19, Μαρ 2015
Why a
win-win is possible for Greece and the EU
By Louka T.
Katseli
Mar 12 2015
In the
Greek elections this January, Syriza, a party of the left, received 36.3% of
the national vote and formed a coalition government under Alexis Tsipras,
backed by the centre-right Party of Independent Greeks. Until five years ago,
Syriza had never received more than 5% of the national vote.
This
dramatic political turnaround could not have happened were it not for the
devastating impact of unprecedented austerity policies. These were imposed over
a period of five years, from 2010 to 2015, by two successive Master Financial
Assistance Facility Agreements, signed between the Greek government and the
so-called Troika (European Commission, European Central Bank and the IMF) in
exchange for 226.7 billion euros in bail-out loans. These were channeled almost
exclusively to the European banking system to avoid the write-down of previous
bad loans to the Greek government and banking system, as well as to pay back
interest and capital operations.
Plummeting
income, rising unemployment
Only 11% of
bail-out loans went to finance the government accounts. Conditionality for the
bail-out loans included sharp cuts in fiscal expenditures and social benefits,
steep rises in direct and indirect taxes and across-the-board cuts in wages and
pensions, exceeding in many instances 40%. This resulted in a massive 25% drop
in national income, raised the average unemployment rate to over 27%, increased
over-indebtedness and exacerbated poverty and inequality. Middle-class voters
of different political persuasions voted massively for Syriza, demanding a new
deal for Greece within the Eurozone to put an end to the harsh austerity
policies and map a feasible pro-growth strategy.
Difficult
negotiations between the new Greek government and its Eurozone partners have
already started. After a failed attempt to reach a preliminary agreement on 16
February, a new statement was finally agreed upon a week later accompanied by a
preliminary list of conditional structural measures and reforms to be finalized
by the end of April and implemented by the end of a four-month period; the list
includes prior commitments agreed upon by the previous government subject to
selected revisions to be suggested by the current government in the spirit of
“given flexibility”.
Based on
the preliminary agreement, Greece will not receive any funds from its official
creditors ‒ including the 1.9 billion euros in SMP profits that have already
been remitted by the ECB to Eurozone countries ‒ until a review of the bail-out
package is successfully completed at the end of the four-month period.
Furthermore, the Greek government is not allowed, for the time being, to issue
more short-term T-bills given that the ECB-imposed limit (set at 15 billion
euros) has already been reached, while government bonds are not acceptable by
the ECB. Thus, liquidity to the banking system is currently provided only
through the Emergency Liquidity Assistance programme of the ECB at higher
costs.
Tricky
talks but tangible gains
Despite
appearances, the negotiating process and the agreement reached has brought
about some tangible political and economic gains both for the Greek government
and Eurozone leaders; it also poses risks that need to be carefully addressed.
Putting
aside the open disagreement of those few who opt for a clear break with the
past even at the cost of a complete breakdown of negotiations or even “Grexit”,
the Greek government’s popularity ratings have exceeded 80% as a consequence of
its negotiating stance. For most Greeks, it was the first time since 2010 that
a Greek government highlighted to the creditors and the international community
the dramatic consequences and the fallacy of an ill-designed austerity and
structural-reform programme that not only impoverished large segments of the population,
but also exacerbated the debt burden, deteriorated investment prospects, led
thousands of highly-skilled professionals to leave the country and worsened the
country’s long-run competitiveness prospects.
Making the
case for Europe
For the
Eurozone’s institutional leadership, the provisional agreement demonstrated its
capacity to take into account and respect democratic processes and outcomes, to
exhibit needed openness and flexibility in the design and conduct of policy and
to underpin the European social model.
At a time
when Euro-scepticism is on the rise across the continent, forging an agreement
across governments of different political orientations that upholds fundamental
European values has enhanced the legitimacy of the European project. It has
also delivered a strong message against the worrying rise of far-right
extremism.
