Sharing responsibilities for the Greek drama

At a time when the Greek saga is getting close to an utterly negative conclusion, it may be useful to express views on the sharing of responsibilities between creditors and the different Governments that ruled Greece in the last few years, say since 2001, when Greece entered the €-area. My own personal view is that the responsibilities are 3/4 for the Greek governments (please note the plural) and 1/4 for the creditors.

Let´s start by recognising that obviously Greece needed fiscal adjustment when its dire deficit condition was revealed.

With hindsight, however, Greece got too much adjustment too quickly. And the sharp adjustment interacted negatively with the limited ability of Greece to move, because of its weak productive structure, from an economy dominated by the public sector to one with a vibrant private sector. The fall in exports in Greece since the crisis, in opposition to the increase in the other “troika countries”, is a precise indication in this respect. 1)See my post on: What went wrong with Greece?

The weakness of the Greek productive sector also explains why the “troika approach” worked well in Ireland and also satisfactorily in Spain, Portugal and, as far as it goes, Cyprus but not in Greece.

Add the uncertainty deriving from the pretence that Greek debt was sustainable and the delay of its restructuring 2)See on this aspect: A major step towards a Greek compromise – Finance Minister Varoufakis’s proposal provides a good basis to start discussions by Zsolt Darvas on 3rd February 2015. to the lethal combination of too sharp a fiscal adjustment and a weak productive sector and you start understanding why Greece lost 25 per cent of its income.

The synthetic reason for which I give most of the responsibility of the drama to the Greek governments is that a country does not get to the abysmal situation of Greece without its government doing terribly wrong things on a sustained basis. The imbalanced and not performing Greek economy is a clear responsibility of its different governments over time. More recently the behaviour of the Syriza government during the negotiations was trust destroying and unreliable. The timid improvements that started to be seen in Greece in terms of growth, renewed access to the market and fiscal situation at the turn of the year were quickly dashed as the only objective of the new government seemed to be to get debt relief.

On the role of creditors, and in particular of its leading country, Germany, one should not forget that the solidity of the € area, of which all participating countries benefit, depends to a large extent on the solidity of the German economy. One should not forget either that sound finances, price stability and a performing productive sector, which are the essential components of the German model, are also the essential components of a successful economy.

On the other hand, Germany`s participation to the 1/4 of creditor responsibility consists of:
1. Its unwillingness to recognise that there can also be serious aggregate demand problems, and that it is not only supply that determines, in the short to medium term, the economic conditions of a country,
2. As a specification of the first point, Germany refuses to understand that a current account surplus of 8% or more is a serious imbalance, which needs correction,
3. Germany also showed a limited ability to play the hegemon role in the European crisis, which the US covered so well after WWII,
4. Finally, Germany refused to accept that there are social and political limits to the adjustment a country can carry out.

As regards the ECB, it has to be recognized that it has been, in all possible respects, very forthcoming with Greek banks. Indeed Greek banks did not succumb, so far, to the broadsides coming from its government only because the ECB supported them. Banks have been kept afloat by the liquidity provided by the ECB, against the actions of their governments. It did increase its lending until the Greek government stopped looking for an agreement. At that point the ECB took the relatively mild measure of not accepting to increase further its support. More recently it took again the relatively mild measure to require increased guarantees for its lending, but still allowed banks to maintain their degree of funding. It is my sense that the ECB has reached the limit of its responsibilities. The ECB must let governments assess the eminently political situation that has emerged from the calling of the referendum and its result before it can take any further action.

Looking forward, I find the probability of an agreement very small: the call, the campaign and the no in the referendum have destroyed that little amount of trust that was left. The lack of trust was the main obstacle to an agreement, more than the relatively small differences on TVA and pensions.

In my view the only, little, hope of avoiding the traumatic outcome of Grexit, is if there was a radical change in the nature of the negotiation and in the agreement to be pursued, with the following components:
1. Tsipras presents a “revolutionary” program (which is appropriate for a hard-left prime minister!) of structural, growth-promoting innovations, to be enacted with a phased but swift approach,
2. Creditors promise a parallel, gradual alleviation of the debt burden, conditional on the gradual implementation of the “revolutionary” program,
3. On the fiscal side, something intermediate between the position of creditors and that of Greece is agreed.

This post was prepared with the assistance of Madalina Norocea.


References   [ + ]

1. See my post on: What went wrong with Greece?
2. See on this aspect: A major step towards a Greek compromise – Finance Minister Varoufakis’s proposal provides a good basis to start discussions by Zsolt Darvas on 3rd February 2015.