How are the southern euro area countries doing in tackling their weaknesses?

There has been a malaise

Overall the experience of southern European euro zone countries has not been good since the euro zone was initiated in 1999 with Portugal, Spain and Italy all founding members and Greece joining two years later. Whether or to what extent this poor performance is due to the supposed structural flaw in the euro zone (an integrated monetary area but not an integrated fiscal or political area) or due to problems in the countries themselves is open to debate. The fact that performance was not very good also in the 1990s compared with previous decades supports the view that the problems lie within the countries themselves although two countries in particular were ultimately hurt by excess borrowing resulting from the mistaken view of markets that the lending within the euro zone was safe. When the 2008-09 financial crisis came from the US to the EU the southern euro zone was hit particularly badly. Initially the worst hit countries were Greece, Portugal and Spain plus Ireland. Ireland was the first to recover while Italy’s problems including those of its banks became worse so the ungainly acronym PIGS remained appropriate swapping Italy for Ireland.

From a societal point of view the biggest problem in all these countries is unemployment, especially youth unemployment. In Greece and until recently Spain youth unemployment is almost 50% (although this does not account for unregistered employment) in Italy and Portugal 40%.

Much advice on offer, perhaps too much

International organisations including the European Commission, the OECD and the IMF constantly call for reform and stipulate a wide range of such reforms. Reforms are also called for by creditor countries notably Germany and the Netherlands and the European Commission has to take account of their views in its own recommendations. The creditors recommendations are inevitably informed by their own self interest. The IMF is also a creditor of Greece and is calling for debt relief but not of its own loans.  Such self-interest is reasonable up to a point. Irresponsible borrowing should not be encouraged. But there comes a point when the pain should be shared. Irresponsible lending which assumes that government loans will always be repaid also should not be encouraged.

The biggest problem with reform recommendations is that they tend to be so wide-ranging as to be telling supposedly sovereign and democratic parliaments how to legislate over a wide range of subjects. This has particularly been the case for the hardest hit country Greece but is also a live issue in the other countries. For this reason I want to focus on those l reforms which I think most important. First are reforms to the labour market, most importantly to modify protections to employees which are perceived by employers as very  burdensome and so discourage taking on employees. The second is the pressing need in several countries to simplify regulations and reduce the cost for starting new businesses and running small businesses.  Thirdly, there is the task of making the rule of law more effective, in terms of independence and impartiality of the judiciary, effectiveness in terms of sanctions and also the time taken to bring about justice. Finally, reforms may be needed to improve the management of public finances, not least in terms of collection of taxes. Decisions about how spending is divided and how much to tax should be left to free democratic choice unless expenditure is bankrupting the country or taxes are utterly crippling economic activity remembering that some countries can be economically successful with high levels of public expenditure.

Spain has led on labour market reform key to employment creation

The most important single reform which can improve the chances that more job opportunities are provided and one which more than most others can be done through a single piece of legislation from central governments is to limit the costs and legal procedures for companies to shed employees. The reason is simply that there is much evidence gathered by a range of organisations like the OECD that, if such costs are reasonable and predictable, companies will be much more willing to take on new employees. The model to be aimed at is one in Scandinavian countries and the Netherlands where redundant employees are given adequate welfare support and crucially access to retraining. However, there has been huge resistance to such reforms in countries like Italy and France from trade unions. Trade unions are a key ingredient in a plural society and should not be lightly over-ridden, but in this instance where they are giving priority to their hold on a diminishing membership at the expense of opportunities for young people, they should be over-ridden. The best example of a country that has reformed its labour market in this way is Spain which began introducing reforms early in the last decade and enacted a major labor market reform in 2012, while in recession.  This reform permitted companies in most cases to dismiss regular contract employees with 20 days severance pay per year worked, compared to up to 48 days previously. There were high levels of job creation in Spain during the boom before the 2008 crash, but during the recession and in the wake of a reform making it easier to fire workers, it went sharply into reverse. From 2014 the economy and employment have been recovering strongly. In Italy Matteo Renzi introduced significant reforms in employment legislation when prime minister between 2014 and 2016. There has been no major impact on job creation so far, though this may be due to the fact that the economy remains weaker than the euro area average.

Such a reform to increase flexibility should not be seen as a complete deregulation of the labour market.  The UK, which has long been one of the most flexible labour markets with high levels of job creation, has kept powerful employment tribunals to protect individuals against discrimination or victimisation, although they are now weakened by cost cutting. However, in Italy a law protecting individual employees was a long cause of controversy with employers accepting paying compensation if found to have dismissed an employee unfairly but arguing that having to take the employee back was disruptive.