The content
of the agreement also provides potential economic advantages to both
negotiating parties. For the Greek side, it provides a degree of freedom to the
government to propose changes in the policy mix and the choice of structural
reforms; in so doing, the government can pursue its objective to shift the
burden of adjustment to higher-income groups, address tax evasion and enhance
social fairness and social protection. Furthermore, the language of the
agreement opens up the possibility of a reduction in the primary surplus target
for 2015 below 3% of GDP to a level that “takes into account the economic
circumstances”. “Excessive, self-defeating austerity is off” proclaimed a
German analyst.
The outcome
will be beneficial not only for Greece, but for all Eurozone member countries.
For the Eurozone, which continues to be characterized by secular stagnation and
deflation, reaching a compromise in the Greek case offers an opportunity for a
needed and wanted turn-around in policies by providing less austerity, more
flexibility and better sequencing. Such a turn-around will have positive
repercussions for trade, investment, growth and employment. Consensual politics
strengthens the arm of those institutions and political forces (e.g. Euro
Parliament, ECB, Commission, Social Democrats, Greens, etc.) that have pushed
for more anti-cyclical, pro-growth policies or have sought opportunities to
alter the policy mix actually pursued in their own country.
Last but
not least, the prospect of a reasonable compromise settlement has strengthened
the legitimacy and viability of the Eurozone against those Euro-sceptics who
have prophesied the dissolution of the currency area in the face of diverging
preferences and underlying economic imbalances.
The
challenges ahead
Despite
these potential benefits, there are a number of risks ahead that could impose
heavy costs on both the Greek economy and the Eurozone. Mitigating them
requires bold political decisions that bridge political differences and restore
trust among partners who profess that they want to continue working together.
In the very
short run, provision of liquidity to the economy is essential. An economy
cannot run if consumers, investors or exporters do not have a minimal assurance
that credit will continue to be available over the next six months. Linking the
provision of ECB credit to the approval and implementation of structural
reforms, which by their very nature take time to be properly designed and
implemented, can easily backfire and has already started doing so: it fuels
widespread uncertainty and deposit withdrawals and provides incentives for
capital flight and quick-fixes. Conditionality needs therefore to be revisited:
reform implementation needs to be linked to debt alleviation or development
finance as opposed to short-run credit provision. The stick needs to be
maintained but not kill the patient.
The second
challenge concerns the issue of debt management. As pointed out by many
economists as early as 2010 (Boone & Johnson, 2010; Cabral, 2010; Wyplosz,
2010; Eichengreen, 2010), Eurozone member countries’ external debt dynamics
were toxic from the beginning. Even today – despite the Private Sector
Initiative, which reduced the burden of its private debt by 130 billion euros
in 2011-2012 – without official debt relief, Greece’s external indebtedness
will continue to rise, sap domestic activity and crumble investment and growth
prospects. Eurozone countries will have to continue to bail-out Greece through
more loan extensions for the country to be able to pay back its creditors.
Debt relief
can be achieved in a number of ways: rescheduling and re-profiling could be
complemented with bilateral debt-equity swaps, the issuance of GDP-indexed
bonds, equitization of debt, etc. underpinned by strong conditionality linked
to the implementation of meaningful structural reforms. If not done, Greece
will not be able to get out of its present low-productivity/over-indebtedness trap
and the Eurozone will continue to bleed. The responsibility of both parties to
reach a viable agreement is of critical importance for the future of Europe.
A new deal
needs therefore to be forged between Greece and its Eurozone partners: one
based on an effective political settlement that would strengthen the Eurozone
by spurring growth, maintaining social cohesion and underpinning inclusive,
democratic institutions. Such a new deal can indeed be a win-win game for both
Greece and the Eurozone.
Author:
Louka T. Katseli, ex-Minister of Economy, Competitiveness and Shipping and
Labour and Social Protection of Greece; Professor, Department of Economics,
University of Athens. She is a member of World Economic Forum Global Agenda
Council on Public Finance and Social Protection.
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