Greece’s creditors matter as much as its voters

Spare a thought on Sunday for the ordinary Greek voter. These are the people who paid their taxes, weren?t corrupt, didn?t get early retirement as hair stylists, and whose sons and daughters are rioting or emigrating because they?ve no prospect of employment for a decade to come.

There are many such Greeks. They?re the object of a cacophony of warnings that if they support the wrong party on Sunday, they will trigger Europe?s economic implosion, their own, or both. With Spanish and Italian bond yields soaring Thursday, in Spain?s case to an unsustainable 6.95 percent, that isn?t hype. Europe is unprepared for Greece to leave the euro.

In the past few days, Greeks have heard from German Finance Minister Wolfgang Schaeuble that they can expect no relief from austerity. His U.K. counterpart, George Osborne, said Germany may even want Greece to leave the euro, because that would help persuade German taxpayers to rescue more important economies. An interactive online game to create Greek scenarios includes a maze of 57 possible steps that all end badly, if in different ways.

This is bewildering stuff, so it?s more than possible that the outcome of Sunday?s election will spell yet more trouble for Greeks themselves and for the wider European economy. The reason to focus on ordinary Greeks — neither less virtuous than ordinary Germans and Frenchmen, nor more responsible for the euro?s imbalances — is to prevent a haze of blame from clouding decisions that the country?s international creditors will have to make after the vote to minimize the fallout. Given the dismal choices on the ballot, how Greece?s creditors behave will matter at least as much as how its citizens vote.

Greece?s parliamentary election, a rerun from an indecisive ballot last month, has become a two-horse race between the conservative New Democracy and the leftist SYRIZA.

New Democracy is telling Greeks they can either vote for the conservatives, stay in the euro and continue the European Union?s austerity program; or vote for SYRIZA, default, leave the euro and suffer even more. This is probably true. However, New Democracy got Greece into the mess it?s in, through an orgy of overspending and state-sanctioned corruption. It?s hard to imagine the party driving through the changes that Greece will need to grow again, if left alone.

SYRIZA?s fiery young leader, Alexis Tsipras, says Greece can junk the austerity program attached to its bailout, and that Europe will go on lending money for a pro-growth stimulus package. As we?ve said before, that?s a fantasy with potentially bad consequences for Greeks, Italians, Spaniards and the global economy as a whole. The best hope is that Tsipras doesn?t believe it himself and would prove a pragmatist once in power.

The result is that the next Greek government will be led either by radicals who have no experience in government, or by a party that has proved itself incapable of reforming Greece?s dysfunctional state. Whichever side wins — New Democracy would be the less calamitous as it is committed at least in principle to the bailout terms — the so-called troika that represents Greece?s creditors will have to lead the way to the least disruptive path forward.

By the end of March, Greece had already received 112 billion euros ($140 billion) of aid. But Europe?s leaders and the troika — the International Monetary Fund, the European Commission and the European Central Bank — are also partly responsible for the political and economic mess Greece is in. Sunday?s election, for example, wouldn?t be happening, were it not for the decision of EU leaders in November to force then- Prime Minister George Papandreou to call off his planned referendum on Greece?s future in the euro. Publicly humiliated, he resigned days later.

As for the troika?s austerity program, it came in two parts. The first, in May 2010, contained structural reforms Greece was supposed to make, as well as budget cuts. Only the budget cuts materialized; the government failed to implement most reforms. When it came time for a second bailout this year, the terms were almost punitive. Support for the political center, made up of parties that supported this bailout process, disintegrated, fueling the rise of SYRIZA.

Greece has to undergo more austerity. Greek unit labor costs rose 30 percent from 2000 to 2008, while they fell by 8 percent in Germany. That has to be rolled back. The Greek state bureaucracy is dysfunctional; it has to be rebuilt. Yet to survive more than a few months, any new coalition government in Greece is going to need to negotiate a more achievable austerity program — and the IMF, at least, recently indicated it is open to that.

The troika should be ready with proposals of its own that are more flexible on timing and more targeted in cutting public- service jobs to improve Greece?s inefficient state, rather than just meeting head counts. In doing so they should try to remember the ordinary Greeks they are stepping in to help, rather than the feckless politicians who have so frustrated efforts to date. This would doubtless take more money, primarily from Greece?s reluctant euro-area partners, including Germany. The alternative is a high stakes roll of the dice on Greek contagion. [Bloomberg]

Subscribe to our Newsletters

Enter your information below to receive our weekly newsletters with the latest insights, opinion pieces and current events straight to your inbox.

By signing up you are agreeing to our Terms of Service and Privacy Policy.