I would like to cut through a lot of the rhetoric and discuss where we are with the Greece crisis and where we are likely to be quite soon. I will conclude with some thoughts as to why this has been an enormous failure on the part of Syriza and the intellectual left that has supported it, and it will come with a very high cost. TL;DR: Wishful thinking is no substitute for real analysis. The European North made its position on indefinite financing of the South (and East) clear before the euro came into being. In fact, that was a condition for the euro to come into being. It has not changed. The deal was fundamentally the same in 1997 as it is today and will be tomorrow.
Here’s where we are:
1. In a series of moves, mostly in 2012, Greece’s debt was “restructured”, which mostly means that lenders accepted 75% losses in exchange for the remainder being transferred onto the balance sheets of European governments, the European Central Bank, and the IMF. In other words the banks ate 75% of the money and European taxpayers became responsible for the rest. So if Greece defaults now it will be defaulting on Europe’s citizens, not its banks. The banks have already taken their hit. Saying that this crisis is the result of Germans and French wanting to protect their banks has not been true for years if it ever was.
2. Until now, Greek debt held by Greek banks could be used as collateral at the European Central Bank, despite the fact that Greek debt is well below investment grade, through the Emergency Liquidity Assistance (ELA) authority. This is important, because Greek citizens have been draining Greek banks of euros since Syriza won the last election, while effectively transferring public debt owned by their citizens to the citizens of other eurozone countries, via the central banks as conduit. Without this program the Greek financial system will collapse, as it appears to be doing as I type. It is important to note that denial of access to ELA was the primary mechanism by which European authorities pressured Irish and Cypriot authorities into “resolving” their rolling banking crises in 2010 in 2013.
3. Greece has received more than 100% of its GDP in direct fiscal assistance from Europe (and the IMF) over the past few years. It is these monies that they are very likely to repudiate now.
For more details here’s one good explainer. And another.
Syriza’s position since it won in Greece’s January election has been that it has a mandate to renegotiate the terms of its repayment to Europe. Europe’s position has been that deals are not renegotiated by one party to them alone, and that they have responsibilities to their citizens as well. Now Syriza has called for a referendum, asking the Greek people to vote in favor of accepting the terms of conditions or rejecting them. Regardless of the result, claims Syriza, Greece has no intention of exiting the euro or renouncing its debt. In so doing, Prime Minister Tsipras has explicitly said that he hopes this will improve his bargaining position:
Many are asking: what happens after the #referendum? With a clear "NO", we will have a much stronger negotiating position. #Greece #vouli
— Alexis Tsipras (@tsipras_eu) June 27, 2015
This is, to put it bluntly, unlikely. The problem is not that the “Troika” (the European Commission, the International Monetary Fund, and the European Central bank, representing Greece’s creditors) do not know that the Greek people dislike austerity. They know it very well. Thus, this referendum will reveal no new knowledge. Since it does not, its impact on the distribution of bargaining power will be nil. (Unless, of course, Greece votes to accept the deal, in which case Syriza is dead.)
The problem is that there is now no deal on the table. The Troika have no made official proposal that could be rejected. The previous bailout expires on Tuesday. And the ELA aid program from the ECB will also be restricted. So Greece will go to the polls on July 5th to reject a non-existing package of debt repayment. They are certainly within their rights to call such a referendum — just as Prime Ministers Merkel, Hollande, Rajoy, Renzi, Michel and others would be within their rights to call referenda of their own. It’s just hard to imagine what this is intended to accomplish.
So we will have a #Greferendum. This act alone guarantees a default on its payment to IMF. (The IMF doesn’t like to be defaulted upon, because if it accepts defaults it ceases to function as an international stabilization institution because member governments won’t fund it. Love the IMF or hate it, borrowing countries would be worse off without it.) In addition, Greek banks will remain closed indefinitely in an attempt to stem the ongoing bank run, and capital controls have now been put in place to restrict Greek citizens (and foreigners, if any of them still have cash in Greece) from taking their currency out of the country. This despite promising to do no such thing earlier on Sunday:
https://twitter.com/BennSteil/status/615322579625246720
That’s how quickly control over the situation can be lost, and Syriza has now lost it. But Varoufakis isn’t wrong; the truth is that Greece is effectively no longer a part of the monetary union. ELA has been “capped” (i.e., cut off). And though the Syriza government refuses to admit it, the July 5th referendum is about whether to stay in the monetary union at all. In fact, the referendum’s ostensible purpose — to accept or reject the Troika’s proposal — is completely impractical because there no longer is a proposal on the table. Nor, after Tuesday, will there be any existing plan, as the current one expires on that date. As of now Greece is fully adrift.
