On the Greek deal

A founding father of European integration used to say that the European Commission was more about politics than economics. This also seems true in the case of the Eurozone. Neither did the Greek government intend an exit from it, nor did the European Commission want to show it the door. At best, it was a revolving door; at worst, Greece got more of the same. The elements of this Greek tragedy were no different from those of the ancient classic Greek tragedies. The fraught relationship between men and gods was represented by the Greek people and the German chancellor, a reincarnation of Margaret Thatcher, the Milk Snatcher. Now that an agreement has been reached, it is time for an Aristotelian catharsis, which might lead to the formation of New Labour in Greece.



How is it that an economy growing at a higher rate than what the average has been for the European Union (EU) for over a decade and a half came a cropper? Celebrated economists Joseph Stiglitz and Paul Krugman have been saying all along that the IMF-type austerity programme for Greece was the cause of its plight rather than the cure. Argentina in 2001 and Iceland in 2009 showed that alternatives exist and work as well. It is too easy to forget that Europe was bailed out after the Second World War by the Marshall Plan without the imposition of an austerity regime.

The Greeks did everything demanded of them and were even able to post revenue figures that were higher than the non-interest expenditure at one point. However, the experience of every financial crisis reveals that bailout packages are designed to compensate the lenders for making costly mistakes rather than assisting the economy concerned out of trouble. Greece was not an exception. After paying the creditors, all it was left with was an unending liquidity crunch and an unemployment rate of 25 per cent. An economy in such deep depression needs to increase rather than cut spending. Taxation also has to wait until the economy witnesses a reasonable revival. The money has to come from the lender of the last resort, which in this case is the European Central Bank. As part of the Eurozone, Greece’s central bank cannot play this role. In fact, this is the design defect of the Eurozone. A crisis requires fiscal and monetary coordination, while the Eurozone is only a monetary arrangement.

The agreement requires prior implementation of conditions, such as a higher value-added tax, reduced pensions, automatic spending cuts to maintain a primary budgetary surplus, collective dismissal of workers and privatisation of the electricity transmission company. A privatisation programme has been imposed with proceeds of the sales transferred to a fund, half of it used for debt repayment, one-third for reducing the debt-to-GDP ratio and the remainder for investment.

Debt comes before growth, with investment getting a pittance. Add to it the burden of additional taxation and a likely reduction in consumption spending by consumers and the government, and the intended beneficiary of the bailout becomes very clear.

The deal bails out the lenders, not the Greek economy and its suffering populace. There is no way for Greece to pay off its debt unless the economy revives. This requires debt write-offs, rescheduling and restructuring, relief in interest payments or a combination of all these. Even the IMF, in whose books Greece is a defaulter, urged the EU to provide the country with some debt relief. No ‘haircuts on the debt’ have, however, been provided.

The purpose of the agreement between Greece and its creditors is to discipline a left-leaning government — if it survives. If it does not, well, all the better! After all, the EU is more about politics than economics.

Published in The Express Tribune, July 17^th,  2015.

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