More can be done to make life for small businesses easier

Making life easy for people to start and run small businesses should not be controversial but is less easy in practice than might be expected. Two reasons may be postulated. One is that registration usually involves local governments, which are rightly autonomous. Secondly, some parts of southern Europe have a long established culture of non-co-operation and even antagonism between the private and public sectors. Private companies regard government as just a hindrance and don’t like paying taxes while government regards private companies as out to cheat. The resulting behavior of one side reinforces that of the other. Nevertheless there have been significant improvements according to the OECD in most OECD countries over the last eight years. In 2016 an OECD survey found that Scandinavian countries, the UK, Ireland and France were below average for both time and cost required to start a new business. Amongst southern European countries, Portugal seemed the best with well below average time and just slightly above average cost (just over 2% of income per capita). Italy was average for time but high for cost.

Another survey on overall Barriers to Entrepreneurship affecting small and medium enterprises also published by the OECD shows that both Italy and Portugal moved from being amongst the countries with the most burdensome regulations to being third and seventh best in terms of least restrictive legislation between 2008 and 2013. Spain, however, which has as noted done most to reform labour market legislation, retained in 2013 the second most burdensome other restrictions on entrepreneurship, having seen no improvement over the previous five years. Greece did improve but still scored only a little better than Spain.

It may of interest that Italy according to the OECD had just over 3.5m enterprises in 2013 more in absolute not just relative terms than any other country apart from the US (and not much less than the US). A generation ago Italy’s local networks of enterprises both cooperating and competing were seen as a model. They have been less dynamic than hoped in the intervening period but remain resilient. In particular Italy is a (possibly the) world leader in design, particularly but not only clothing, and there has been a moderate return of clothes making to Italy for those willing to pay a little more.

Quality government usually changes only gradually

On the general question of good government, a very interesting and still relevant book called Making Democracy Work: Civic Traditions in Modern Italy by Robert Putnam was published in 1993.  It takes as its starting point the major devolution of government reform which took place in 1970 following 100 years since unification of centralized government. It compared various survey measures of good government seen through the eyes of both individual citizens and businesses and measures of civic participation (partly actual participation in social groups and partly attitudes). It found that regions with a higher degree of “civicness” correlated surprisingly closely with better government performance both through objective tests and as seen by citizens. The higher degree of civicness itself was found to be linked to the history of the regions – ones that had been city states or with local autonomy hundreds of years ago showing much higher levels of civic participation than those that had been under autocracies – most notably in the south. But the book did not find that as a cause for fatalism. Both southerners and northerners were positive about the impact of devolution and improvements on the quality of government could be seen in the south as well as north between 1970 and the early 1990s. While the south remains poorer than the centre and north and with higher unemployment, its standard of living, which had remained very low during 100 years of centralised government, has increased hugely in the decades after 1970. The book is not only relevant to Italy. The differences between regions within a country are perhaps particularly strong in Italy but also exist in most other countries and should be a warning against sweeping generalisations.

Often taking for granted when it operates well, the effectiveness of a country’s legal system including the objectivity and independence of the judiciary, is essential to a good environment for businesses of all sizes to operate and so to economic development. Companies need to be able to enforce contracts and be able to operate without fear of criminals particular mafia-type organisations which have in southern Italy particularly conducted widespread extortion.  In Spain and Italy the judiciary is independent and has been a thorn in the side of allegedly corrupt politicians in both countries, including members of the governing Popular Party in Spain. On the other hand, the system can be very slow, especially in Italy. As is well known Sicily and southern Italy are where the word mafia originated and particularly in Sicily, Calabria and around Naples has had a vice-look grip on parts of the economy. Due to the dedication and bravery of police, public prosecutors and judges, and also the co-operation of businesses in resisting extortion, the power of the mafias especially in Sicily have been reduced though they remain a major challenge and have indeed spread into the north.

In overall terms, I think the four countries I have discussed are all making changes for the better albeit slowly and unevenly and subject to the normal political shenanigans of any democratic country. The devolution of power in Italy has been very beneficial, although inevitably it means differences in quality of government between the regions. It has also overall been beneficial in Spain, despite some bad examples of corruption associated with speculative building in some regions. Outright independence for any region would be a step backwards. Although independence is favoured by many in Catalonia, a geographically small but economically important autonomous community in Spain, I don’t think the majority exists to bring it about.

The issues here discussed are in my opinion more important for the countries’ future than whether or not they remain members of the euro zone, though leaving would cause a lot of disruption and no significant benefit. Criticisms made of euro area policies towards countries dependent on the backing of creditors and of the European Central Bank are mostly valid but their claim that a softer policy would have enormous benefits is exaggerated. Once country Greece is being unjustly treated by Germany and the Netherlands taken into account how much pain it has suffered in the last nine years, the fact that it finds itself host to more refugees relative to its population than any other EU member and the fact that lenders and EU decision makers acted just as irresponsibly as Greek governments, but even in this case the answers to Greece’s economic travails lie more inside Greece than outside.