So the fundamental issue remains what it always has been: Greece wishes not to repay. Most expert observers believe that the Troika is willing to accept substantial non-repayment, but not for nothing. That is, they want the consequences to be painful enough that countries will do everything in their power to resist falling into similar straits in the future. Not least Greece, which is still unable to match its spending to its income and so is not on a sustainable growth trajectory. Greece managed a very small primary surplus — government revenues minus expenditures, ignoring debt repayments — last year, but the Troika wishes to see a larger one sustained for longer before it is sure that Greece’s finances are sound.
Syriza is unwilling to agree to this and has, in my mind anyway, acted completely irresponsibly since it came onto the national scene. Its campaign promises were ludicrous, and it has steadfastly refused to accept the fact that it has very little leverage. It has spent the past 6 months doing everything except craft a credible plan to return Greece to growth whilst remaining in the eurozone, instead choosing to link contemporary Germans to the Nazis. It has behaved as if the only democratic will that matters is that of its citizens, none others, and has not acknowledged the quite extraordinary lengths that the rest of Europe has gone to to keep Greece solvent. It has insulted European partners who are poorer than Greece but are nevertheless being asked to subsidize its relatively generous welfare state:
“We are much poorer than the Greeks, but we have performed reforms,” Rosen Plevneliev, the president of Bulgaria, a northern neighbor of Greece, said in an interview. “When you have a problem, you have to address it and not shift it to Brussels or onto somebody else,” he said, deriding Syriza’s complaints that Europe had let Greece down. …
When Greece’s finance minister, Yanis Varoufakis, in an early round of negotiations in Brussels, complained that Greek pensions could not be cut any further, he was reminded bluntly by his colleague from Lithuania that pensioners there have survived on far less. Lithuania, according to the most recent figures issued by Eurostat, the European statistics agency, spends 472 euros, about $598, per capita on pensions, less than a third of the 1,625 euros spent by Greece. Bulgaria spends just 257 euros. This data refers to 2012 and Greek pensions have since been cut, but they still remain higher than those in Bulgaria, Lithuania, Latvia, Croatia and nearly all other states in eastern, central and southeastern Europe.
Such statistics have made it very difficult for Syriza to win support for its argument that Greece is suffering a uniquely painful “humanitarian catastrophe” and that fellow European Union countries ought to put up their own money to save Athens from bankruptcy. “Greece is not seen as suffering so much,” said Ognyan Georgiev, an editor at Kapital, a Bulgarian business newspaper. “They have the sea, they have big pensions and they have a life that looks better than what we have.”
Syriza’s biggest threat is to walk away from the currency union, but the eurozone would be stronger without Greece while Greece would suffer immensely from being excluded. The rest of the world economy won’t be affected at all. And, if the EU decides to retaliate by expulsing Greece from the Common Market they would also lose preferential access to the world’s largest market and the ability to emigrate freely. Meanwhile, the European Commission appears to be united against Greece, with all 18 ministers signing statements rejecting Syriza’s proposals and Tsipras’ decision to hold a referendum.
In other words, Syriza has taken a bad situation and worsened it significantly by refusing to understand that Greece has no claim on the rest of Europe. It has tested Europe’s patience by refusing to craft a credible plan for budget stability that does not rely on continued financing from Europe. And now it faces a referendum that seems likely to repudiate these actions, which would then probably collapse the Greek government and waste even more time while the economy collapses further.
It has been a stunningly poor 6 months for Tsipras and Syriza. It would be difficult to imagine anything worse.
