Should we postpone Greek default till November?

It really looks like we are not learning from our mistakes. This whole situation between Greece and its international creditors is becoming ridiculous.

Here, the two points that are striking to me:

  1. We have learnt nothing from economics. How come that current negotiations keep on discussing and putting forward economic provisions that proved to be wrong? (and by wrong here I mean that had pro-cyclical effects, i.e. contributed to recession rather than to growth and prosperity)
  1. We have learnt nothing from politics. How come that we haven’t realized yet how bad it is to continue with externally imposed measures on a country and its population? (and by bad here I mean that it reinforces, gives arguments and vigor to those extremist or Eurosceptic forces which are threatening European integration and are growing in several countries)

I will discuss these two points in more detail and then move on to see whether it is possible to find some points on which there is agreement and propose the establishment of a table on investment for Greece.  

We have learnt nothing from economics: Austerity alone does not work.

The Greek proposal submitted to President Juncker early on Monday, 22 June 2015, (available here) represented quite a commitment for PM Tsipras and Greece.  Since then they have further tried to close the gap with the demands of the international creditors and the latest proposal aims to raise €8 billion, mostly through:

  1. Reforms of the pension scheme with strong disincentives to early retirement and a retirement age to be raised to 67 years old by 2022 (instead of 2025 as proposed on Monday)
  2. New taxes on wealth
  3. Increase on corporate income taxes from 26 to 29%
  4. Some increases in VAT rates on selected items (as requested previously by the institutions formerly known as Troika)
  5. Eliminate VAT discounts on the islands (politically sensitive issue in Greece)
  6. Cuts in defence spending (finally!)

I don’t have a PhD at Harvard, but to my understanding, none of these measures will be able to put Greece back on the right track and boost economic recovery.

The institutions formerly known as Troika and the Germans have made it clear that there cannot be good prospects for the economy without sound fiscal consolidation. And that’s ok, let’s assume this statement is correct. Let’s take on board some austerity measures in the form of cuts to unproductive spending and rationalization of the tax base. Haven’t we said that fiscal consolidation is only part of the story? Isn’t Juncker’s number-one priority to push for productive investment that creates jobs? I also thought that the IMF had realized its mistakes, they even issued reports on how their prescriptions for Greece where wrong. Nonetheless, no change; negotiations on fiscal consolidation have not been coupled with a wider debate on possible solutions to stimulate growth in Greece. We have not learnt that the Greek economy, more than other economies in Europe depends on internal demand, which we keep on weakening. We have not learnt that wealth produced in Greece is taxed elsewhere under more favourable regimes. Can we open a serious debate on corporate income taxation at the European level? Can we work together to find a solution to tax evasion and avoidance? That’s not a fight that a Member State can carry out alone.

The proposal of international creditors demands about €11 billion in spending cuts. So, if Greece agrees on the terms and implements additional austerity measures they will receive the € 7,2 billion which they can use to repay their debts. And then what? Unless we create the conditions for a slow recovery of the Greek economy, an additional bail-out will be needed in the near future. Do we really think that the six points mentioned before will make Greece more likely to grow and repay bonds that come to maturity?

International creditors and Germany care about financial stability, they want public finances to be in order. The Stability and Growth Pact is stringent, deficit-to-GDP and debt-to-GDP are crucial, but I am still looking forward to the moment in which there will be an EU Summit focusing on the denominator, after that so much attention has been given to the numerator over the last decade.

We have learnt nothing from politics: Without Country Ownership we feed Extremism

Why do that the international creditors keep on imposing specific policies and economic doctrine on a democratically elected government?

Please allow me to borrow from a recent opinion piece by Nobel laureate Prof. Krugman: Creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy.” (see Breaking Greece, New York Times Blog – The Conscience of a Liberal, 25 June)

During my previous studies in development economics, the notion of ‘Washington Consensus’ came up pretty often. It refers to a set of economic prescriptions – notably macroeconomic stabilization and openness to trade – which were imposed by three institutions – the IMF, the World Bank and the US Treasury Department – whilst disbursing funds to developing countries. The strict conditionality of this type of financial assistance and this way of promoting reform in crisis-wracked countries have been long debated. It comes without saying that when prescriptions are wrong (see my previous point) we are facing a serious problem; but I want to focus attention on the political aspects of conditionality, too. Two results are expected from an external imposition of (harsh or undesired) reforms: 1) the malaise with respect to the external institutions increases, see the anti-American feeling which permeates in many Latin-American countries, and this usually generates waves of extremism and radicalism within big portions of the population; 2) a progressive worsening of the accountability of local and national institutions, which are partly deprived of their role and become less and less able to drive transformation and reforms.

It is myopic not to consider that externally imposed reforms that endanger democracy at the Member States level are at least partly responsible for the progressive disaffection towards the European project and the advent of radical parties.

Development economists and the United Nations – together with other multilateral organisations – have recognized the importance of country ownership in the determination and implementation of development strategies and reforms. Country ownership entails that the government should find sufficient support for the proposed reforms among stakeholders at the national level. To put it bluntly, international actors must remember that there is a constituency and elected political leaders who are ultimately responsible for the identification and implementation of national strategies for economic development.

