Spain’s Christmas election: what does it mean?

The results of the Spanish election on December 20th are not clear-cut. Four parties, two old –the centre-right Popular Party and centre-left Socialists (PSOE)—and two new, the left wing Podemos (We can) a movement of local groups which grew out of the 2011 street protests by the Indignados at the time that government cutbacks, and the centrist Ciudadanos (Citizens). The new parties have mounted a significant challenge to the old parties, but unlike Greece failed to dislodge them.

 A fragile lefty-wing coalition may emerge

There does appear, however, to be the possibility of a narrow margin in favour of those who want a change of from the PP, a party whose government in the last four years has succeeded, at considerable social cost, in turning round the economy, but whose moral authority has been weakened by the revelation that the party had for a long time ran a dual bookkeeping system, one above board and one for illegal contributions and illegal payouts. The PSOE is also tainted by corruption but mainly in its regional stronghold, Andalusia. Moreover the PSOE leader, Pedro Sanchez, is relatively new and not seen as tainted by past malpractice. The PP leader, Mariano Rajoy, has by contrast been party leader since 2004 and cannot convincingly claim that he new nothing about what was happening, unless by deliberately turning a blind eye.

The election of 69 MPs to Podemos and 40 to Ciudadanos (out of 350 deputies in the lower house) from none in the previous national election in 2011 are major breakthroughs but ones that were fully expected. Indeed the result for Ciudadanos was in comparison with opinion polls during the campaign the most disappointing of all four main national parties. One reason may be that polls seemed to be pointing towards a centre-right coalition of Ciudadanos and the PP. Some potential Ciudadanos supporters may have moved to other parties on the left because they did not want to prop up the PP.

As it is neither the two national parties of the centre-right nor the two national parties of the left, the PSOE and Podemos, can quite muster the 176 seats needed to hold a majority. The other parties are mainly regional ones, some of whom are on the left, others in the centre. However, because the PSOE and Podemos are more sympathetic to the ambitions of the regional parties (though not as far as wanting to concede outright independence to Catalonia or the Basque Country) they will probably support a left wing government enabling it to have a fragile majority.


Meeting the hopes of its voters will be an uphill struggle

Such an alliance might be portrayed as an anti-austerity coalition but if it tries to live up to such a name it will be wasting precious time. Investors in Spanish government paper have to be kept happy that the government will keep the deb from rising rapidly, otherwise they will charge higher interest rates leaving less available for other government expenditure or in extremis force the government to seek a full scale bail-out (they at present have limited support to help prop up illiquid savings banks) from the European Stability Fund (ESM), thus leading them from the frying pan of the need to keep investors happy to the fire of being told what to do by the Quadriga (the old Troika of IMF, European Central Bank and European Commission plus the ESM).

What the government may be able to do is to distribute the burden of austerity more fairly between the privileged on the one hand and the less privileged and public services on the other. That means higher taxes, and crucially a drive against tax avoidance and evasion. An exception should be made to the relatively small proportion of private wealth going into small and medium businesses. To successfully make significant moves to a more equal society while also promoting continued economic recovery, will require single-minded determination, skill, patience and the willingness of competing parties to work together. At the time of writing this looks a tall order, and the left can be sure that the PP will exploit any weakness or failures.





Will Tsipiras seize the day?

Despite having abandoned most of the policies on which it been first elected in January and in August agreed with creditors to a programme roundly rejected in a referendum on July 5th, the left wing Syriza emerged as the victor of the September 20th election and is again able to form a governing majority coalition with the centrist Independent Greeks. The traditional centre right New Democracy seemed neck and neck in opinion polls a week earlier but was decisively put into second place. Most surprising a dissident group from Syyriza that rejected the agreement with creditors and called for Greece to leave the euro so that it could run it’s own economic policy did not even achieve the 3% threshold required to be represented in parliament.

The leader of Syriza Alexis Tsipiras, performed his u-turn with grace and has managed to make the Greeks feel better about themselves. Has he achieved anything other than to be re-elected. The answer is no. Will he be able to achieve anything? The answer is that he still might and has a better chance as the head of what is still a new team than the old parties New Democracy and Pasok just because his ministers have had less time to learn bad habits and still have a degree of freshness. Nevertheless all power corrupts and if progress is not quickly made old ways may reassert themselves.

Although the agreement with creditors imposes severe constraints on the new government’s freedom of action it still leaves plenty it can do. It should in no way limit Tsipiras’ ability to tackle corruption and reduce the power of vested interests which he has declared as his priorities. Nor will it prevent him from what must be an ambitious reform of the public administration so that civil servants know their job is to serve the public’s interest not their own and to minimise rather than maximise the burden of bureaucratic procedures on individuals and businesses.