 

 

What Future for the EU of 27?

Echoes of UK anti-EU opinion are found in the 27

The UK was never a lynchpin of the EU and the immediate effect of its vote to leave has been to strengthen pro-remain opinion in other countries. However, there are strong anti-EU sentiments in many member states and there is a notable lack of solidarity amongst the 27 in facing current issues, so there is no room for complacency. The British desire to blame the problems of modern life on “Brussels bureaucrats” has echoes in many other countries and there are strong parties which like UKIP play on nationalism “we against them” in France, Netherlands, Germany and many other countries. But at present emotions in the 27 are stirred almost entirely against would-be immigrants or asylum-seekers from outside the EU, particularly Muslims, partly because except in Germany there is less movement of intra-EU labour into any of the 27 than into the UK. Moreover no other country has any equivalent of the UK’s anti-EU press (Sun, Daily Mail, Daily Express and Daily Telegraph).

 

A divide remains between east and west

There are two fault lines through the EU-27, that of the former divide between communist eastern Europe and western Europe and that between north and south. The one between east and west reflects the fact that there is much less ethnic diversity in the east and consequently a fear of the consequences of any immigration from outside Europe and the ability of their societies to cope. This explains why there has been such strong resistance to any refugee quotas despite the fact that the numbers being asked of them are tiny compared with the million refugees taken in by Germany in 2015.  Two eastern European countries, Hungary and Poland, have also witnessed a worrying retreat from principles such as independent judiciary and a free and diverse press, which were part of the criteria for their entry to the EU, although the Polish Law and Justice Party is having to contend with a loss in popularity.

 

Another is between north and south

The second divide is across the euro zone where southern countries are struggling with high debt and stagnant economies, while Germany and some smaller countries are doing much better economically and have their public finances under tighter control. (France is only partly a southern country but does have some of the same problems.) It may well be the case that some of their difficulties would have been mitigated had southern countries not joined the euro zone at the start as this led to rising public and private borrowing from 2000 to 2008 encouraged by low interest rates and excessive confidence. But that does not mean that anything would be gained by breaking up the euro zone now. Croatia which is not in the euro zone has similar problems to countries that are in the zone. Short term growth might be achieved by currency depreciation and monetary accommodation of the consequent inflation but at some inflation would have to be brought under control. The labour market problems notably in Spain and Portugal existed before joining the euro. In Spain there was a big rise in employment after 2000 but much of the increase was due to the excessive boom particularly in construction backed by private sector borrowing. The recession in Spain brought about a big rise in public borrowing to a country whose public finances had been exemplary. In contrast Italy, Portugal and Greece were all crippled by high public debt already before the introduction of the euro.

 

Germany has taken role of disciplinarian

Germany has acted as a strict disciplinarian, not because it is trying to exercise power but because it believes that is the right policy for all countries and essential for the stability of the euro zone. It acknowledges a mea culpa in breaking the fiscal rules which Germany itself had insisted on as a foundation of the currency union in 2002-03 which undermined efforts to promote fiscal discipline in other countries during years of relatively strong demand. It has reacted by trying very hard to impose very tight fiscal discipline on itself, perhaps excessively especially in prioritising such discipline over infrastructure repair and improvement. It has a point in not excluding investment from fiscal targets since this can result in unnecessary investment, which will not lead to increased revenue in the future. It should, however, engage in debate on prioritising investment that is either going to become essential soon in the future or which can bring in revenue through fares, road tolls or other charges.

 

Renzi would like more flexibility

At present, the government of Matteo Renzi in Italy can claim to be the main spokesperson for southern Europe, given that his government has by Italian standards lasted a long time (just over two and a half years) and the next largest country, Spain, has been without a parliamentary-backed government for the whole of this year. But he is holding a referendum on December 4th on major constitutional reforms designed to produce a less costly and more effective parliament. He had earlier said he would resign if the reforms are defeated although he has recently been reticent about this. The reforms can be criticized in detail but are part of a wider reform programme that is trying to bring about changes that have long been recommended by organisations like the OECD, IMF, the European Commission, and indeed Germany, to reduce the cost of public sector administration while safeguarding key services like health and education, reduce regulatory and tax disincentives to establishing new businesses or increasing their size by hiring more employees. Renzi is straining at the leash of the fiscal rules to, on the one hand, try to help companies take on more employees by reducing labour taxes and the other to boost public investment; one need is to rebuild after the earthquake around Amatrice in August with buildings able to withstand future earthquakes.