Your basic points are correct but the conclusions you draw are ideologically-driven and nonsensical. For instance, “the eurozone would be stronger without Greece while Greece would suffer immensely from being excluded.” This presumes the Eurozone was/is a purely economic project, which you and I both well know it never was. A member leaving the Euro would be disastrous for the lifes work of many in the EU and render it rapidly unstable: the FN in France wants to leave also, for instance. It would also embolden the British when they vote on EU membership. A Greek departure from the Euro and a British departure from the EU would be disastrous for the entire project. The point here is not a small one. Whatever the reasons behind the current crisis, the EU cannot continue to ignore the wishes of citizens in any state- its intrinsically anti-democratic nature must be reformed, and Syriza is seeking to do that within its own context. If the EU throws Greece under the bus, instead of recognising that the current government is doing precisely what its people want, whilst also pledging commitment to the EU project, then it will be at fault. The Germans are the main culprit here. Essentially, when the Greeks vote no, the ball is in the EU’s court- if they force Greece out, then they must shoulder the blame for the consequences to themselves: not because they don’t have an economic rationale to be upset about renegotiating this agreement and/or other EU citizens subsidizing Greece, but because the basic EU project is about political solidarity, not economic realpolitic. If the EU abandons that principle of solidarity, then more will leave, and soon. Merkel and Hollande can continue their project alone.
“This presumes the Eurozone was/is a purely economic project, which you and I both well know it never was.”
I presume no such thing. But both the economic and political projects failed in 2010, when it became clear that it was untenable to have a monetary union without a fiscal authority granted to the supranational level, while nobody supported a fiscal union. But please note that the transference of Greece’s fiscal authority to the supranational level is precisely what Syriza is protesting against. I.e., the political project — a century-long process to create a United States of Europe — is over in its present form.
“The Germans are the main culprit here.”
This is ludicrous. Germany was willing to extend its credit rating to the rest of the EZ, but it never agreed to open-ended fiscal transfers to countries that couldn’t manage their macroeconomies successfully. It would not agree nor could it agree to that. Thus, institutionalized austerity was part of the original package, and everyone knew it. Greece chose to pretend as if that wasn’t the case, and has been suffering for it. But to say that this is Germany’s fault is outrageous.
“the EU cannot continue to ignore the wishes of citizens in any state- its intrinsically anti-democratic nature must be reformed, and Syriza is seeking to do that within its own context.”
Greece is not the only polity that matters, and entire rest of the eurozone support the Troika. (At least their elected officials do, but so does public opinion in every country that I’ve checked.) If there is one identifiable “democratic will” in Europe it is most assuredly *not* to go easy on Greece.
“If the EU abandons that principle of solidarity, then more will leave, and soon.”
Why? Clearly the European mass publics — even in Greece! — believe the costs of staying in EMU are outweighed by the benefits. If Greece does leave and performs very well then maybe others will be tempted to join them. But that is highly unlikely. Conditions will worsen, probably for a very long time, and no one will wish to follow Greece down that path. We’re already seeing it: support for Podemos and other left-populist parties has shriveled as a result of Syriza’s blundering about.
Again, you misunderstand the nature of the political project (I presume because you are not European). Yes there are some Eurocrats who want a United States of Europe but that is not, at all, the essence of the European project. I can’t be bothered to explain it to you. But believe me, if Germany et al push Greece under the bus they will destroy the project more so than anything else could have done.
Anyhow, a better set of thoughts than yours:
https://www.theguardian.com/business/2015/jun/29/joseph-stiglitz-how-i-would-vote-in-the-greek-referendum?CMP=share_btn_fb
You oversimplify and distort “the essence of the European project” to suit your rhetorical ends. There was never one single, unifying, “essence” of the European integration project. From its earliest stages there were a diverse group of actors with varied interests and “visions” jockeying for their preferred outcomes. The debate in the 60s between Gaullist intergovernmentalists versus Euro-federalists/supranationalists never ended, and is still playing out to this day. Even now, within the EU bureaucracy this day there are still a diverse set of visions regarding how the EU should manage relations with memberstates, what precisely should the EU’s global rule be, the desirability of a pan-EU defense policy, the EU’s relationship to NATO, so on and so on.
However, Kindred is quite right to say that the federalist vision of the EU, and it’s form from the signing of Maastrict to 2010, has utterly failed – in fact, I would go even further and say that it is a deathblow to any EU federalist/supragovernmentalist/neofunctionist. Economic and (especially) monetary union cannot succeed without political union – end of story.
Oh, and accusing Kindred of being ideologically driven while posting a Joseph Stiglitz article? Nice touch.