There is however one overriding priority: to make Greeks pay their taxes. Unless they do public services will collapse through lack of funding and the better off will retain their privileges at the expense of the large numbers of unemployed or on very low incomes. Tax receipts have probably fallen during recent months when lack of trust in bank deposits have made Greece into a mainly cash economy. The travails of Greece have still not led to any sense that  paying taxes is one of the obligations of citizenship.

A difficulty is caused by the position e of the richest Greeks are shipping magnates. They were given a particularly favourable tax deal by previous governments in order to attract them to live in Greece and spend money there. This a rational reason but it is still wrong. If rich shipping families are seen to get away with paying little tax other wealthy Greeks will ask way they should and if wealthy Greeks pay little middle range businesses and self employed will ask the same question. Addressing the issue is not easy. The shipping companies have to be treated favourably or they will noticeable to compete with those registered in other countries. This does not prevent fair taxation of the income and wealth of individuals. The individuals of course as to whether they live in Greece or not and even if they do they may try to hide their wealth in tax havens. But international cooperation in tracking down this wealth in places like Switzerland has made considerable progress should seek the advice of countries like the US and Germany which have acted

Refugees replace Greece in the headlines

Angela Merkel changes image of Germany

How much has changed in a month! The headlines are no longer about the struggle of the Greek government and people to find a way forward for their becalmed economy but the more traumatic sufferings of the Syrian people fleeing their civil war. The latter is not new: the war has lasted four years and the numbers coming to Europe have been steadily increasing over the last twelve months. Germany was already committed to accepting large numbers of the refugees and local authorities an voluntary organisations were busy preparing to facilitate their arrival. But the numbers have increased, particularly coming through Turkey and the Balkans overland or via Greek islands. Most important Angela Merkel decided that the issue could no longer be treated as a subsidiary problem but had become the greatest challenge facing the European Union this year and perhaps for years to come. Not only the courage and humanity of her decision to prepare to accept up to 800,000 refugees this year and 500,000 a year subsequently, but the extent to which it is endorsed by large numbers of ordinary German people who have openly even enthusiastically welcomed the arrival of refugees, for example at Munich’s main railway station, have been remarkable. Opposition has so far been muted and mainly concentrated in former eastern Germany.

The image of Germany as rigid and hard-hearted particularly in Greece and other southern European countries but also more widely across the EU by its insistence on harsh fiscal austerity and its refusal to countenance debt forgiveness has been overturned. The Greek drama has not come to an end. A second general election this year is to take place on September 20th. However, for better or worse, the wings of the radicals are likely to be clipped. The main contest is between the traditional centre-right party New Democracy and a Syriza separated from its most leftwing component, and committed to implementing a programme of pragmatic reforms agreed with its creditors, not least the hardline German finance minister, Wolfgang Schauble. It has become clear that a dramatically different economic policy would only be possible if Greece were to leave the euro, a choice supported by a significant but minority section of the Greek population. The dramatic decline in living standards since 2009 and the 50% level of young people’s unemployment in Greece have had devastating consequences that are more comparable to the conditions of the 30s than anything in western Europe since the 1950. Nevertheless it is evident to Greece, which has received many desperate refugees on its easternmost islands, as well as the rest of Europe, that the plight of the Syrian people and other refugees is far worse.


Differences between east and west Europe

The refugee crisis has thus done a little to ease divisions between northern Europe and southern Europe, but has opened divisions between west Europe and countries in central and eastern Europe which feel that the refugee problem is not theirs. There are some differences between these former communist countries. The Hungarian government has made it clear that it feels little but hostility to the refugees coming through, even though it knows that they are all heading onwards, mostly to Germany. At least the Polish government has agreed in principle to take 2,000 refugees while putting forward the argument , up to a point valid, that Poland’s demography and economy make it much less suitable to taking large numbers of refugees than Germany. Donald Tusk, the former Polish prime minister, now president of the European Council, has shown the statesmanship to take a wider view of the issue than he probably would have if still prime minster of Poland.

The new president of Poland, Andrzej Duda, has pointed out that the situation in its neighbour Ukraine remains of concern to Poland, much more so than to countries further away from Ukraine. There are substantial numbers of Ukrainians in Poland. Although only a minority of those there at present come from eastern Ukraine and so are refugees rather than migrants in search of employment the numbers of both could rise if the situation deteriorated. In recent months Ukraine has not been very much in the news and to an extent no news is good news even if the low level war in the east continues to cause loss of life. The government is trying to put a bill through parliament to give very substantial powers to the provinces of Donetsk and Luhansk including control over the police forces and courts while allowing Ukraine to regain control of its eastern border, as agreed with Russia at Minsk. Such an eventuality looks theoretical at present but the bill shows that the government is rightly willing to make sacrifices in  the search for peace and stability. In doing so it provoked a violent response from the far-right Svoboda group which killed a policeman outside parliament and the loss of support in parliament from the nationalist Radical Party.


