In economics you need imagination that goes beyond conventional patterns of thought which are incompatible with the fast, sometimes quite dramatically, changing reality. In politics, which is defined as the ability to leverage opportunities that come our way, imagination is even more needed. What if someone plants some kind of a Trojan horse on us… Not only don’t we know what the weather, prices, exchange rates, supply, demand will be like but, most of all, there’s no knowing what “they” will do. They – meaning the coalition and the opposition, friends and foes, our country and world at large, the poor and the rich, and, of course, the notorious markets. Curiously enough, sometimes politicians themselves don’t know what their next move will be, as politics is more like no-holds-barred wrestling than chess. There is no way to plan everything, but we can try to foresee, though it’s not easy. At times, however, as it is the case of the Greek saga (indeed, it is a saga and not a drama anymore), this is extremely difficult.
What a beautiful catastrophe!
Successive scenes of the Greek syndrome parade before our eyes like pages of an economic and political thriller. No writer could invent what is going on these days. Neither Homer, nor Sophocles, well, maybe only Nikos Kazantzakis, the author of the immortal “Zorba the Greek”. Interestingly enough, Zorba’s first name was the same as that of Prime Minister of Greece, Alexis, and his adventure ends up in a big fat catastrophe. When all they have built goes tumbling down, he asks his friend, laughing, if he’s ever seen such a beautiful catastrophe?! He hasn’t because there has never been one like that … There is also an episode in that story where an old Greek woman dies and her female neighbours steal her pillows and sheets while she’s still on her deathbed. A bit like rich creditors, who wanted Greece, pushed to the brink of death, to surrender to them its family silver in the form of attractive assets worth no less than EUR 50 bn. Prime Minister Tsipras did not agree to this dictate of so-called troika, Greece’s three western creditors: the European Union, the International Monetary Fund and the European Central Bank. Assets in more or less that amount are to be ring-fenced and, though subject to foreign control, three fourths of them are to be used in Greece: half to recapitalise the devastated Greek banks, and one fourth for investments. The last fourth would go to repay part of foreign liabilities.
The author of our thriller would have to be very imaginative to predict that at the next turning point of the negotiations/confrontation with troika (there have been more of those moments and there is more than one ahead of us), left-wing government prime minister will announce a national referendum. Its outcome was easy to foresee, even though Greeks were blackmailed that if they voted for “no”, they would have to leave the eurozone or maybe even the EU. They did vote for “no” and, for the time being, they are not leaving. The referendum question was worded in an extremely cunning way as there were many ways to interpret the negative response: I am against, nay, for. However, Greeks are not the only ones against (sacrifices) and for (euro).
In this tragic comedy, also an overwhelming majority of Germans are in favour of Greece staying in eurozone, but only half of them in favour of granting “financial assistance” to it, although the former is impossible without the latter. Even German minister of finance is contradicting himself. This way he is pretending that Germany wants Greece to stay in eurozone, while promoting its “temporary” exit from the single currency area, which he discussed at the Brussels summit. Now Wolfgang Schaeuble says that “debt forgiveness is ‘not possible’ while a country is still inside the euro [zone]”. But he also says that it’s not clear how Greek finance can be rebuilt without reducing the debt somehow. Hence, either he doesn’t know what he’s saying, which should be ruled out, or he’s saying that Greece needs to exit from eurozone, meaning that he is dissociating himself from what he himself signed together with his chancellor.
After the referendum, which was meant to strengthen prime minister Tsipras’s bargaining position in his efforts to reject the austerity package pushed on Greece, he presented to the troika their own package as his proposal, albeit slightly softened. This way he got his compatriots angry while getting his partners cornered: you must accept what you basically suggested yourselves. And so it happened, after stormy all-night debates. However, the troika, at the bidding of Germany and the Netherlands and some small states with conservative governments – Slovakia, Estonia, Finland, Latvia, Lithuania, Malta and Luxembourg – demanded that to lend credence to this offer, top level political guarantees are necessary. This was about immediate (which is very difficult, considering the legislative complexities) adoption of laws amending regulations on the fiscal system and tax rates (especially raising VAT and CIT), job market deregulation, greater pension system discipline and extended retirement age, as suggested in the Brussels package.
Prime minister Tsipras said the day after the Brussels summit – another one touted as a “breakthrough” – that he did not believe in the laboured deal but he had accepted it. He referred to proposals contained there as “irrational”, but he was willing to implement them to avoid the collapse of banks and disaster for Greece. But how do you implement an irrational agreement?
