June 29, 2011
As the sun rises over central Athens those that have engulfed the Parliament building ponder their situation. They have been driven here by disappointment, desperation, even anger and the stark realisation that this is truly as bad as it gets. Their disenchantment has made them think the unthinkable and all of the sudden
While their elected representatives prepare to make one of the most important decisions of their lives, those gathering around Syntagma Square argue that they are the victims, they have been robbed by a corrupt political elite, an inefficient bureaucracy, a clientalistc system which dictates that it’s who you know, not what you know, that really matters. They are the working and the middle classes, the pensioners and the unemployed graduates that are asked to shoulder the burden of the austerity measures necessary to put in order Greece ‘s finances. But as far as they are concerned they are not the ones that caused the crisis. They accept the notion of collective responsibility, they are aware that they are complicit to the crimes committed over the past 30 years but they are not the ones who engaged in vast corruption in the public and private sector, they are not the ones that evaded taxes massively and they are not the ones that spent investors’ capital to buy risky sovereign bonds. So they do not understand why they have to stand by and watch their taxes rise, their wages shrink and their public services disappear when those that brought the country to the brink of collapse escape prosecution or avoid having to accept the consequences of their own actions.
Whatever one thinks of these arguments it probably matters little to those that are charged with helping Greece out of its current predicament. The IMF, the EU governments, the financial markets and above all taxpayers across the eurozone want to see the Greeks earn their bail-out. They do not care much about who in the country carries the bigger share of responsibility. As far as they are concerned the austerity measures imposed by the IMF-EC-ECB programme are the bare minimum the country needs to do if it is to put its finances in order (and redeem itself in the process). They want to make sure that the Greeks will pay them back but the way they go about will likely produce the opposite result.
The loans that form the bail-out, especially the EU part, are offered at an interest rate above 5%, which is substantially higher than the average rate eurozone and EU states borrow at. So when Greeks pay back those loans its EU partners stand to make a hefty profit. But the kind of conditions attached put that prospect in grave risk. Because asking an economy that is going through a devastating contraction to adopt punitive austerity measures, at the same time as it is trying to adopt and apply structural reforms, compromises its chances of growth. Economic development cannot be achieved by cutting public spending, while imposing crippling tax rises, which take money out of the economy, and cutting – already low by EU average standards – wages, reducing the population’s purchasing power. Such policies undermine the country’s ability to generate income and pay back its dues, hurting at the same time indirectly and unintentionally its own partners. If that’s not shooting ones self on the foot, what is?
Many argue that there is a way out of this unpleasant situation. Greece should default and leave the eurozone. Devalue the drachma and run its own monetary policy. But that is a narrow minded and myopic view. Going back to the drachma, not a simple procedure by any stretch of the imagination, will have devastating effects on the economy, the banking sector and the wider population. It will condemn the country to poverty, cut it off capital markets (and EU assistance) and make it even more dependant on IMF assistance, and the austerity conditions that come with it. At the same time a devaluation, no matter how steep, is unlikely to bare any fruit, considering that, unless massively restructured, the Greek economy is unable to produce competitive internationally products and services. No matter how cheap they are. As for running an independent monetary policy, how independent can it be when conducted from a small corner of Europe , with sadly a history of incompetent handling of monetary affairs?
Not to mention the effect a Greek default will have on the markets. The problem does not lie exclusively on the level of exposure some European banks have to Greek sovereign debt. It also resides in the level of exposure they have to each other and the limited amount of confidence they have on their own health. Most European banks still carry the scars of the credit crunch, one of them manifested in the lack of trust they have in their peers, and this fragility makes them panicky and likely to over-react. So even though Greece is no Lehman Brothers in terms of size and exposure, a fragile, paranoid and over-sensitive financial services sector is bound to over-react, run for the heals and in the process cause a huge stumpy, crashing on its way countries like Portugal, Ireland, even Spain, which, especially in the case of the latter two, are objectively nowhere near the precarious state of their Greek partner. But they might find themselves in the Greeks’ shows just because of the degree of mistrust and the lack of confidence the European financial services sector has in itself.
So what is the solution? First of all we have to acknowledge that we are devoting far too much attention to the bush, ignoring completely the forest. For whatever reason Greece has become the focus of attention, maybe to take the spotlight away from other bigger and equally indebted EU member states. But the future of the eurozone will not be fought and lost on the streets of Athens . Here is a country equivalent to less than 2% of EU GDP, in the periphery of the eurozone, literally and metaphorically. If enough (but not comparatively much) political and financial capital is invested the Greek debt crisis can be (and should have already been) resolved.
Secondly, we need to take a step back and remind ourselves of the state of the eurozone as a whole, which is full of successful, dynamic economies. These economies could certainly be in a better state if the process of economic integration was more complete but we should not discount the way the eurozone as a whole has weathered the crisis just because of debt and structural problems in a couple of its member states. The single currency itself is holding, albeit with some, understandable, fluctuations, its value – a significant vote of confidence from the markets and its partners. Furthermore, international actors, not least the Chinese, are happy to continue purchasing European paper, recognizing the long term positive prospects of the eurozone. Many others, including oil-rich states in the Middle East , have been, for a while now, diverging their foreign currency holdings in favour of the euro, a further sign of support for the single currency.
But above all we need to allow the Greeks enough time to put their economy in order. That means first and foremost reconsidering the kind of remedy (or punishment) we ask the Greeks (as well as the Irish and the Portuguese) to take for the mistakes they committed. The IMF inspired bail-out terms are full of neo-liberal ideology and are running the risk of causing more trouble than offer solutions. Greece needs time to restructure its economy. While it is undertaking the necessary, and painful, reforms it must be allowed to extend the repayment of its current debts. Private investors have a role to play and a voluntary roll-over of debt repayments is in their long term interest as well. Also privatization should not be rushed, a fire sale won’t help the Greeks much. Giving up now on state assets that have the potential to generate better returns when sold at a more benign environment is counter productive, to put it mildly.
Furthermore, the terms of the EU-EC-ECB bail-out should be revisited, there is no reason for interest rates to be so high and repayment to be demanded so soon. As argued above these terms limit, not enhance, Greece ’s ability to pay back its partners. In addition it is imperative that the notion of Eurobonds is reconsidered. Such a move might implicitly mean that Eurozone taxpayers underwrite Greek debt but it is cheaper than the bail-outs currently considered and will allow Greece to return, indirectly at least, to the markets. Going down that route will of course set the process of fiscal integration in motion and while the EU’s political leaders need to have an honest discussion with their electorate of what that will entail there is no other alternative than allowing our economic and monetary union to grow into a fiscal and political union. Because without adding those two pillars the architecture of the euro will never be complete.
At the same time a bad assets bank should be set up, aimed to rid the banks of the bad loans that are hiding beneath the surface. For that to happen light must be shed to some dark corners of the financial sector, not a particularly pleasant process, but the eurozone will not secure itself a healthy future unless its banking sector is cleansed once and for all from past sins.
Last but not least, a serious and proper development plan must be set up for Greece . Call it Marshal, or even better, Merkel Plan, but for the country to generate growth it requires investment that can only be provided at a scale similar to the one Americans offered to Europe after the 2nd World War.
So, as the whole of Europe (and perhaps the world) is holding its breath in anticipation of the vote inside the Greek Parliament later today, the leaders of the EU should spare a thought for those gathering outside the building. Irrespective of the outcome of the vote, this is a time for hard choices, not just for the Greeks but the eurozone as a whole. Political bravery and economic long term thinking is needed. Otherwise the people of Greece might start believing that a salto mortale is the only option they have left.
Petros Fassoulas, European MovementAuthor : European Movement UK