 

On refugees Germany is closer to Italy and Greece than to many other countries

Despite tensions on fiscal policy, Germany is actually closer to Italy and to Greece in that both southern countries are like Germany struggling to take a degree of moral responsibility for the migrants risking their lives in crossing the sea. In the case of those coming to Italy a substantial number are from sub-Saharan Africa. In some cases they are fleeing from war or terrorism instigated by Boko Haram or other insurgents but where only a limited part of a country is so affected they should in theory be able to be returned to another part of the country. However, the process is costly and difficult and should perhaps be accompanied by financial aid. In Greece most migrants are from countries to which return is impossible. Germany is provided some financial aid to Greece to help it make living conditions bearable its many asylum seekers who are no longer able to continue to another country.

 

In the end EU will survive only if it can act as a community

Although aspects of the EU involve a legal framework of rules and enforcement, an equally important aspect is that it is a community of nations trying to act together and share political and ethical objectives. In a way it is a pity that the word Community was replaced by Union in the organisation’s title by the 1992 Maastricht Treaty. In any case, the EU’s leaders should not forget that acting as a community remains essential to its effectiveness and possibly its survival and that not everything can be done through rules or joint institutions, for which there is little appetite amongst public opinion in most member states.

 

With the EU in crisis Commission and other member states should show more solidarity with Greece

 Asylum crisis threatens to weaken EU 

In an interview with the BBC, Manuel Valls, the French prime minister, said that the EU itself was under threat from the crisis posed by pressure of refugee seekers. This on the face of it would seem exaggerated. If some member states are more generous than others in accepting refugees why should that undermine their capacity to work together within the framework of the EU treaties? The Schengen system of borderless travel across most EU member states has already partially broken and could completely break down as member states try to stop or regulate the flows of external migrants. This is a serious blow given the impact of the Schengen agreement on everyday life and symbolism in breaking down barriers. It does not mean that end of the EU, but the fact that people like Mr Valls are talking in these terms is evidence of a deep crisis.

 

At a time of several other difficulties 

The challenge of the asylum seekers is highlighting the differences between and within EU countries and comes on top of several other problems. One of these is the forthcoming UK referendum on whether to stay in the EU, with UK opinion polls suggesting that those likely to vote to stay in or leave are quite evenly divided. A vote to leave would deprive the EU of a major player, which has made a particularly important contribution to the development of the EU’s single market. Furthermore its departure would set a precedent, which would give impetus to anti-EU sentiment on other countries where it is already strong including France, Italy and Poland.

Another major problem is posed by the fact that some of the countries that acceded to the EU in 2004, notably Poland and Hungary have weakened their compliance with political criteria under which they were allowed to join, such as the impartial rule of law, as for example in the packing of Poland’s constitutional court with its own sympathisers by the newly elected Law and Justice government. The attempt by the European Commission to monitor such measures has provoked increased hostility to the EU in Poland and Hungary, and this has become meshed up in hostility to the EU’s strongest country, Germany.

A third problem is the euro zone crisis. Although the threatened departure of Greece from the euro zone was averted last year there are still considerable tensions between countries of the south with high debts and northern countries. Recently there has been an increase in tensions between Italy on the one hand and Germany and the European Commission on the other.

Differences over how to tackle the refugee influx is exacerbating the other differences. There is no simple answer: one policy extreme would mean that the EU abandons any pretence to stand up for human rights of those not already EU residents; the opposite of free entry for all genuine refugees would create unsupportable social and political tensions even in countries like Germany with an initially welcoming attitude. A muddled middle way is the only one that can hope to avoid one or other such consequence.

 

Commission takes wrong approach to Greece

But there are ways in which the EU could do better. In particular the key role of Greece in the crisis should be acknowledged. On January 27th the Commission published a report highly critical of Greece, threatening to expel in from the Schengen zone if it did not do better. This followed a proposal to help Macedonia man its frontier with Greece without consulting the Greek government. Even if the Greek economy were not experiencing the most severe economic crisis any member state has experienced since the early days of the EU, it or any other country would struggle to cope in a humane manner with the huge numbers crossing the sea onto Greek islands. In contrast to the Commission’s attitude a group of academics have put forward islanders that have rescued and helped refugees forward has a candidate for the Nobel Peace Prize.

 

Greece should be praised for what it has done rather than rebuked for what it has not done, and given far more funding to help it manage camps and processing centres to separate refugees from economic migrants and provide migrants in Greece with basic needs in the meantime. It may be that it is will be no longer practical to keep fully open frontiers with Greece given the amount of migrants arriving there, but this should not be portrayed as a punishment but rather as an unavoidable necessity in which Greece needs far more support from its partners.

 

 

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.

Ohi

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.