February 18, 2015
A clash of titanic national illusions is at play in the critical negotiations between the new Greek government and the Eurogroup on the future of the financial assistance program to Greece.
It is an illusion for the Greek government to believe that it can escape its obligations to the other Eurozone countries that have financially supported Greece when it risked collapsing and over the past few years have already agreed to lower the cost and extend the maturity of Greece’ debt. It is an illusion to believe that, in an economic and monetary union that has rules as its cornerstone, a new Greek government can be let renegade at will agreements of previous governments. It is an illusion to believe that Greek democracy counts more than democracy in other Eurozone countries where the public opinion is against further financial solidarity with debtor countries. It is an illusion to claim that “we will not negotiate our national sovereignty”, as Prime Minister Tsipras declared in his first defiant speech in front of the Greek Parliament, pretending to ignore that participation in the European Union and in the Euro brings benefits but it implies also significant limitations to national sovereignty, especially in economic policy making. It is an illusion to believe that public spending in welfare can get Greece out of its troubles, without continuing structural reforms that put the country on a track of sustainable prosperity . It is an illusion to think that the Greek government can impose its will to other countries by threatening to use its veto right, at the Greek government hinted it could do on the sanctions to Russia or the Transatlantic Trade and Investment Partnership (TTIP) being negotiated with the United States, or by trying to create an alliance of the debtor countries. It is an illusion to believe that Greek’s case is helped by boosting Greek nationalism and awaking the ghost of the past, by asking Germany for reparation costs of World War II. Last but not least, it is an illusion to believe that Greece could have a better future outside the Eurozone or in the sphere of influence of Russia.
But the illusions of the Eurogroup are of not less titanic proportions. It is inconceivable that the new Greek government can continue the adjustment program agreed by the previous governments without significant changes (as it was proposed by the Eurogroup last Monday with a draft statement that looks almost like a provocation). After years of fiscal consolidation that have left Greece with a higher debt ratio, record high unemployment, significantly lower living conditions for wide sectors of the population, and have strained the social fabric to its limits, a change in policies is unavoidable. It is an illusion to believe that when national democracy (which has spoken loud and clear at the last general election in Greece) and international rules and obligations come into conflict, eventually the former doesn’t matter. In fact the Tsipras government could be the last democratic bulwark before citizens disillusioned with democracy and strained by severe economic difficulties revert to far right extremists (a risk that goes far beyond Greece). It is an illusion to consider that in the current economic situation Greece (and in fact other European countries that are struggling to overcome a severe economic depression) can be transformed only by structural reforms and privatizations without any investments to boost demand. It is an illusion to believe that Greek’s problems are only a problem of Greece and that the Eurozone can postpone indefinitely the reform of its architecture and governance to address collectively and in a better way economic imbalances and debt levels in the Eurozone. Last but not least, it is an illusion to believe that, if worse comes to worse, Greece could abandon the Euro without any significant impact on the rest of the Eurozone.
Over and above rests the illusion that such problems can be solved by negotiations among 19 finance ministers sitting in the Eurogroup, or by 19 heads of state and government sitting in the Eurosummit. Each of them has a national constituency to represent and report to, 19 different national constituencies with 19 different priorities and national political dynamics. First and foremost each of them is, rightly, concerned of its national interest and of the consequence of any deal on its respective national political situation.
The risk of a lose-lose conclusion for all parties involved is high. Maybe it can be avoided at the last minute. Maybe the Greek government can be forced to accept a continuation of the current programme, forced by the lack of liquidity for the banking and the public sector. Maybe the Eurogroup could eventually agree to some temporary relief. Maybe both parties can paper over their differences for some months. Buying time is at the moment the only way out for all parties. But a sustainable win-win-solution requires more than that. It requires a fundamental change in the way of addressing economic imbalances in the Eurozone when a country is unable to return to economic stability (if not prosperity) by itself.
How should such a deal look like?
- Greece should commit itself to continue its structural reforms, seriously fighting tax evasion, corruption and cronyism, reforming the public administration and breaking the vicious cycle between business, politics and vested interests. Likewise, national fiscal consolidation (including primary surpluses to enable debt reduction) should continue. These steps are all necessary for Greece to maintain the trust of other Eurozone member states and the EU institutions (that are providing significant financial support) and put the country on a track of sustainable prosperity
- At the same time, the Eurozone should reward the consolidation and reform efforts of Greece with a bundle of investment initiatives especially targeting Greece. If public finances don’t allow room for demand-boosting measures that off-set the deflationary effects of the adjustment program, such initiatives should come directly from the European level. They would have more durable effects on the economy and its competiveness than national welfare measures to boost private demand.
- This mix of national adjustment programme and European investments for growth should be formalised in a new “contract” between the European Commission and Greece, replacing the relevant part of the existing memorandum between Greece and the Troika. Similar arrangements could be put in place with other countries under Macroeconomic Imbalances Procedure. Such a contract would be akin to the “contractual arrangements” initially proposed by the German government and then the European Commission in 2013 and not far from the request of a “new contract” raised by the Greek government. Its execution should be implemented and monitored by the European Commission itself, not by the Eurogroup of finance ministers of the Eurozone.
- In parallel, discussions should be resumed on instruments to collectively manage a reduction of national debt in the Euro area, like the Debt Redemption Fund initially proposed by the German Council of Economic Advisors.
Obvious problem with such a plan is that today the Eurozone does not have the tools and resources to support growth in Greece (or any other country) to incentivize and offset the effects of national adjustment efforts. Moreover, the institutional set-up of the Eurozone does not allow embarking in any debt issuance and/or management at European level nor does it allow the Commission to act as a Government of the Eurozone.
In fact, plans for contractual arrangements and incentive investments proposed by the previous Commissions have been shelved. Plans for development of the Eurozone governance and instruments have been stalled for now two years. The Investment Plan for Europe proposed by the new European Commission can be a partial replacement, but it will take some months, possibly one year, to come to life. When it does, it will be hampered by severe limitations: limited availability of public money, over-reliance on its ability to attract private funds, selection of projects based on the profitability rather than, at least partially, development needs of affected regions, disconnect with the overall Eurozone governance framework. Some of these limitations may be corrected in the legislative process, should there be political will to do so. Further financial means could be gather by a more flexible use of existing structural funds (including waiving co-financing requirements, fast track the use of future funds allocated to countries under assistance, disregard any national co-financing from the calculation of the Stability and Growth Pack). Again, should there be political will. Likewise, the discussion on deepening the Eurozone has resumed with last week communication by the Commission’s President to the informal European Council on Preparing the next steps on better economic governance in the Euro area but its outcome is still uncertain.
A change in ambition and pace in each of these initiatives is now extremely urgent.
Obvious part of the challenge is that progress in solidarity mechanisms for the Eurozone is much more than an economic project, it is a political project, which raises questions of government and democracy at Eurozone level, ultimately the question of whether the Eurozone wants to evolve into a political federal union. “Risk sharing and sovereignty sharing are linked” repeats often German Finance Minister Wolfgang Schäuble. It is such a political and economic project that should be put on a fast-track mode, to produce a durable solution for Greece and to brace the Eurozone for other similar situations that are inevitably recurrent in a monetary union of such wide geography and economic differences.
It the Eurozone doesn’t achieve rapid progress on these matters, any time bought by any temporary arrangement over the financial assistance to Greece will just be wasted. There is more at risk than the membership of Greece in the Eurozone, it is the future of the Eurozone itself that is at stake.Paolo Vacca