Dear Eurogroup Representatives:
This meeting has been called to discuss the urgent matter of how to proceed with Greece after the installation of the new government. As you know, urgency is in order, because Greece requests a discontinuation of the Troika-supervised Program and some kind of bridge financing until the government can agree new bailout terms with its Eurozone partners. All this in the face of 7.2 billion Euro which the Troika has promised to Greece, if program results are deemed satisfactory. This is the agreement between the previous Greek government and its Eurozone partners. Whether the program is discontinued or not, Greece needs approximately this amount of money. The announcement by the ECB on Feb. 4 to discontinue honoring Greek government bonds as collateral for liquidity assistance has further destabilized Greek banks and led to significant withdrawals of deposits. This political interference by the ECB – even before the meeting on Feb. 11 where Greece for the first time can “officially” announce its negotiating position– has further destabilized the Eurozone situation.
The new Greek government was elected on the promise to end the specific conditions which the previous government agreed with its partners and which have been crippling the economy and Greek society. The Greek prime minister speaks of the urgent need to end the humanitarian crisis, which has befallen Greece. Eurozone representatives may differ in your assessment of this social situation, but they must also respect the Greek government’s political will to embark on a new direction for Greece.
As far as (sometimes inconsistent) Greek announcements during the past two weeks can be read, the new government is not abandoning “structural reforms” which is part of the Troika conditionality. But it wants to negotiate new, and effective conditions to set the Greek economy on a growth path, to end the humanitarian crisis and to enable the country to start paying back its debt. They want to change the unfair and ineffective tax system, to break the crony-capitalist ties between the “old” political system and business and to effectively fight widespread corruption. These are likely more significant and radical “structural reforms” than those agreed with the Troika. Both the prime minister and the finance minister have stated that they will continue the budget consolidation path, will continue to generate budget surplus – but need to channel the major part of this surplus (it was recently nearly 5% of GDP) for growth-enhancing and humanitarian measures, instead of using it to repay debt at the present time. Greece last year spent 4% of GDP on interest on government debt. Only a little more than 1% of their surplus remained for growth: this was unacceptable to the Greek populace, and to change that distribution, they voted for the new government and sent the previous government into opposition.
The experience of Greece’s bailout (which increased the government debt ratio by 60 percentage points of GDP and caused the humanitarian crisis) is only the most extreme example of the failure of Eurozone economic policy: “austerity cum structural reform” which extends to all Eurozone countries accounts for the fact that today Eurozone GDP is still below its pre-crisis 2007 level. Polarization within the Eurozone has increased, positions hardened, also as a result of the frequently brash presentations of the new Greek government representatives. Many in the Eurozone, especially the media which form public opinion, have taken offense at the dress code and election campaign proclamations of the new Greek government. These are in contrast to the behind-the-door negotiations in the Eurozone and EU, to the tone-setting announcements of the “leading” Eurozone countries, to the “respect” requested by the large Eurozone countries from their smaller partners. The new “Greek style” has given rise to moral arguments about debt redemption, about “pacta sunt servanda”. These arguments need to play a role, but economics is not about legal contracts. The cohesion and viability of the Eurozone needs to adjust to empirical facts and changing circumstances.
This is not about giving Greece another sweet deal. It is about learning from experience, respecting the Greek vote and finding joint solutions to a very urgent problem. It is about changing the direction of Eurozone and EU economic anti-crisis policy, in the interest of all economies of the Eurozone. Playing hardball with Greece cannot be the new Eurozone style. Public opinion in some of the Eurozone countries would be in favor of a tough line: it is up to the political representatives of the Eurozone countries to make the argument that a necessary change in policy direction is in the interest of all Eurozone countries and their populations.
Kurt Bayer Vienna, Austria
Feburary 9, 2015
Kurt Bayer's Commentary 