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Giving Greece a chance, not just a tranche

By Nick Malkoutzis

It is a sad indictment of the manner in which the Greek crisis has been handled by all sides that for probably the first time since the economic unravelling began about three years ago, moderates in Athens as well as other eurozone capitals looked at each other in the wake of another inconclusive Eurogroup meeting on Wednesday and wondered: “Why did we ever get involved with these guys?”

The rest of the eurozone's grievances with Greece – many justified, some the product of stereotyping – have been well documented but the inconclusive 11 hours of discussions between eurozone finance ministers in Brussels this week tipped the balance the other way. It was the turn of level-headed Greeks, fully aware of their own country's shortcomings, to fume about their euro partners' footdragging and failings.

Yet, just as it has been unfair for Europeans to have undue expectations of Greece, so it is excessive for Greeks to expect 16 eurozone countries to each easily overcome their national concerns and promptly agree a strategy that would make Greek debt sustainable.

However, after months of backchannel discussions and two marathon Eurogroup sessions to discuss what has been obvious since the restructuring of Greece's private sector debt in March, the reasons for Athens, its eurozone partners and the International Monetary Fund failing to agree on a formula to move forward are wearing extremely thin.

In fact, apart from the technical issues mentioned in Eurogroup chief Jean-Claude Juncker's statement early on Wednesday, it is difficult to justify the latest round of indecisiveness. The procrastination comes as Greece is almost out of cash reserves and its government is about to be hung out and dried by a sanctimonious opposition that can hardly believe its depiction of euro leaders as austerity-thirsty, self-serving political pigmies intent only on punishing Greece rather than tackling an urgent European – and not exclusively Greek – economic problem is about to come true.

The delay in agreeing a strategy for debt restructuring, which would pave the way for the release of the bailout funding Athens has been expecting since June, is rubbing salt into the wounds of the coalition. Prime Minister Antonis Samaras and his partners have gone out on a limb over the latest austerity package, shrugging off the opposition brickbats to vote it through Parliament. Emerging battered and bruised on the other side, the release of funds to complete the recapitalization of Greek banks and the payment of state arrears, as well as a solution for the country's impossible debt are the only spoils Samaras has to show in order to appease an increasingly bitter electorate and fend off an advancing opposition. Every day that goes by without a deal, his government's credibility is eroded a little more.

Part of the argument about why it is so difficult for some countries to agree to a debt restructuring is that, regardless of whether Samaras government has met its commitments and is showing willingness to pick up the pace of essential structural reforms, there is still resentment towards Greece for its past sins, and the idea of giving it this kind of break is anathema to some electorates and parliaments.

This dismal state of affairs is the result of mistakes, including woeful communication, by past Greek governments but also the pusillanimity of European leaders who have lacked the guts to explain to their voters what this crisis is about. It should be absolutely clear by now to people in the eurozone that making Greece's debt sustainable is not – as some would still have it – about helping slackers but about recognizing economic reality. It should be about accepting that an economy which was driven to the edge by feckless politicians and a largely compromised population has now been driven into the ground by the mistaken policy of imposing towering austerity at a time of deepest recession. It should be about acknowledging that some of the key weaknesses that were so publicly aired at the start of the crisis: public spending, wage costs and a current account imbalance have now largely been corrected. It should also be about recognizing that this, possibly the world's most dramatic fiscal adjustment, has come at a huge cost, one that cannot be borne indefinitely.

Even if one had been oblivious to what has being going on in Greece until now, just a cursory glance at the economic data published this week would confirm that a tremendous fiscal effort has been made but that this has not prevented the economy disintegrating. The Bank of Greece, for instance, said the country’s current account produced a surplus for the third month in a row in September. Considering Greece’s current account deficit stretched to more than 20 billion euros before the crisis struck, September’s 775 million surplus is a giant stride in the correct direction. After all, one of the aims of the internal devaluation in Greece was to correct this trade imbalance. Yet, if one looks closer at the figures, this correction has come almost exclusively as a result of the collapse in demand created by the crisis. The rapid drop in imports, rather than any great increase in exports is acting as a levelling factor. The structural problems affecting the current account have not been rectified yet.

Also this week, the Finance Ministry confirmed another primary surplus, of 930 million euros, in October. The primary deficit of 1.1 billion euros for the first 10 months of the year is well ahead of the 2012 target and is further proof the effort being made on the fiscal side. But the adjustment has been aided by a building up of state arrears and the extra revenues from increased taxes. An overshoot by social security funds could still have a negative impact on the final figures. Again, this points to the high cost being paid by citizens who carry the weight for helping public finances survive the onslaught of the recession.

A stark indication of just how high a price Greeks are paying came with the release of data by the Hellenic Statistical Authority (ELSTAT) that showed a 37.3 percent increase in tax on incomes and property between Q2 in 2012 and Q2 in 2011, there was a 13.6 percent reduction in disposable income, a 15.1 percent drop in compensation, a 9.5 percent reduction in welfare benefits and a 37.3 percent increase in taxes. This is all in keeping with the strategy that will see Greece unwind by the end of this year the rise in unit labor costs between 2001 and 2009. Yet, the ELSTAT data also shows a 20.6 fall in investments. And, when one considers that despite their drastic salary reductions, Greeks are still forking out about 30 percent more than the EU average for basic goods such as milk and eggs, the signs for the economy are ominous.

So, as eurozone finance ministers gather again in the next few days, it would be worth them considering which of their governments would survive, which of their electorates would tolerate and which of their countries would be able to absorb the impact of such an abrupt adjustment. Greece has paid and is continuing to pay for its grave mistakes but we have reached the point where its partners must realize that they hold the key to the country being able to make a fresh start. The fiscal consolidation and the structural reforms (those already carried out and many more still to come) will count for nothing if there is no convincing deal on Greek sustainability. Greece’s political system, its society and economy will not survive without such an agreement.

There are some within the Eurogroup who are concerned that a reduction of interest rates on bilateral loans and reimbursing Athens with the European Central Bank’s profits from Greek bond purchases constitute fiscal transfers, which are currently illegal. They should consider that up to now, their countries have made a profit from lending to bankrupt Greece, initially at interest rates of between 3.4 to 4.5 percent. The eurozone is happy not to consider Germany, for instance, making gains of 380 million euros on its 15-billion-euro contribution to the first bailout package, a fiscal transfer. It has also been content until now to accept that the central bank of the euro area should be allowed to act as a private institution and pocket the profit from investing in bonds of a member that is on its knees economically. Furthermore, it has accepted the European Investment Bank, another institutional tool, abiding to private sector criteria, such as demanding excessive guarantees, before releasing any capital funding to boost Greek SMEs and help stoke some growth and job creation.

If a deal on Greek debt is to emerge by Monday evening, all sides need to accept that they’ve been guilty of serious misinterpretations and mistakes in dealing with this crisis. Now with something tangible to point to, Greece can argue that it is atoning for its faults. It can look across the table and ask what concessions the others are willing to make in order to make up for the failures of the last few years. Hopefully, this will be the moment that all sides realize it is in their common good to move on together rather than regret ever embarking on this journey in each other’s company.

[Kathimerini English Edition] , Friday November 23, 2012 (16:23)  
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