Again, you are conflating the political essence of the European project with high-political leaders (Gaullists, etc.) instead of assessing where it’s true power has always been: in the minds of European people (minus the British). It is this that those who fail to show solidarity to Greece are destroying. Nobody is denying mistakes were made in Greece, what people are hostile too is the marching band of economists placing all blame on their shoulders. The economic crisis did not start in Greece (shhh; that was the U.S.). The general discourse on the Greek question is symbolic of the tendency to reduce politics to neoliberal capitalist logics. It’s too late for the U.S., in Europe people still have hope.
Your position here is so vague that I’m not sure what you’re saying:
” in the minds of European people (minus the British)”
But in the spirit of anecdotal generalisations, I think you misunderstand most peoples relationship with the European Union (note that I’m probably more sympathetic to your stance than Kindred’s as a whole.)
The EU won’t be ‘destroyed’ out of disgust at the way Greece is being treated due to some pan European solidarity among ‘the people.’ It will be destroyed when the populations of the countries feel that the EU no longer provides a mechanism to develop economically, and where it no longer represents a symbol of cultural and economic modernisation.
Most people I have met (selection bias admitted) from the non core countries primarily view the EU instrumentally and nationalistically. Which isnt too say that there isnt some form of pan European solidarity, but that it’s contingent on local politics and the EU providing economic , cultural and security benefits to various populations. When those benefits no longer outweigh the costs of membership, that’s when the project will collapse.
Agreed with all that. And yes I’m being vague. It’s a kind of strategic vagueness though: the focus on the economic arguments are so specific (as well as often being wrong) that they distort from the long-term consequences of what is being forced upon Greece… The moment the EU is seen *entirely* in terms of instrumentalism then it is done for. While some see it in this way at the moment, many do not, especially states like Greece. I would say the instrumentalist view is largely dominant only in the UK and Eastern Europe…
It’s not a very good strategy to be vague when you want to convince people, and even less so when you’re trying to sell a multi-billion write-off of Greek debt. If that ever happened in the name of some vaguely-defined “European spirit”, you can bet that the anti-EU movements you referred to in your first post would be buoyed and the centrifugal tendencies increased.
Syriza’s main mistake was that they bet everything on inspiring an Eurozone-wide popular revolt against austerity that would force the governments of other nations to relieve their pressure on Greece. Then, when it became clear early on that no such thing was happening and none of the other countries were breaking ranks, they simply didn’t have a plan B, unless the initial is supposed to stand for “brinksmanship”. They knew that the manifesto on which they were elected and the demands of the institutions/troika couldn’t be reconciled, and they could’ve held a referendum at any point to resolve the dilemma, but they didn’t do so until after the deadline for technical bankruptcy.
Whatever you think of Syriza’s politics – and I actually agree with them that austerity has been a massive policy failure for all except the richest – this was just stunningly inept. In this game of chicken, there was never a reason or an indication that the institutions would be the ones to blink, yet Tsipras and Varoufakis chose a time-wasting strategy that’s now led to banks being shuttered and people headed to the polls without a clear idea of what they’re actually voting on. And unless they somehow produce a last-minute agreement today, they’ll either preside over their country’s bankruptcy and expulsion from the Eurozone, or have their political authority reduced to zero, forced to implement an unclear proposal that’s guaranteed to result in an intra-party revolt when it comes to specifics. No matter how you look at it, this is just one gigantic mess without any imaginable upside.
Very interesting that the 75% debt write off never shows on the Greek side of the balance sheet. Debt in 2010 was substantially the same as it is now. How can you write off 75% and never even for one year show a major drop in debt load?
I think this is a one-sided narrative and misses the point which many prominent economists have made. The debate is over the degree of austerity (especially the level of the primary surpluses required) and is associated with debt sustainability. In short, too much austerity coupled with economic uncertainty has triggered a downward spiral of recession and a higher debt/GDP rate, which forces Greece to overtax to pay its liabilities, which in turn triggers more recession etc, more cuts and taxes. This makes debt repayment more difficult and recovery almost impossible.
Note that all Greek public debt is external debt. This means that any savings via cuts or any added tax income is an annual drainage from the domestic economy WHILE in recession already.
Structural reforms were implemented in Greece – contrary to widely held beliefs – but they only lead to positive results after some time and may not be sufficient to trigger investment in a country whose standing in the eurozone has been constantly challenged due to debt sustainability concerns.
