Micro-Managing Greece into Desaster?


 

The latest Greek agreement (“Memorandum”) to secure loans of up to 86 bill € from its international creditors for 3 years is reminiscent of Austria’s League of Nations loan conditions in 1922, when the bankrupt country, still reeling from the breakup of the Austro-Hungarian Monarchy and internal strife, requested an international loan. The High Commissioner had full budgetary approval power, every single government expenditure, every change in the tax laws, all government matters affecting the economy had to be approved by the Commissioner.

While some maintain that the present Memorandum is much more “lenient” than the previous ones (which had been rejected by the Greek population both in the election in January and in the referendum in August), it is once more full of very minute prescriptive “key deliverables” and “prior actions”, setting very tight conditions on Greek economic and social policy, effectively handing over control over Greek finances and social policy to the EU (and possibly IMF) “institutions”.

The major “conditionality” is – no surprise here – budgetary performance: starting from a small primary deficit (budget balance before interest and debt service) for this year, within 3 years a primary surplus of 3 ½% of GDP needs to be reached. The rationale for this is, of course, that surpluses must be achieved, in order to build up reserves to pay back the staggering 180% (of GDP) debt ratio. Most economists outside the „institutions“ doubt that the narrow, weak and uncompetitive Greek economy will be able to achieve enough growth to fulfil this objective. The paradigm behind the creditors’ demands is that the prescribed reforms to the labor and product markets will generate this growth. This is to be doubted, in the face of severe reductions in private and public demand. While the Memorandum tasks the Greek government with the design of a growth strategy, neither measures not budgetary means towards this end are specified, curious in the face of the attention given to minutest detail with respect to other expenditures.

Still, as a disciplinary measure, the EU and IMF institutions have insisted on this unrealistic budgetary targets. Changes in the tax structure, in services and goods markets, in public administration abound, most of them with strict timelines and binding restrictions. A very large privatisation program (totally unrealistic given recent experience, let alone its effect on public services) has been agreed, which is supposed to accumulate funds for debt repayments and some Greek objectives.. All its actions require the approval of the creditor institutions.

It might have been clearer and more consistent, if the whole economic and social policy decision-making powers of Greece had been taken over by the Institutions, de facto turning Greece into a protectorate of the EU and the IMF. Politically, this might have been impossible, especially given the recent referendum.

Economically speaking, this program follows once more the EU’s ill-fated policy direction, i.e. budget consolidation cum structural reform. How the Greek economy shall regain growth under these conditions, remains a puzzle.

The major conundrum, however, is why the Tsipras government eventually agreed and accepted this Memorandum. The split in the Syriza party is the most visible result. The forthcoming election will show whether a functioning government will come forth. It seems clear that Tsipras and his followers want to avoid Greece leaving the Eurozone at all costs, in this regard following the polled opinions of the majority of Greeks. The part of his previous Syriza party which refused approval of the memorandum is forming a number of new parties. All of them seem prepared to leave the Eurozone, hoping for more leeway for Greece’s economic policy. Whether Greece can survive in the medium to long run without access to private and public financial flows, remains highly doubtful. The recent example of Argentina does not raise a lot of hope.

It seems obvious that the EU and especially the leading powers in the Eurozone wanted to state a strong precedence with their handling of the Greek situation. They have not been able and willing to admit that their belated aid to Greece, the refusal of a loan instrument in early 2010, the refusal to grant significant debt relief, the structuring of the loans in a way which one-sidedly flowed out of the country to European banks (thus avoiding Germany and France having to rescue their own banks which had extended loans to Greece), the transfer of the loans from the private sector to the public European institutions – that all this contributed to this severe humanitarian and economic crisis, in addition to all the faults which recent Greek governments (including the most recent one) have made. European authorities insisted on disciplinary action on two fronts: on the institutional front by forcing debt transfer on Greece, on the substance front by refusing to change the failed EU austerity policy as the major anti-crisis mechanism. The Tsipras government had argued for half a year in favor of a more growth-enhancing policy package – to no avail: budget consolidation and bank rescue remained the dogma. The threats of forcing Greece out of the Eurozone, if only temporarily, seem to have bent Tsipras into submission.

Now we have a Eurozone which seven years after the onset of the crisis is (hopefully) barely reaching the economic output it had before the crisis; we have a deeply divided Eurozone where more ill will has been produced than a joint project can bear; we have a country which cannot fulfil the conditions set for its ”rescue” by its creditors; we have a country without an elected government, with unclear composition of the next government; we have spent 7 months of – eventually fruitless – negotiations and summits on a small country with an unfulfillable program, while a number of major crises should have commanded the EU’s and Eurozone’s attention: Ukraine, ISIS, the gigantic refugee crisis, climate change, a weakening of global growth drivers, a restructuring of the Global Governance institutional landscape, and many more.

Even for fervent aficionados of the Eurozone and the EU as ideas, it becomes more and more difficult to have confidence in the problem-solving power of the EU institutions. The failure of the Greek situation may even produce a failed state on the European periphery. At least, it has shown that the more forward-looking powers have given way to narrow-minded  ideology and power play. tp the detriment of European cohesion and the economic fate of the EU populations. To stick to one’s guns, no matter what the outcome, seems to be the order of the day. Woe to the EU and the Eurozone!

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Filed under Crisis Response, Financial Market Regulation, Fiscal Policy, Socio-Economic Development

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