What would the consequences of SYRIZA’s economic policy be if the leftist opposition party came to power? Given the often differing positions expressed by some of its leading MPs, we have focused on the speech of its president Alexis Tsipras at the Thessaloniki International Fair in September.
There are two overarching propositions in SYRIZA’s economic agenda: (a) The Memorandum is to blame for the crisis, and not the reverse; (b) the Greek economy’s main problem today is the lack of sufficient demand and not supply. Both propositions are popular, and both are wrong.
Tsipras says that if the Memorandum laws are abolished, if wages and pensions (especially minimum ones) return to pre-crisis levels, and if the structural reforms of the last few years are canceled, this, together with a bold increase in public investment, will lead to a speedy economic recovery.
Maybe all that would work if we were living in a closed economy with its own currency. This is not the case. The adoption of the above would lead to a sharp decline in competitiveness, whose improvement has so painfully been achieved over the last few years. It would also lead to a rise in imports and a re-emergence of large external deficits. Europe is indeed suffering from low aggregate demand, but this is an issue for the eurozone as a whole, especially Germany, and not for an economy such as Greece’s, with a persistently high share of consumption to GDP and a chronically weak export sector. The entire eurozone is in urgent need of a public investment boost, but the Greek economy needs to attract private investment and expand the supply of goods and services.
SYRIZA’s emphasis on the demand side underestimates the need to produce more efficiently and more extrovertly. A common basis for the country’s low productivity and the high incidence of tax and social security contribution evasion is the plethora of very small business units. The reforms seek to encourage the development of more rational business units of a larger and thus more productive size. SYRIZA’s policies, such as the abolition of reforms in the product and labor markets and the cancellation of privatizations, would raise the production and labor costs for serious companies. They would create an adverse environment leading to an exit of domestic and foreign companies and mass capital flight. Then we would only be left with the very small businesses that survive on tax and social security evasion. We would be back to the vicious cycle of an inward-looking economy incapable of producing growth and raising public revenues.
Tsipras also presented a cost estimate of his proposals (something to be welcome), which was disputed by the government but also by economists who generally view SYRIZA favorably. We consider the cost estimate produced by the Finance Ministry as more realistic than that of SYRIZA, especially if the proposed debt relief for troubled private sector borrowers (below 3 percent of nonperforming loans, or NPLs) were to have any meaning. But even under SYRIZA’s cost estimates there is a gap equal to around 5 percent of the country’s GDP, with obvious implications for the fiscal balance. How would such a gap be covered? Curbing tax evasion and fuel smuggling, while strongly desirable, would not suffice. Replacing the current unified property tax (ENFIA) with a tax on large property of an equivalent effect would presuppose confiscation terms.
As a result, SYRIZA’s program leaves a large funding gap. How would that be covered? The recent surge in bond spreads, despite the primary budget surplus, demonstrates that resorting to the markets would be impossible. Greece’s partners would be far from eager to lend to the country on favorable terms without an economic program with strict conditions. Would Tsipras sign a new bailout program? It would be an interesting case of history taking revenge. The numbers just don’t add up, and the gaps in the logic are too big to ignore.
On the sovereign debt, SYRIZA keeps on repeating there should be a large haircut on its face value – fortunately, as recently specified, not of a unilateral type. It would be nice if SYRIZA’s arguments could persuade the Belgian parliament that a haircut is needed because Greece cannot produce primary budget surpluses of 4 percent when Belgium did so for over 20 years, the Slovak and Estonian parliaments that the haircut is needed to restore the purchasing power of Greek pensioners when pensions in those countries are much lower, or the Italian parliament that a haircut is needed for the Greek public debt to become viable when the Italian debt is nearing 140 percent GDP. If all the above are proven unfeasible, then the only remaining solution is the reduction of the net present value of the debt mainly through maturity extensions, interest rate reductions and an extended grace period. Europe should indeed summon the courage to press ahead with more radical solutions to the huge debt overhang problem, such as Pierre Paris and Charles Wyplosz’s PADRE plan, converting debt into perpetuities, or solutions of debt mutualization, Eurobonds or a greater involvement of the European Central Bank. But such options would apply to the European debt problem in general, and not specifically to that of Greece. SYRIZA rightfully emphasizes a European solution. But such a solution presupposes a national commitment to significant primary budget surpluses and structural reforms, both of which SYRIZA denounces.
On other issues, SYRIZA’s proposals cover existing gaps of government policy or suggest measures that are already being applied. For example, SYRIZA is right to stress the problem of the long-term unemployed left without any income support – a gap that could be covered by expanding the already introduced minimum guaranteed income scheme.
To conclude, SYRIZA’s proposals are both reasonable and original. However, those that are original are not reasonable, and the reasonable ones are not original.
* George Pagoulatos and Panos Tsakloglou are professors at the Athens University of Economics & Business (AUEB).