Quotas may not work but sharing is essential

The refugee crisis is seen differently across the 28-member EU, as is the case with other issues like the troubles of southern members of the euro zone. No one is suggesting that other countries should open the doors to the extent that Germany is doing. The 160,000 for the rest of the Schengen area proposed by the European Commission is several times lower than the number Germany is prepared to take. In the end rigid quotas probably will not work since it is hard to say how Syrian or other Muslim refugees could be settled in a country as hostile to them as Hungary even if its government agreed. Nevertheless a degree of sharing is required if the EU is to hold together.

Anti-system parties adapt to opposing forces

The agreement reached between the Greek government, led by the leftwing Syriza coalition, and representatives of Greece’s creditors on August 11th for a third loan to avoid default, following those in 2010 and 2012, increases the chances that Greece will stay in the euro zone, despite uncertainties over whether the government will be able to implement what it has agreed to and as to whether the creditor governments from the rest of the euro zone will be willing at some point to make the debt manageable.

It means that – apart from a significant dissenting minority—the formerly anti-system Syriza has succumbed to the rules of the euro zone. This development can be looked at negatively as the denial of democratic hopes of the Greek people but there is still the chance that the new government can prove to be radical in the Greek context.  It can remodel the administration to work for the public rather than in its own interests or those of privileged clients as has often been the case; it can reform the tax system to enforce payment of taxes, but for this to be possible it will have to ensure that payment of taxes is compatible with Greece’s large number of small businesses thriving and expanding. Despite this proviso it cannot act to reduce inequality. There is still scope to hope that a government not formed of one of the two that have governed Greece since the end of military rule in 1974 will be able to do what the others failed to do, namely transforming the enduring Greek view of the state as opponent of the individual citizen to one of a state serving the citizen.


Spain’s Podemos likely to make gains but will also have to compromise

In Spain two new parties, Podemos (We Can) and Ciudadanos (Citizens), will at the end-November elections in similar manner challenge the longstanding hold on power over 30 years of two established parties of centre-right and centre-left.  While Ciudadonos is a centrist party, Podemos is very similar to Syriza, except that Syriza is a coalition of formerly existing small parties, while Podemos has emerged as completely new since the 2008-09 crisis. It achieved considerable breakthroughs when local groups supported by Podemos won sufficient seats on the town councils of Madrid, Barcelona and some other cities, to appoint mayors. The new mayor of Barcelona, the 41-year-old Ana Colau was previously running a campaign group against evictions of families unable to pay mortgages while the new mayor of Madrid, the 71-year-old Manuela Carmena, had in the past been a leading member of a law firm focusing on employment law, who had seem some of her colleagues in the firm assassinated by right wing extremists soon after the restoration of democracy in 1975.

Creditor institutions are now claiming that a Greek recovery was beginning at the time of Syriza’s election victory in January 2015, but any such recovery was highly tentative and had not had any impact on the great majority of the Greek public. The Spanish government of Mariano Rajoy (Popular Party) can point to expected 3% growth this year and half a million extra jobs in the year to mid-2015. The opposition, which includes the traditional socialist party (PSOE) as well as the two new parties, can point to major corruption cases implicating the PP and continuing near 50% youth unemployment. Despite Podemos’ success in major cities, the two new parties, alone or together, are not likely to win the election. But they should become a significant presence at national level and could be part of a coalition of the centre-left.


Portugal prepares for a traditional two party contest

Portugal is holding general elections in early October. Remarkably, despite the severe austerity the country has experienced, there is no sign of any increase in support for non-traditional or existing far-left or far-right parties. The elections will be a close contest between the governing parties –the Social Democrats  and  Christian Democrats – which have recently united to fight the election– and the opposition Socialist Party. One reason may be that, despite government cuts and high taxation reducing living standards unemployment at 11% is much lower than the rates of 23% and 25% in Spain and Greece. Another could be that an active and independent judiciary has gone so far as detain the former Socialist prime minister, Jose Socrates, in prison since November 2014 awaiting trial for corruption and Ricardo Salgado, the head of the country’s largest failed bank, Espirito Santo was put under precautionary house arrest in July pending trial on a range of charges connected with his leadership of the bank. The public may therefore not feel the establishment is able to act with impunity.


Real change may still be possible

In Greece and Spain, anti-system parties have made gains and are likely to do so again in the November general elections in Spain. But they have been and will continue to have to compromise with internal and external forces they oppose. Even so they bring new energy and challenge vested interests. Some real change could be achieved, although it will fall well short of their ambitions.

At last IMF says the king has no clothes

It has been known for some time that the IMF considers Greek debt unsustainable and that any credible programme requires writing off a substantial proportion. But it is only on the eve of the Greek parliament voting on a brutally severe package of measures that it has said so openly and formally. Now, the creditors must be ready if the Greeks are to be expected to adopt measures which pile more pain on its already strained social fabric, to do what they are telling the Greeks to do: to face up to reality and admit that they have also made huge mistakes in the handling of Greek membership of the euro rate back to its flawed admission in 2002 and that by lending to Greece irresponsibly they did far more harm than good to the Greek people, acting little better than a backstreet loan shark.

