as defined by primary surpluses isn’t even much of an argument any more. The creditors have lowered significantly their targets as a share of GDP for this year and the next 2 years to 1%, 2% and 3%, respectively. Syriza accepts the need for surpluses and has countered with its own targets of 0.75%, 1.75% and 2.5%, respectively. This isn’t why the negotiations will fail, or end up in Grexit, if indeed they do at this point.

Third, the real contention is about reforms, which Simon argues are a flagrant denial of the democratic mandate won by Syriza in January. Technically this is true, but it’s also only partially true. Greece isn’t the only country with a democratic mandate. Creditor countries have a democratic mandate too. They have obligations to both their parliaments and to voters in respect of what they can offer and what they feel they cannot. If their starting position is to negotiate on the basis that there are rules for dealing with countries in Greece’s position, and they want to be repaid by a sovereign (Greece), that is no less a mandate than Syriza coming to the table with a demand for debt-write-offs or restructuring.

Further, there is no question that the the Troika institutions have, for various reasons, and in some cases myopically, articulated reforms harshly. But it is hopeless to say in a generic sense reforms are wrong or inappropriate. One way or another, Greece is going to have implement reforms, period.

Pension reforms, for example, can be implemented in many ways. Rather than insist on immediate and additional pension payment cuts, one way of putting the system on a more sustainable basis would be for Greece to agree a more radical rise in the pension or eligibility age. It’s a no-brainer in ageing societies anyway. Instead of overhauling the VAT system overnight, the Greek government could agree to a phased introduction and an immediate and determined strategy to improve tax collection, and broaden the tax base. More flexible hiring and firing reforms could also be agreed on a phased basis, during which other labour, wage-setting and product market reforms could be introduced. Older worker and female participation in the Greek labour force is one of the lowest in Europe, so a suitable case for treatment, and one that’s economically productive. Public administration reform, measures to create a trusted and respected legal system, and improved public and corporate governance don’t cost a lot of money but would improve the ‘infrastructure’ of the public sector – which lies at the heart of the trust issue between creditors and debtors – and thereby improve the prospects for higher efficiency and competitiveness in the economy.

The Troika has misjudged the effects of austerity in a country whose governance and clientelism have not really changed, and been wrongly focused on a range of reforms and, more especially their sequencing. But Syriza, which has articulated well decades of misrule in the country, should have had no excuses not to press ahead with domestic public, social and legal reforms, regardless of the status of the negotiations with its creditors. And who knows what a stronger willingness might have elicited from the other side?

If Greece ends up leaving the Eurozone, either as a result of the (in)actions of the ECB or because it chooses to do so, the country will have no choice but to plump for an even harsher austerity than that which the creditors are stipulating today. It makes sense for Syriza to want to stay in the Eurozone. But if it ends up outside, there is little to be gained or learned by simply ranting that the creditors screwed up. Trust is a two-way relationship. If theTroika misdiagnosed the Greek economic situation and lost credibility in Greece, it’s just as true that, even with its left-wing agenda, Syriza was always a supplicant with attitude. It should have been prepared to concede and implement reforms that would have perhaps softened and even lessened the demand for immediate austerity. It takes two to tango.

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