27 January 2015

Greece – the E.C.B. - the E.U.: A bundle of contradictions!

Syriza's victory was achieved based on a policy commitment to ensure Greece’s ongoing membership of the EU as well as the Eurozone, the support for which – according to opinion polls – is at least twice as large as Syriza’s share of the vote, writes Paul Goldschmidt.

Syriza’s victory is first and foremost a victory for democracy. The people have expressed their desire for change; it is incumbent on those elected to pay heed.

If the mandate, allows the Greek Government a free hand to reform internally, it does not confer on it any legitimacy to impose on its European partners, who have provided some €240billion in assistance, unilateral changes to existing agreements.

A renegotiation – already announced – is therefore indispensable. What are its essential parameters?

• Terms and conditions of the outstanding debt (maturity and interest rate)
• Conditionality requested by creditors (reforms – undertakings)

Failing agreement, Greece cannot avoid default which will follow one of two scenarios:

• Default within EMU which would require at least temporary limited access to bank accounts by depositors (on the Cypriot model) and the introduction of exchange controls ;
• “Grexit” (leaving EMU) with largely unforeseeable – though highly damaging – consequences both for Greece and the remainder of EMU Members.

Concerning the renegotiation of the terms, a further extension of maturities or a reduction of interest payments is the equivalent of a “partial default”, similar to what occurred at the time of the second bailout package granted by the EU and the IMF.

On this point it is necessary to quash immediately the “scaremongering” reports by the media that the cost to the French State of forgiving its Greek debt holdings (€40 billion) would be equivalent to €700 per head. Considering that outstanding debt benefits from a moratorium on interest and principal payments for 10 years and that amortization is spread over a further 20 years, one should compute the “present value” of this investment. Based on an average discount rate of 4% pa (including 2% for inflation) over an average life of around 25 years, (a conservative hypothesis), the cost to the French taxpayer, in case of immediate total debt forgiveness, would be considerably less.

As far as the negotiation of additional conditionality, an outright acceptance of Syriza’s electoral reform agenda (evaluated at €12 Billion) in addition to amending existing undertakings, would not only violate commitments relative to previous loans but also the rules applicable to all EMU Member States. Furthermore, if these concessions were not subject to a formal “stabilisation agreement” with the EU, it could put into jeopardy the success of the recently announced quantitative easing program by the ECB. Indeed, the Central Bank, echoed by many Governments, insisted on the need of further structural reforms to ensure the success of the program. A compromise would be all the more damaging that excessive concessions might create precedents encouraging other Members to postpone their own necessary structural reforms.

The calls for a “change in European policies”, interpreting Syriza’s victory as the sign of an upcoming European wide political upheaval, are totally incoherent. It is sufficient to consider that the sole common characteristic of these advocates (with the notable exception of Syriza) is their “euro-scepticism” and their common belief that the victory of an “anti-system” party augurs their own future accession to power.

Within the EU framework, as currently embedded in the Treaties, it is wholly unthinkable that a majority could prevail within the European Council allowing for further flexibility with regard to the discipline and rigour that the sharing of sovereignty over the single currency impose. A precondition to considering such changes is an in depth reform of the institutional architecture of the Union. Once endowed with a federal structure, a significant budget, access to own resources and a borrowing capacity, the EU could, indeed, embark on economic stimulus programs financed through budget deficits or recourse to borrowing which would be “mutualised” by their “federal” nature; the EU would then have tools, comparable to those available to the USA, the U.K. or Japan, that it currently lacks. This precondition is, however, firmly rejected by all those who hypocritically call simultaneously on “Brussels” to change its policies.

As I have already suggested in my piece “What after Charlie?”, decision time is fast approaching concerning the Union’s future. The instrumentalisation of the Greek election results by nationalist parties propagating a visceral anti-European message is already dashing the hopes that were born after the terrorist attacks, from the broad recognition by EU citizens of shared values that only a strengthened Union can successfully uphold.

© Paul Goldschmidt