Another paradox is that any implementation of those changes (and, mind you, apart from the parliament, there is also the constitutional tribunal that has already questioned some decisions to trim certain social transfers and benefits awarded in the past) requires support from part of the opposition for the Syriza government as many of its deputies are also “for” and surely “against”. Zorba is scratching his head …
This is not, however, the greatest issue in this unsolved puzzle as the Brussels agreement concluded on Monday morning is one big disagreement; it is simply unfeasible. Not only behind closed doors, but mostly to the media, that is to the world at large, German chancellor Angela Merkel and her minister of finance Wolfgang Schäuble strongly emphasized that there is no way the Greek debt will be reduced, even if Greeks tighten their belts even further to have funds to pay it. Meanwhile, this debt must be reduced as it is unpayable. And if something is unpayable, then, by definition, it cannot be paid, can it?
I have been suggesting for years to reduce the Greek debt in return for a suitable adjustment policy to put this country on a path of sustainable growth. Interestingly enough, my opinion on that subject was published by newspapers such as “The Economist” and “Financial Times”. Not only because I am right but also because, as Poland’s deputy prime minister and minister of finance, in September 1994 I signed a conditional debt reduction deal for half of Polish debt to western banks. And everybody benefited from it, much better than from insisting that we tighten our belts and pay the total. Now it’s the same story.
Not troika anymore but dvoika
Prime minister Tsipras succeeded at what economists did not quite manage, though they used rational arguments based on correct economic theory. He made some of his greatest creditors, especially France and Germany, accept the indispensability of cutting not budget expenditure but foreign debt. Earlier on, French president François Hollande and Italian prime minister Mateo Renzi were open to talks on reducing the Greek debt, which is a sign of their economic pragmatism and class as politicians, considering that Greece owes them EUR 42.4 bn and EUR 37.3 bn respectively (EUR 56.5 bn to Germany). After all, it is more difficult to take this bitter pill when you have your own problems with lingering budget deficit and a major public debt, which stands at ca. 95 % GDP in France and exceeds 120 % GDP in Italy.
Now it should be easier for everybody to follow this path as this time it was the International Monetary Fund that surprised all the other players by fiercely criticising the bailout deal offered to Greece by eurozone. IMF believes that Greece’s public debt is currently “highly unsustainable” and urged debt relief “well beyond what has been under consideration to date”. Later on Tuesday, IMF published the advice it had given to the Eurogroup of finance ministers over the weekend. This advice includes a proposal to write off Greece’s immense debt (“Greece debt crisis: IMF attacks EU over bailout terms”, BBC).
It’s very important as now it’s no longer but a handful of enlightened economists that promote bringing the Greek debt to a reasonable level. So does IMF, departing from its previous orthodoxy. Considering the power this organisation has in the global finance arena, this sheds a new light on the Greek problem. Such a change of approach by one of troika members poses a huge challenge to its remaining partners, now only a ‘dvoika’, i.e. the European Union and the European Central Bank. This way IMF is also trying to escape the co-responsibility for the unprecedented escalation of the crisis which could have been more easily solved if advice had been sought from wise economists rather than from neoliberal doctrinaires.
In my article entitled “Africanisation of Greece” was published (“Roubini Global Ecomomics”, July 6th, 2015; see http://www.economonitor.com/blog/2015/07/africanization-of-greece/) I wrote that the IMF and its executive board was dogmatic. Now I will concede that they are far from following a dogmatic approach, which, unfortunately still guides some European politicians, most notably the German ones. What is most important now is to be pragmatic when negotiating the extremely dangerous bend that not only Greece, but also eurozone and the European Union as a whole have arrived at. I will repeat once more and I will keep repeating it for as long as it takes: the Greek debt must be reduced, otherwise even the most courageous and reform-minded government won’t cope with the crisis. Only then will those items of the Brussels weekend (dis)agreement that are correct – and there are quite a few of them – stand a chance of being implemented in a way that furthers the case.
How to do it?
How to get out of this dead end? Well, I suggest making two shelves. The shorter one is already there. It’s the ring-fenced Greek assets worth EUR 50 bn aimed to restore the financial liquidity and capacity for output growth. What we need to put on the longer shelf is part of the debt, 150 billion euro, and these liabilities should be frozen for 25 years at their face value, that is with no interest charged, and then whole amount written off. Of course, provided that Greece solves the part of the task that is allocated to it, proving to itself and others that it is capable of strengthening its market economy institutions and streamlining its fiscal policy. I believe it is capable.
Hence, we are in for next surprise: how will Germany and those marching alongside it justify their consent to reducing the Greek debt? Well, this is what they should do if they want to recover more money than they would in the alternative situation of a chaotic Grexit and Greece bankruptcy. The cue on how to get out of the pickle politically in this wandering world came from Barack Obama on the day the deal was struck on solving the conflict situation around Iran’s nuclear programme. US president said that the compromise reached – as this must be a compromise – is not built on trust but on verification. The same can be said by German chancellor and bureaucrats from Brussels to Greece, for their own benefit. It’s no longer about getting out of this mess without losing face but mostly without losing common sense.