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07 June 2015

Financial Times: Two dismal economic plans for Greece

There are now two proposals on the table — one from the creditors and one from Greece. What they have in common is that neither of them will fix the Greek economy. They do not even pretend. Both deserve to be rejected flat-out.

Whenever European technocrats enter long negotiations, they get lost in the technical detail and become constitutionally incapable of seeing the bigger picture. They can spend weeks discussing whether the 2016 primary surplus, before payment of interest on debt, should be 1.5 per cent or 2 per cent — seemingly unaware that the error margins of any of their projections exceed that small gap by a large multiple. The economic diplomats have lost sight of what this is all about — allowing Greece to survive, and eventually to prosper, within the eurozone.

There is a less charitable explanation. They might simply not care. Some of the creditors are only interested in keeping the show on the road come what may. In particular, they refuse to recognise officially that their loans to Greece will never be repaid. They know they misled their electorates about Greece, and do not want to be exposed, at least not while they are in office.

The main goal for Alexis Tsipras, Greek prime minister, meanwhile, is to stay in power. An agreement of the extend-and-pretend variety, which is the likely outcome of these negotiations if they end in success, may suit him. And thus the probability of a lousy deal that suits the negotiators but that will not help the Greek economy is high.

So what’s wrong with the two proposals? The Greek one is dishonest. The creditors’ proposal demands a level of austerity that is impossible, but also necessary if Greece is to bring down its debts to a more sustainable level while meeting its obligations. That is a bad combination.

What makes the Greek proposal dishonest is that the numbers do not add up. The fiscal adjustments are milder than what is needed to achieve a primary surplus to 3.5 per cent, a demand made by the creditors with which Mr Tsipras says he agrees.

Mr Tsipras may as well be saying to them: I am happy to put in any number you like. I am going to cheat anyway. If a loss of mutual trust is the problem, this proposal will not fix it.

Step back a little and the solution is not hard to see: less austerity, more public sector reforms, and some clever debt restructuring. That was the overwhelming conclusion of a recent conference by some of the world’s leading experts on this issue, as reported by Richard Portes and co-authors from the London Business School in a recent article.

We are not talking about reforms of the ideological variety, on hiring and firing for example, or on ending collective bargaining, but socially useful reforms such as credible tax collection, a modern public administration or a working legal system.

Without a modernisation of Greek public-sector infrastructure, there is no way that Greece and large parts of northern Europe can coexist in a monetary union. It would be a recipe for a never-ending, structural slump.

How about the argument that Greece should accept a bad deal now, as it would buy time for a more comprehensive negotiation during the summer? The trouble with that argument is a false premise. Once Greece accepts the current deal, it will have accepted the basis of the next agreement as well because the fiscal calculations will not change. If you accept austerity now, you have accepted it.

The best negotiating tactic for Mr Tsipras would be to reject the creditors’ offer flat-out, and come back with an intelligent plan, one that has a chance to work. It would have to include more reforms than he is offering right now. He would need to go beyond his famous red lines — on pensions or on value added tax, for example.

A realistic programme would commit Greece only to a balanced primary budget this year, and modest surpluses in the future linked to economic performance. This may not be acceptable to the creditors. It might already be too late for it. But at least Mr Tsipras could claim the moral high ground. His current proposal is not in that league. The worst possible outcome would be another extend-and-pretend type deal, leaving an unreformed and cash-
deprived Greece in a perma-depression.

The eventual consequences of such a path could be a breakdown of civil society and democracy. A bad deal also increases the likelihood of an eventual exit from the eurozone. Grexit, as the latter is known, is not a good option. The eurozone has no rational interest in it.

Full article on Financial Times (subscription required)

© Financial Times

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