It sounds much better with the words of Prof. Habermas:The weak performance of the Greek government doesn’t alter the fact of a scandal that consists in politicians in Brussels and Berlin refusing to meet their colleagues from Athens as politicians. They indeed do look like politicians but (until last Monday) only spoke in their economic role as creditors.” (see Why Angela Merkel is wrong on Greece, Social Europe Blog, 25 June)

To me, it remains also quite unclear how and why the Greek leftist government has put forward a proposal that deviates so strongly from the philosophy and policies that inspire their political movement. They must be really committed to avoid default and remain in the Eurozone. However, they are facing hard times at home and are not likely to find support for this proposal in the Greek Parliament.

Said that, I am wondering whether it would be possible to find an agreement on some basic points:

A) Greece and Greek people have already done progress and suffered abundantly

I was still working at the Council of Europe, back in 2013, when on the occasion of an international conference on Poverty and Inequality, I got mindful about the magnitude of the impact of austerity on people’s life in Greece. A surgeon, Dr Georgios Vihas from Athens, presented CAT scans of women affected by breast cancer at a very preliminary stage – when the cancer is treatable. Then he reported the story of these women, who were refused cares by several public hospitals because they were not insured and the hospitals, due to cuts in spending, had no means to provide assistance. Finally, Dr Vihas showed the CAT scans of the same women when they got to the solidarity health centre where he volunteers. Those images were alarming. What could have been ‘easily’ treated became fatal in just few months of hanging around among unresponsive public health centres. Access to basic health services has become a real problem in Greece and informal solidarity centres providing health care to non-insured patients have multiplied. Check for instance the Solidarity medical office Piraeus (link) and Social Solidarity network-Herakleion Crete (link), the volunteer medical office of Rethymno (link) or that of Preveza (link). Thankfully, solidarity within Greece has not been damaged by progressive impoverishment.

In an attempt to rationalize government spending, salaries have been cut and over 280,000 workers have been laid off from the public sector since 2009. As reported by Prof. Whelan, total public sector employment declined from 907,000 in 2009 to 651,000 in 2014, a drop of over 25%. (see The FT Lets Itself Down Again: Francesco Giavazzi on Greece – Is this Italy’s answer to Hans-Werner Sinn?, Bull Market Blog)

public employment greece

Source: European Commission, The Second Economic Adjustment Programme for Greece Fourth Review – April 2014, Occasional Papers No. 192, DG ECFIN.

Prof. Whelan further reports the improvements on:

  • Business and growth friendly measures that moved Greece from the 109th to the 61th place in the WB Doing Business ranking, between 2010 and 2015.
  • Fiscal deficit has decreased from 15,6% of GDP in 2009 to 2,5% in 2014, “a scale of deficit reduction not seen anywhere else in the world” Prof. Whelan comments.

This just to say that we should probably refrain from stigmatizing Greece and Greek people as lazy or not committed to change.

 B) An Agreement over the Weekend does not solve the problem

Even if, on a Saturday morning in late June, an extension of the current Greek bailout is agreed on, what changes? Let’s say that Tsipras accepts Merkel’s offer of a bailout extension with additional EUR 15 billion  released till Novemeber. What will happen after November?

If creditors offer nothing more than what is currently needed to service debt repayments, we will be confronted with a similar situation in six or eight months’ time.

Let’s have a look at what happened with the EUR 225 billion lent to Greece by international creditors in 2010. As reported by Yiannis Mouzakis, just about 10% of these loans ended up in the fiscal deficit of Greece, 19% was used to recapitalize Greek banks, and the rest was simply used to pay off old loans and interest payments. (see Where did all the money go?, MacroPolis)

wheredidmoneygo-large

Source: Yiannis Mouzakis, Where did all the money go?, MacroPolis, 5 January 2015

That didn’t help out Greece to stand on its own feet and I don’t see why we should apply now a similar philosophy.

I understand that tomorrow may not be the right occasion, but there is a desperate need to open a parallel discussion on what the EU can do for Greece, in the framework of existing redistributive and financial tools. A table where only Greece and European Institutions sit – I mean no IMF, a table that looks at all resources available via Cohesion funds, EFSI and ESF, a table that gives sufficient means to Greece for the local implementation of the Social Investment Package and the Youth Employment Initiative, a table that explores the possibility of a Special Cohesion Fund within the EMU as recommended by Jacques Delors to “to recover a growth model […] and build an industrial structure or a research policy” (see Rethinking the EMU and making Greater Europe Positive Again, Jacques Delors Institute, Tribune, 28 June)

A table that consider the adoption of a ‘contractual arrangement’, between the EU and Greece in the framework of the “Convergence and Competitiveness Instruments” proposed by the European Commission. Something that on the one hand can respect the definition of national priorities and policies as defined by the Greek constituency and on the other hand shows the highest European commitment, within the current – limited – framework of integration, to assist Greece in the difficult task of going back to growth and prosperity.

Offering a deal which gives just enough money as to repay outstanding loans is not a concession to Greece, it is just sadism. It is just a way to postpone discussions on default.

The Commission has realized that the drop on investment was one of the primary causes that impeded the EU economy to recover promptly. Greece is in desperate need of investment, particularly in job-intensive sectors and care services. Is it too much to ask for a table where Greek and EU authorities tries to come up with a shared vision for an investment strategy which can be scaled up by European efforts?

Well, now I take my weekend off, best of luck to those who will have to work this Saturday. I wish them to focus on what really matters. Hopefully, the prediction of Phedon Nicolaides that Greece will not default will come true.

@Rinaldi_David

The opinions expressed are those of the author and do not reflect the position of the institutions he works for.

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