It is pointed out that Greece’s votes for the Syriza government in January and in the July 5th referendum have to be balanced against the democratic wishes of the other 18 euro zone member states. But it should also be pointed out that whereas every Greek man, woman and child (except for a tiny minority with wealth held abroad) has had their lives drastically altered for the worse over the last six years, the impact on the lives of German or Dutch workers of writing off half of Greece’s debt would hardly be noticeable. Indeed actually it would just amount to acknowledging the reality that the money was lost when it was recklessly lent in the 2000s. Politicians in such countries would suffer scorn by the popular press but if the issue was tackled there would then be a reasonable possibility that Greece could recover and so no longer dominate the politics and newspaper headlines of the euro zone.


I would have voted Yes. But the Greeks by a decisive majority voted No–Ohi–as they did to Mussolini’s ultimatum in 1940 and Ohi Day is still a national holiday.

The vote is against the humiliation to which the Greeks have been subjected by its euro zone partners and the “troika” (European Commission, European Central Bank and International Monetary Fund) since 2009, and which was again manifest when the Syriza government finally produced a serious budget programme which was welcomed by the European Commission but which was sent back by the IMF with red lines and corrections like a teacher marking poor homework.

The IMF represents many nations with incomes below Greeks even today, and well below the average of the euro zone, but has lent funds subscribed to by such countries. It should never have been involved in the Greek bailout back in 2010 and its loans should be bought out by the other euro zone countries who can well afford to do so.

The vote was against humiliation but the Greek government has to recognise that it cannot be against austerity. Even if the entire Greek debt were written off tomorrow, the government could not spend more than it receives in taxes and that means both high taxes and severely constrained spending ie austerity.

The resignation of the former finance minister, Yannis Varoufakis, immediately after the result of the referendum was his most statesmanlike move and a welcome development since he had shown no capability to grapple with the management of Greek public finances.

This resignation does mean that a last effort to agree a new bail-out may be worth a try since there was not very much difference between the final positions of both sides but hopes of success cannot be high.

In the event that an agreement remains elusive, the alternative will have to be embraced—a new currency for internal use, although the euro will still play a key role as it will remain the preferred currency for anyone who has access to it. That does not mean leaving the EU and must not mean that Greece is no longer a concern to the other euro zone countries or the EU institutions. If the outcome is euro zone exit that is a severe defeat for the EU project; if it meant leaving the EU either officially or by Greeks no longer feeling part of the EU that would be a catastrophe of historic proportions for Greece and for the EU.

As argued in the previous post, the fault for either outcome would lie at least as much with the other euro zone countries and the EU institutions as with the Greeks. The acknowledgement by Wolfgang Schauble, the hardline German finance minister, who has sometimes given the impression of smug superiority, that Greece’s partners would retain responsibility for the destiny of Greece, is to be welcomed. But that responsibility can only be what the EU has failed in so far to do, namely to give the Greeks a real chance to help themselves.

Game of brinkmanship between Greece and rest of euro zone may be at decisive stage

Neither side is being responsible

The game of brinkmanship between the Greek Syriza government and the other euro zone countries, together with the EU institutions and IMF, has been going for nearly five  months since the January Greek election and the best that looks likely to be realistically hoped for in the coming months is that it continues without Greece falling out, or being pushed out, of the euro. It is not an edifying spectacle on either side. Alexis Tsipiras, Yannis Varoufakis and their colleagues have shown no sign of being able to manage an economy of any kind, whether communist, socialist of capitalist, let alone one in the condition of the Greek economy. But the posturing on the other side has been equally unhelpful and has indeed encouraged the government to go on playing to the gallery rather than knuckling down to deal with the real problems. It is quite unreasonable to expect a country on its knees to achieve the size of primary surplus on its government accounts of the likes of 3.5% of GDP which is being asked of it and demanding that it does so provides the excuse for the Greek government to go on arguing rather than addressing the problem of maintaining a small primary surplus up to 1.5% of GDP which is itself hard enough given the massive decline in the tax base due to both falling GDP and increased tax evasion and the pressures on social services and maintaining livable incomes for pensioners and others. Spread out between the other euro zone members most of them much richer and many much larger than Greece the difference is negligible, far less that the potential costs of Greece leaving. It is not necessary to insist that Greece reform its pension. This may be advised but if the government refuses and then finds it cannot meet its pension or other domestic commitments that is the responsibility of the Syriza government to explain to the Greek electorate.


