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.

 

 

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