Greece Should Not Give In to Germany’s Bullying
It’s not just a question of being morally right - it’s sound economics. And
Athens has a lot more leverage than anyone thinks.
Philippe Legrain
Foreign Policy, February 19, 2015
via http://www.eurotopics.net/en/home/autorenindex/autor-legrain-philippe/
Ever since the initial bargain in the 1950s between post-Nazi West Germany and
its wartime victims, European integration has been built on compromise. So there
is huge pressure on Greece’s new Syriza government to be “good Europeans” and
compromise on their demands for debt justice from their European partners - also
known as creditors. But sometimes compromise is the wrong course of action.
Sometimes you need to take a stand.
Let’s face it: no advanced economies in living memory have been as
catastrophically mismanaged as the eurozone has been in recent years, as I
document at length in my book, European Spring. Seven years into the crisis, the
eurozone economy is doing much worse than the United States, worse than Japan
during its lost decade in the 1990s and worse even than Europe in the 1930s: GDP
is still 2 percent lower than seven years ago and the unemployment rate is in
double digits.
The policy stance set by Angela Merkel’s government in Berlin, implemented by
the European Commission in Brussels, and sometimes tempered - but more often
enforced - by the European Central Bank (ECB) in Frankfurt, remains disastrous.
Continuing with current policies - austerity and wage cuts, forbearance for
banks, no debt restructuring or adjustment to Germany’s mercantilism - is
leading Europe into the ditch; the launch of quantitative easing is unlikely to
change that. So settling for a “compromise” that shifts Merkel’s line by a
millimeter would be a mistake; it must be challenged and dismantled.
While Greece alone may not be able to change the entire monetary union, it could
act as a catalyst for the growing political backlash against the eurozone’s
stagnation policies.
For the first time in years, there is hope that the dead hand of Merkelism can
be unclasped, not just fear of the consequences and nationalist loathing.
More immediately, Greece can save itself. Left in the clutches of its EU
creditors, it is not destined for the sunlit uplands of recovery, but for the
enduring misery of debt bondage. So the four-point plan put forward by its
dashing new finance minister, Yanis Varoufakis, is eminently sensible. This
involves running a smaller primary surplus - that is a budget surplus, excluding
interest payments - of 1.5 percent of GDP a year, instead of 3 percent this year
and 4.5 percent thereafter.
Some of the spare funds would be used to alleviate Greece’s humanitarian
emergency.
The crushing debts of more than 175 percent of GDP would be relieved by swapping
the loans from eurozone governments for less burdensome obligations with
payments tied to Greece’s GDP growth. Last but not least, Syriza wants to
genuinely reform the economy, with the help of the Organization for Economic
Cooperation and Development (OECD), notably by tackling the corrupt, clientelist
political system, cracking down on tax evasion, and breaking the power of the
oligarchs who have a stranglehold over the Greek economy.
Had the Varoufakis plan been put forward by an investment banker, it would have
been perceived as perfectly reasonable. Yet in the parallel universe inhabited
by Germany’s Finance Minister Wolfgang Schauble, such demands are seen as
“irresponsible”: Greece must be bled dry to service its foreign creditors in the
name of European solidarity.
While the Greek government is certainly in the right, there is still fear that
the might of the German government will prevail. The Greek government may run
out of cash - perhaps as soon as next month. Faced with a run on Greek banks,
the ECB could deny the country’s central bank the right to provide them with the
emergency liquidity that they need to survive. At that point, compromise -
surrender - could impose itself.
Or not. The belief that Greece has little leverage in its negotiations with
eurozone authorities is false. If no agreement is reached and Greece is
illegally forced out of the euro by Berlin and Frankfurt, it would doubtless
default on all its debts to both eurozone governments and the ECB, as well as
the Bank of Greece’s Target 2 liabilities. Speculation would soon start about
which country might be next to exit the euro - Portugal? - and the single
currency would suddenly look eminently revocable.
Do Berlin and Frankfurt really want to push Athens over the brink? I doubt it.
Especially since, freed of its external debt and an overvalued exchange rate,
Greece would doubtless be growing again once the immediate chaos subsided. After
all, even an economy as badly managed as Argentina started growing again only a
year after the government defaulted and junked its dollar peg in 2002.
Of course, eurozone authorities may miscalculate, or allow their emotions to
trump economic logic. And since Athens does not want to leave the euro, it also
has a fallback option, as Willem Buiter, chief economist of Citigroup, and John
Cochrane of the University of Chicago have pointed out. The Greek government
could meet its domestic obligations, such as pension payments, by issuing
tradeable IOUs that could also be used to make tax payments - in effect,
creating a parallel currency. This virtual money could also be used for other
purposes: for instance, to recapitalize ailing banks. That would enable the
Greek government to default on its EU creditors relatively painlessly, while
remaining within the euro.
The eurozone establishment and much of the media think Greece is foolish to
stand up to Germany. But what would be truly foolish is giving in. That would
leave only the neo-Nazis of Golden Dawn in the anti-Merkelism camp, which might
portend ill political omens. So long as the Greek government is willing to stand
firm - as a vast majority of Greeks and many Europeans are urging it to - it can
obtain a fairer deal for the Greek people and, with luck, the eurozone.
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