Creditors should admit they have also made mistakes

The issue of moral hazard may be raised, the principle that economic actors should not be able to walk away from the consequences of reckless actions. But that should apply as much to those who have made foolish loans as those who have borrowed too much. While the present Syriza government can only be held responsible for the mistakes since it was elected, the rest of the euro zone is responsible for:

1)   letting Greece into the euro zone without a proper look at its accounts;

2)   the ECB’s failure to warn bank lenders that the risk premium on lending to Greece should have been far higher and also for not highlighting the country’s massive current account deficits;

3)   the failure of national regulators and national central banks in countries like Germany, France and the Netherlands including not to warn of the same hazards;

4)   the decisions by other euro zone government in 2010 and 2012 to bail out the private sector lenders so letting them get away with reckless lending and  transferring the losses to the public sector while not addressing Greece’s evident bankruptcy;

5)   the failure of Eurostat and the European Commission to question figures from the Greek statistical office including allowing an  increase of the GDP estimate, not only before the collapse of the Greek economy;

6)   the continued unwillingness to admit that the money lent to Greece is already lost due to the above mistakes because of not being prepared to admit such mistakes and instead placing all the blame on the Greeks.

Greek politicians administrators and the Greek electorate have indeed to take a lot of blame but they have suffered unprecedented declines in income, one of the two major parties that have dominated Greek politics since the end of the military dictatorship in 1974 has been virtually destroyed and the other ND is now out of office. The new government has been elected on the unrealistic claim that austerity can be abolished (which would not happen even if all Greek debt was wiped out). It needs to admit that not all its rhetoric is actually applicable to the condition of the Greek economy. But if the other side (the rest of the euro zone and the EU institutions) were to accept responsibility for their mistakes they would be in a better position to argue that the Syriza government takes a responsible approach to the challenges it faces.


Stop pretending that Greece is being helped

The rhetoric of the institutions and other member states should also be changed to point that since Greece will have to run primary surpluses, even small ones, it is not in fact being offered any more help. The only help it was ever provided was the poisoned help of cheap loans before the crisis. Not surprisingly if the false picture is given that Greece is taking more and more help, the taxpayers of other member states will protest. But the money Greece was lent is already clearly unrepayable. To pretend otherwise is far from helping Greece. It is making any chance of the Greek economy’s recovery more difficult and distant.


None of this is to defend the Greek government’s policy prescription. But the lack of reality in the external demands made on it is doing nothing to help it face domestic economic realities.


A Greek exit default, leading to a Greek exit from the euro zone, may be imminent. That would look bad from the euro zone, but much worse would be a Greek exit from the EU. If Greece does exit the euro zone the Greek question will not have gone away.



To tackle present challenges Greece and its euro zone partners need to overcome antagonism over past wrongs

In the epic of Greece’s adventures in the euro zone a small measure of encouragement  can be drawn from the agreement of the Syriza led government to pay its debt servicing instalment due to the IMF on April 9th and its ability to find the funds to do so. But the country is likely to stagger from one funding crisis to another every few weeks over the coming months so long as it is unable to negotiate a comprehensive new programme with the EU institutions and other euro zone countries. Such a programme mst inevitably bear some resemblance to the hated Memorandum between the previous New Democracy government and the hated Troika (IMF, ECB and EU Commission), which Syriza pledged to renounce. But there also can and should be differences, otherwise the democracy which the EU would claim as fundamental to its values has become a sham.


Troika arrangement is flawed

For a start the Troika itself should be re-appraised.  Although it is not sure that it will be able to continue to do so, Greece has rightly felt an obligation to meet its IMF obligations (IMF debt being about 10% of the total) given that the IMF pools the funds of countries from all over the world, many much poorer than Greece. But for that reason the IMF should not be a lead player on what is a euro zone problem and one which the euro zone which taken as a whole commands enormous financial resources. Its role should become purely advisory. The ECB’s role should also be changed. In financial terms it is the motor of the euro zone and so has to be fully involved in the discussions but it is not a political institution and as such should not be taking decision except ones which strictly entail the sound functioning of the euro system. The Commission should continue to play a central role since the 28 commissioners are almost all formerly elected national politicians put forward by their national governments and are accountable to the European Parliament.  Clearly however the other national governments of the euro zone are a key part of the picture. The chair of the euro group of finance ministers, Jeroen Dijsselbloem, the Dutch finance minister, has a key co-ordinating role, and it is appropriate that he is from a country which has been close to Germany in its economic thinking but is not Germany.


Time for a programme of economic recovery

Secondly, after six years in which Greece has suffered more economic pain than any country in the EU since the 1940s, the programme must be focused on economic recovery. This must include further pursing measures to facilitate business growth and expansion some of which such as labour market reform the new government wanted to reverse. It should also encompass a much more active investment programme from the EU budget and European Investment Bank. Jean-Claude Juncker’s €315bn EU-wide investment programme a centrepiece of his programme before and after being elected by the European Parliament as the new Commission president seems to have gone off the radar. It would make good sense for Greece, as the most troubled economy in the EU to take a pioneering role as a showcase for what can be done if the funds are used imaginatively and appropriately in tackling the existing situation and future prospects of Greece rather than being hidebound by the thinking of a generation ago when the EU’s spending was expanded under Jacques Delors.


