As the hard talks on Greece’s bailout start again, there is no time to lose. A compromise is possible.
Before the weekend, Eurogroup president Jeroen Djisselbloem said that “Greece wants a lot but has very little money to do that. That’s really a problem.”
Unfortunately, Brussels is not exactly in a winning position either.
Eurozone’s fragile stability
In the Eurozone, the fiscal balance will remain negative through the coming years, while government debt is close to 97%. If the Eurozone was an aspiring member of the region, it would not be able join it today.
Are things getting better in the Eurozone anytime soon? That’s not likely. Currently, the expectation is that real GDP growth in the Eurozone will hover around 0.7% in 2015 and remain at 1% for the next half a decade.
In the short term, growth in Germany and Spain, which currently drive the regional growth, is likely to decelerate, whereas France and Italy can expect still another year of underperformance. Germany’s recent growth surprise was based on private consumption and net exports – both of which will take a hit if European turmoil prevails.
Even despite the weakening euro and the plunge of energy prices, the Eurozone inflation rate remains low.
As long as Europe’s political stability remains at risk, the ECB’s sovereign QE cannot give a critical boost to growth or inflation. It is more likely to support mainly asset prices – but even those only in the short term.
EC president Jean-Claude Juncker’s much-touted €315 billion investment plan hopes to build on €5 billion from the European Investment Bank and €16 billion from the EU budget. It will not achieve leverage of “private and public investment” by 15 times.
The longer the Greek talks will take, the greater will be the subsequent economic harm, political destabilization in the 2015 election season and market volatility.
A failure of the ceasefire in Ukraine and further sanctions on Russia would ensure broader collateral damage across the region.
Greek debt is systemic
Today, we know that when the IMF board met in May 2010 and approved Greece’s first bailout, many emerging economies opposed the Troika’s bailout and supported debt cancellation.
To them, the Greek crisis was the latest link in a chain of debt crises since the liberalization of bank lending in the 1970s, including the debt crises in Africa and Latin America in the 1980s and early 90s, East Asia’s financial crisis in 1997-98 and the subsequent defaults in Russia and Argentina.
When the Troika’s (IMF, ECB and EC) bailouts began in Europe in 2010, some estimates indicate that €310 billion had already been lent to the Greek government by banks and the European financial sector. Thereafter, the Troika poured another €252 billion to Athens.
Today, the Greek government debt still hovers around €317 billion. Reportedly, less than 10% of the total has gone to the Greek people. Most went to European and Greek banks, which lent money to Greek governments and state bureaucracies, whose corruption were known in Brussels, Frankfurt and Washington DC.
With the bailouts, the Troika sought to contain a potential Greek contagion. Most recently, Greece was given still another bailout package so that Rome and Madrid could get their economic house in order. These policies relied on projections that were flawed, as IMF chief economists would acknowledge later, and schedules that were not viable, as critics warned three years ago.
Before the sovereign credit crisis, Europe already suffered from long-term economic decline, due to subdued growth, low productivity gains, aging demographics and the absence of structural reforms. However, the stringent austerity policies caused unemployment to soar and mass opposition in the streets, which could be predicted already in spring 2010.
Ironically, too stringent austerity policies have only intensified Europe’s erosion, especially relative to the U.S.
Toward a compromise
Today, more than 70% of Greeks would like to remain part of Europe, even after they have lost almost a third of their living standards. That’s what Brussels should build upon.
Instead, Brussels demands an extension of Greece’s current rescue program, which expires in less than 2 weeks. In turn, Greece wants to replace the current bailout with a “bridge program” to avoid defaulting on its international debt.
Initially, Prime Minister Alexis Tsipras supported a huge social-policy package, which would benefit ordinary Greeks, and an international conference on debt relief – like the London conference in 1953 which agreed to a 50% debt cancellation for Germany.
Now Tsipras has stepped back from some of those demands, while his finance minister Yanis Varoufakis has retreated from a debt haircut, instead proposing a “menu of debt swaps.”
The latter might be more viable in Brussels and Berlin and could leave privately-held Greek government bonds (GGBs) intact. Syriza has also expressed commitment to reach primary surplus at the cost of some of its spending pledges.
For the first time, Brussels is negotiating with a Greek leadership that wants to go after “corrupt elites” and restore “rule of law” in government bureaucracies and non-competitive private-sector concerns.
A sustained recovery in Greece is not possible as long as political risks cloud its economic prospects. Nor is a sustained recovery viable in the Eurozone as long as economic risks fog the region’s political prospects.
Despite all the posturing, a compromise is still possible between Greece and its creditors. The costs of a failure are prohibitive.
The original version was released by EUobserver on February 16, 2014.