Nowhere does your analysis mention Greece’s idiosyncratic position not to have its own currency but instead to be asked to rely on internal devaluation to increase its competitiveness. Internal devaluation of wages, unlike currency devaluation, means that debtors still owe debts in a hard currency while their incomes have been slashed. Add to this rising unemployment among families and you will get the full consequences for Greece’s banking system (unpaid loans) far before Syriza came to power.
Your moral argument (why the Bulgarians have to pay Greek pensions) is at least cheesy. Bulgaria could have opted out if they did not want to be part of an economic program on moral grounds. By not allowing Greece to default in 2012, they chose to participate in an adjustment program, not a punitive exercise at the expense of another nation. The logic of adjustment is that it has to be paced, economically viable and socially and politically sustainable. Should they want this programme to succeed, they will understand this. For your consideration, pensions have been cut considerably and Syriza has acknowledged the need to further reform the pension system.
Surprisingly for a radical left party, SYRIZA did talk of privatisations a few days after it got elected to power. Yet, it has been caricatured as a neocommunist party that wants to turn Greece into Venezuela. Far from the truth.
Finally, you say nothing about the human face of the crisis: the immorality of governments making wrong decisions or simple miscalculations and the fact that ordinary people have to pay this price. People have one vote every four years over a choice of two or three parties with a bundle of topics to think about, lack of financial/economic education, in a climate of misinformation and with little personal stake to invest time and effort to unveil what Prime Minister Simitis, for instance, has agreed with Goldman Sachs behind closed door a few years ago.
‘they want the consequences to be painful enough that countries will do everything in their power to resist falling into similar straits in the future.’ So the objective of the programme never was to help Greece’s economy recover, but to ensure that no one else will ever be tempted to risk getting into the same kind of trouble. Then it’s the Greek government that is irresponsible, because it doesn’t want its people to suffer just to make a point?
Yes, quite true. The last time this happened, one should recall, was post-war Germany. Post-World War II, its debt was cancelled… The German state has a short memory, it seems.
The IMF’s own documents assert that Greece would face unsustainable level of debts by 2030 even if it signed up to the stringent measures it wants.
Greece would face an unsustainable level of debt by 2030 even if it signs up to the full package of tax and spending reforms demanded of it, according to unpublished documents compiled by its three main creditors.
Yes. There were two objectives: one, to establish the precedent that open-ended fiscal transfers from some EZ members to others was off the table (thus countering market expectations); two, to push Greece into undergoing the structural reforms that many believed to be necessary to prevent future crises, but which Greek politicians seemed unable to actually carry out for political economy reasons. These reforms would mostly about boosting productivity and enhancing the fiscal capacity of the state, and that really is necessary for Greece to take its place among Europe’s developed core.
The analogy to Germany after the war is over-used. First, there were some reparations payments. Second, Germany’s promises to reform were guaranteed by occupying armies (I don’t think Athens would agree to that in the present day). Third, I think everyone knows that much of Greece’s debt will be cancelled too, but it is in the Troika’s interests to use the leverage of the debt to force through reforms *now*. Otherwise Greece won’t reform and will likely find itself in a similar situation in another decade or so.
In sum: Greece will have to reform whether this debt is discharged or not, but so far its political class has not been capable of carrying out any substantial changes, so the external financial powers are using financial means to put pressure on Greece to come up with some solution that puts them on a track to self-finance.
The analogy with post-war Germany is apt for one key reason: solidarity. There was a clear recognition post-war that responsibility was collective for many aspects of what occurred. Presently, the ‘Troika’ are pushing for punitive terms against Greece (there own documents acknowledge nothing will be better by 2030 on their own terms). What is the alternative to the left wing in Greece? Golden Dawn? The degree of political irresponsibility being exercised in the name of fiscal responsibility by the Troika is shocking. And we don’t need any U.S.-based political ‘scientists’ adding to this.
Greece will have to reform, huh? As if they haven’t? The point is to stem the disastrous consequences of those reforms: suicide, economic depression, etc. This is not an issue just for the Greeks. Those advocating for your perspective are the same as the cess-pitt citizens featured in this video: https://www.youtube.com/watch?v=irx_QXsJiao. The British government has just abolished any measure of child poverty in its country (because it was growing). Not everybody wants the world to sink to the IMF’s (your?) standards.