Stakes are very high

The future of Greece is a key political issue for the EU. Apart from the anomaly of Greenland (an autonomous part of Denmark) no country has so far left the EU or euro zone.  If Greece were to leave or be forced out of the euro zone it could still be part of the EU, but it would be an embittered country whose continued membership would be tenuous. It would be a potentially disastrous precedent for other countries.

The high political stakes have been highlighted by the trip of Alexis Tsipiras, the Greek prime minister, to the Kremlin and apparent attempt to curry favour with President Putin, at a time when the latter is provoking the EU by fomenting civil war in Ukraine in punishment for Ukraine having wanted an association agreement with the EU. Insofar as he is looking to Russia in order to emphasise the geo-political implications of what happens in Greece, that is a reasonable way to remind EU politicians that there is more at stake than whether EU countries get back the money they have lent. However, in seeming to condone Russia’s de facto invasion of Ukraine he risks losing sympathy for Greece. Bad as Greece’s situation is, unlike Ukraine (a poorer country than Greece and one that also has a debt problem), its territorial integrity is not seriously threatened despite its age-old concerns with regard to Turkey. If Greece is not willing to show any solidarity with Ukraine it will struggle to argue that its fellow euro zone member states should show solidarity to Greece.


Greece’sEU partners need to take long term view

If Greece needs to take a more enlightened view of its self-interest, so do its euro zone partners. The position of Germany and the tensions between Greece and Germany are of huge importance but it also must be remembered that other countries in the euro zone have also lent to Greece  and that many of them take a harder line even than Germany.

Given that the future of Greece is of historic importance in the story of the EU, German politicians should realise that history cannot be ignored. With most of Germany’s western  EU partners, a process of reconciliation took place in the late 1940s and 1950s, in connection with the formation of NATO the Council of Europe. the European Coal and Steel Community and the European Economic Community; and a similar process took place with central and eastern Europe in the 1970s as part of the Ostpolitik initiated by Willy Brandt and then in connection with the unification of Germany in 1990 when Germany accepted its loss of territory to Poland in 1945 and the expulsion without compensation of millions of Germans from Poland and former Czechoslovakia. This process of reconciliation does mean that relations between Germany and these countries is about the present and future, and to bring up the Second World War in relation to today’s politics is regarded as against unwritten rules.

No such process ever took place with Greece one of the countries to suffer in terms of loss of life and economic damage from German occupation.

Moreover an aspect of the Greek crisis is whether the new Greek government has to be regarded as responsible for the behaviour of previous Greek governments and whether over the coming decades Greece should be able to look to future not overburdened by the consequences of the past mistakes.

It should be added that Germany is not the only country with historical issues in relation to Greece. After the Second World War, the British supported the Greek right in two civil wars against the Greek Communist-led left which had led the resistance to Germany.


Historical wrongs do not take away responsibility to address the challenges of today

Once all that has been said, the Syriza led government of Greece needs to realise that its main challenge is not to settle historic grievances or to negotiate with its creditors but to prove that it can make a success of its decision to try to remain in the euro zone. That does require the understanding and help of rest of the euro zone but the main responsibility rests with the Greek government itself: to manage the public finances on both the revenue and expenditure side much better than in the past and create the conditions for economic recovery. The Syriza government may be suspicious about the merits of foreign business investment, but that is all the more reason that it must encourage Greek businesses to invest through measures such as attacking corruption, reducing unnecessary regulation and improving the legal system.  It would not be in the interest of Greece for its partners to take a nonchalant attitude to these matters as they unfortunately did in the period after Greece joined the euro zone. But Greece’s partners should also not provide an excuse for the Greek government to avoid its main task by making demands which understandably make the Greek electorate resentful.































Euro zone must help Greece find a way to economic recovery

At least the Eurozone governments and the newly Greek government after two weeks of tense negotiations (which some described as a “game of chicken”) come to an agreement on policy parameters to tide them over a period of up to four months in which to discuss how Greece should approach its economic future on which its political future as part of the EU and NATO also depend. Germany’s finance minister, Wolfgang Schauble, who played a key part in the negotiations along with Jeroen Dijsselbloem, the Dutch finance minister, and chair of the group of euro zone finance ministers, said that gratuitous insults to today’s Germany comparing it to Nazi Germany did not help the Greek side. In itself this may be a reasonable point, but Germany’s most widely read tabloid Bild Zeitung has for the last six years been building up a picture in the German public of Greeks as feckless work-shirkers which has influenced the political debate and is indirectly reflected in the somewhat patronizing remarks about Greece by German (and also Dutch, Finnish and other) politicians who have never had to deal with in their generation anything like the Greek economic depression of the last six years, which is more comparable to the economic hardships of Europe between the wars than anything endured by any EU country since 1950.

The issue that should be discussed in the next four months is quite simple: how to enable the Greek economy to be start to provide employment and hope for its people, especially young people. That is how it is seen in Greece. Tragically it is not how it is seen in much of the rest of the euro zone although the political cohesion of the euro zone and the EU itself actually depends on a positive answer to the question.  Some of those who rebelled against agreeing with the Eurozone-Greek agreement in the Bundestag actually said that the agreement encouraged “moral hazard”, in other words implying that the Greek people had not yet suffered sufficiently from the policy mistakes made by their governments in the decade before the crisis to have been warned against making the same mistakes again. They imply that there should be no moral hazard for those who voluntarily made the foolish decision to lend money to Greece in the early 2000s, loans which created a bubble which was actually harmful to the Greek economy.

It is not fair to compare Germany’s present government with the Nazis as some Greeks have occasionally done, but it is fair to point out that six years after the end of the Second World War the countries which had formerly been Germany’s enemies were willing to provide the economic conditions for Germany to make a new start, consolidated by the 1953 London agreement which halved Germany’s debt. Surely if Germany deserved another chance in the early 1950s despite its earlier policies and their impact on its fellow Europeans, Greece deserves another chance now. However, although Germany  is seen as the main protagonist vis-à-vis Greece, it has to be said that there are many other countries whose agreement to a longer term deal with Greece cannot be taken for granted.

Whether Greece can recover depends on part on its fellow euro zone members but it does also depend on the new Greek government. First,  although right to resist ever-increasing primary surplus demands it will have to manage the public finances to maintain a primary surplus, and this is not compatible with fulfilling many of its promises. Secondly, although it understandably resists an unthinking continuation of the whole policy prescription imposed on it by the hated troika (IMF, ECB and European Commission), there are parts of the policy which are essential to providing the conditions for the private sector to generate new jobs, including reducing the costs to employers if they have to dismiss employees for economic reasons and opening up trades and professions to new entrants. Such changes are also encouraged by the OECD, an organization which the government refers to more than once in the policy outline it has given to euro zone governments. There are other parts of the prescription that the Syriza government is committed to, such as measures against corruption and tax evasion.  There are also some it can legitimately question. It has agreed to continue with privatisations in progress but should be entitled to question the benefits of further privatizations. The sale of assets can only make a modest contribution to reducing debt and takes away potential sources of future government revenue. Sometimes it can go badly wrong as for example in the case of Croatia’s privatization of Pliva to a foreign investor, which proceeded to close the company, which had a good track record of research and development of pharmaceuticals.

Germany risks losing EU moral leadership over handling of Greece

Germany, led by Angela Merkel, is at present the leading country in the EU and deservedly so. The standing of President Hollande though bolstered by his sure handling of the crisis caused by the shooting of Charlie Hebdo staff and Jewish hostages, is weakened by his having come to power on the basis of policies that could not work and have had to be reversed; the UK’s policy towards the EU changes day by day largely driven by the nationalist UK Independence Party and the rightwing of the governing Conservative Party; and, though Italy has a stronger than usual government under the youthful Matteo Renzi, that follows 20 years dominated by a politician in constant trouble with the judiciary for tax evasion and other illegal business practices, and Renzi acknowledges that the standing of Italy depends on the success or otherwise of a 1,000 day reform programme.

Germany has achieved not only political stability and economic strength, but also moral leadership resulting from a number of factors;

First, it has achieved what can rightly be called a social market economy. Its competitiveness is combined by company structures which give employees a large say through works councils and supervisory boards and a large proportion of companies are located in their communities and feel a social obligation to those communities particularly in providing younger ones with high quality training schemes. Trade unions though they come sometimes cause disruption through industrial action still have a respected role in large parts of the economy.

Second, Germany has a consistent foreign policy based on support for the EU, and for NATO as a defensive alliance, while taking a very cautious approach to military interventions elsewhere in the world. With regard to the EU’s largest neighbour, Russia, Germany has made strenuous efforts to achieve good and stable relations but has recongised that Russia’s incursions into Ukraine are unacceptable and have to be resisted by economic sanctions.

Third, Germany has in recent decades, become a country open to large scale immigration. Although immigration under the free movement principle from other EU countries is higher than to the UK it has not led to controversy and it has taken more refugees from Syria than most other EU countries (albeit little in relation to those in Lebanon, Turkey and Jordan). The anti-Islamic Pegida movement is a cause for concern but its support is still much less than for the UK Independence Party or France’s Front National, and it has been categorically condemned by Mrs Merkel.