Well, well, even the IMF thinks you/the Germans/etc. are wrong! 20 year grace period, debt relief? It seems Syriza were absolutely correct in their strategy. The only question is why the IMF never said this in earlier negotiations… and why the Germans, especially, refuse to admit it, and Martin Schulz- outrageously- calls for the removal of a democratically elected government to be replaced by a ‘technocratic’ administration. Anyhow, post-this IMF intervention, everyone should be quiet about Syriza’s tactics.
https://www.theguardian.com/business/2015/jul/02/imf-greece-needs-extra-50bn-euros
Did you actually read the IMF report? This is on page 1:
“If the program had been implemented as assumed, no further debt relief would have
been needed under the agreed November 2012 framework.”
But Greece didn’t implement it. As I’ve now mentioned several times. The report goes on to say that *because Greece didn’t implement the program* interest rates spiked again, the budget balance worsened, and the growth trajectory narrowed. It is THIS — Greece’s unwillingness to implement the program — that made the debt unsustainable.
Everyone now knows that further debt writedowns will be necessary. But given Greece’s repeated history of not making implementing reform packages that could prevent these same problems from recurring again and again, I think it makes sense for the Troika to use all the leverage it has to force reforms before that is done.
It’s really not a question of whether the Greeks like paying loans back, or how quickly they impose reforms (even if necessary in the long run, reforms intended to improve productivity won’t revive an economy that’s already operating 20% below capacity). The question is whether the alleged recovery program is sustainable. Austerity, more fully applied in Greece than in any other EU country, has driven the GDP down and worsened the debt burden, and it shows little prospect of improvement.
https://krugman.blogs.nytimes.com/2015/07/05/austerity-arithmetic/
No, that’s not the question at all. Because any relaxation in austerity will have to be funded by taxpayers in other EZ countries. So the question is: who pays?
That’s always been the question.
Well even if you assume that austerity is necessary, there’s a difference between the 1%-of-GDP primary surplus they managed to come up with last year and the 3.5% that the Troika is pushing for. And a solution that consistently drives the economy down and worsens the debt burden over time really has to be a question. On the other hand, the rest of Europe could try to expand their own economies and then buy things from Greece, which would at least add to Greek demand and reduce the overall current-account imbalances. (Of course, in the US, taxpayers in New York or California perpetually subsidize taxpayers in Mississippi and South Carolina without ever realizing it, but I guess that’s the difference between a country and the hybrid entity that is the EU.)
May I add a point? It’s true that various Greek governments did not honour the many previous agreements — did nothing to improve tax collection, did not reduce corruption, and did a balls-up of the few things they did do (for example, to reduce gov’t expenditure, they axed a percentage of employees in each department without the slightest regard for competence or even honesty). But Syriza was elected on a platform that promised exactly something new in each of these areas. They were not responsible for the mess left to them. Whether they could have managed or not, I cannot know, but after six months of hopeless wrangling with the EU, they have gone nowhere in exactly the reforms that would have made a difference. Is that really what we want?
Great points. To be fair, I don’t want to leave the impression that Greece has done nothing. They have, and the IMF estimates the fiscal cuts at about 16% of potential GDP (altho this can get a bit dicey, and I haven’t yet found how they calculate potential GDP or what the baseline is). But as you say very little of this has set the country up for future growth, or for public spending to be in line with a lower growth rate.
But as to what Syriza has done the answer is effectively nothing. They don’t need the Troika’s permission to go after tax cheats and rich landowners. They don’t need the Troika’s permission to look for parts of a sovereign budget that could be cut relatively painlessly, which should be possible since gov consumption is 60% of GDP. Etc.
Instead, Syriza’s first insistence was on a 4 month extension to the bailout with no conditions so that they could craft such a plan. They actually got that! Then, over the next 6 months, they made proposals and then withdrew them, spat a lot of bile at the Troika — calling them extortionists, blackmailers, terrorists, and linking them to Nazis at every turn wasn’t even cute — but never came up with any credible plans for tackling any of these issues, even as Greece’s budget worsened further and its banking sector was only kept afloat by ELA. It looked all along, as it looks now, that Syriza would like very much to do almost nothing and continue to get concessionary finance with no conditions. I mean, I’d love that too but it’s not hard to understand why the Troika refused.