However, although German policy under Angela Merkel and the finance minister, Wolfgang Schauble, has contributed to keeping the euro zone together since it was hit by crisis six years ago (first in Greece, but then spreading), the soundness of its policy has been open to question as has whether it is a genuine European policy or one designed to protect narrower German interests. In the early years of the euro, Germany, despite having strongly insisted that members of the euro zone must be underpinned by strong economic fundamentals as set out in the so called Maastricht criteria in the 1992 Maastricht treaty, failed to enforce these criteria. Countries were allowed to join the euro zone which only on a very generous interpretation of the rules met the Maastricht criteria, and most egregiously Greece joined two years after the others on figures which it was known had been manipulated by advisers from Goldman Sachs. While Germany was itself breaking the Maastricht rules in the early 2000s, investors poured money into Greek and other south European government bonds and banks with no effective warning of the dangers from the European Central Bank then still largely dominated by German thinking (its then chief economist, Otmar Issing is German).

Germany acknowledges that it made mistakes during this early period in the history of the euro, but the only lessons its policy makers draw is that fiscal discipline must now be imposed ruthlessly in very different times. They do not want to allow Greece,  after six years of economic and social turmoil, Greece should be allowed a new start and that even a small part of the adverse consequences of past mistakes should be borne by the richer countries. Unattributed comments from German government sources have suggested that Germany would be relaxed about Greece leaving the euro, if a new government  questions the policies being imposed on it and whether it can ever reasonably be expected to pay back its foreign public debt. If, after suffering more than any other EU economy has ever suffered since the beginning of the euro, in order with the aim of remaining in the euro, Greece were to be effectively expelled because of disagreements with a newly elected government, the economic contagion might be containable (as it would not have been in earlier years), but the political contagion resulting from a breakdown of EU solidarity would be unpredictable and irreversible.

It is understandable that Germany does not want to sign blank cheques for transfers to poorer EU members similar to those West Germany has provided and still is providing to other Germans in eastern Germany. The EU, Germans reasonably insist, is not a “transfer union”. But, with Greece now running a primary surplus (excluding interest payments) on its government accounts, demands that it should fully service and eventually pay back its 177% of GDP debt are in effect demands for transfers from Greece to richer countries in exchange for the poisoned chalice of inflows in the 2000s whose impact on the Greek economy was almost entirely harmful.

That said, it has to be admitted that a negotiated writedown of Greek debt will not in practice be easy or quick. The more aggressive stance of the victorious Syriza towards the demands of the Troika (IMF, European Commission and European Central Bank) can not be seen to be immediately rewarded in preference to New Democracy’s more cooperative approach.

Secondly, although Germany does to a considerable extent pull the strings of the Troika, it is not all-powerful. First the IMF cannot consider any forgiveness of its debt. It is not an EU institution and represents many other countries, mainly much poorer than the EU. The IMF can continue to offer advice from its wide experience on policy reforms but it cannot be part of the debate on fiscal obligations within the euro zone. The European Commission and the ECB with regard to its role in the Troika–,which is completely separate from its main function of setting monetary policy on which it is independent–are effectively constrained by euro zone member states, of which Germany is the most powerful, but not of course the only one. Through the European Stability Mechanism all other euro zone countries, both strong and weak, have stakes in Greek debt and would correspondingly share in any debt write-down. Logically opposition to such a write-down should come most from the weaker countries though that does not seem to be the case. The most hardline stance is that taken by the prime minister of Finland, Alexander Stubb. Finland presents a unique problem. It is an anomaly in the euro zone in that it is the only Nordic member and its original decision to join was taken by the government of the time against a much degree of opposition than in other member states at the time of joining. The government there is under pressure from the nationalist True Finns (as though other parties were not truly Finnish) which makes a big issue of providing “help” to allegedly profligate southern Europeans. Finland might have to be treated as an anomaly and excluded from any deal. Of more concern should be adding to the debt of weaker member states but given the relatively small size of the Greek economy, and that lending to it is shared between all the other euro zone states, a substantial write-down of the €320bn debt is not going to have a dramatic impact on any of the others.

A final concern is to what extent a write-down of Greek debt would lead to other indebted euro zone countries to demand their own write-downs. But the only other country which may need such a write-down is Portugal and this would be to a lesser extent than for Greece. Italy’s public debt to GDP ratio is 130% but the country has lived with a similar ratio for 20 years, since before it joined the euro, and a high proportion of its debt is held domestically. Ireland also has a high debt to GDP ratio, but is now coming out of its prolonged recession and has always despite cuts in living standards, been one of the richest countries in the euro zone. Spain’s public sector debt is lower  and similar to that of Germany’s.

Moves to tackle Greece’s unmanageable debt will take time and the new Greek government will have to ensure that its accounts remain in primary surplus, but after six years of painful measures, it would  be wrong to prevent it from taking measures to ease the hardship of the most vulnerable people or to push it into even deeper cuts in expenditure to meet the demands of creditors and even more wrong to remove Greece from the euro zone as an answer to an impasse in the negotiations.