Can Spain’s new parties bring new vigour to Spanish politics or will there be deadlock?

 

On January 13th, the new Spanish Parliament, the Cortes, met for the first time following the election of December 20th which gave significant numbers of seats to two completely new parties formed since the previous election, the left wing Podemos (“We can”) and the centre-right anti-corruption Ciudadanos (“Citizens”). The emergence of one, let alone two, new nationwide parties winning substantial numbers of members of parliament, is a rare event in Europe (or outside Europe). The only other example in a large European country this century is the Movimento 5 Stelle (M5S) in Italy. The formation of new parties, despite making government formation more difficult is in the opinion of InsightEU, a positive development which has the potential to re-invigorate democracy. The ability of the two parties to continue to flourish is therefore important for Spain and indeed for the EU as a whole. To do so they have to steer a difficult passage between being simply a protest party determined not to sully itself with real life compromise and treating the pilloried establishment parties with the modicum of respect needed for any negotations and being sucked into coalitions where they have to share responsibility for government and its inevitable failures and in a worst case scenario come to be seen as complicit in a system which they have been able to do little to change. M5S has avoided the latter but at the cost of remaining essentially a protest movement. But the Italian electoral system has meant that M5S is in any case an opposition party. In Spain the electoral result on December 20th and the refusal of the leader of the established Socialist Party (PSOE) to form a coalition with the party governing Spain until the December 2015 election (and still the provisional government) the right-of-centre Popular Party (PP), mean that the two new parties’ choices will be key to determining whether a government can be formed and win a vote of confidence or whether as must happen if no government is formed within two months of parliament reconvening, another election is called. In the latter event it would be likely that voters would move towards the PP as the largest party and therefore the one most likely to provide a majority government.

 

Sub-plot in Catalonia could prevent progress in Madrid

Pedro Sanchez came back from an early Janurary visit to Portugal extolling the recently formed coalition there between the Portuguese Socialist Party and two parties further to the left including the Portuguese Community Party. Sanchez has called for a left wing coalition in Spain, as was suggested as a likely outcome in our post of December 24th, but this now looks very difficult. The Catalan nationalist parties, which have just formed a new regional government, are set on their demands for a referendum on outright independence. Podemos favours such a referendum but the PSOE has promised to oppose it. Thus a coalition including the PSOE and the Catalan parties is impossible, while one including both the PSOE and Podemos looks very difficult. Not only is there the inevitable mistrust between two parties competing for the left wing vote, but there is also the whole issue of the future survival of Spain as a nation. Moroever, without the Catalan parties, Ciudadanos would have to be included to make a majority in the Cortes.

 

Can Podemos compromise enough to allow for new government?

It is to be hoped that Podemos is willing to modify its position on a referendum in the near term. It would be very unfortunate if a new party formed to combat the injustices of a 21st century economy were to be diverted onto the path of supporting nationalism of a kind little different in essence from the 19th century nationalist movements. There is some right and wrong on both sides of the referendum argument. On the one hand, the Spanish establishment needs to understand that if the majority of Catalans feel over a long period that they are not respected in Spain and are thwarted from fulfilling reasonable expectations as resulted from the constitutional court’s overruling of an agreement with the previous PSOE government for increased devolution, this will undermine the legitimacy of Spain. On the other hand, where pro and anti independence opinion is quite evenly divided and also volatile, a referendum which gave a little over 50% to a pro-independence question on one day but could be different if held a few years earlier or later, is a very flimsy basis on which to overturn the 524 years of unity since the merger of the Kingdoms of Aragon and Castile in 1492.

Whatever the pros and cons of the argument for Catalan independence it is almost irrelevant to the issues of inequality and lack of opportunity which affect all parts of Spain (as indeed many other countries).

Ciudadanos appears more willing to take the risks of entering a coalition government than Podemos. A possible way forward, though not one likely to guarantee a government to last the four-year parliamentary term, would be a minority coalition between the PSOE and Ciudadanos backed from outside government by Podemos, in return for meeting the two immediate demands that Podemos has made: a halt to banks repossessing homes from those unable to meet mortgage servicing commitments and free medicines for the elderly. Such demands should be possible to meet without endangering the credibility of Spain’s fiscal policy.

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.

 

 

 

 

VW emissions scandal suggests EU regulation is weak, but Commission shows no sign of wanting to do anything to strengthen it

The fact that Europe’s leading auto manufacturer had been brazenly undermining the purpose of regulations designed to limit poisonous emissions from its diesel cars has made a fool of the EU’s regulations to limit air pollution.  The fact that VW’s ploy was discovered in the US where only 3% of cars are diesel compared with 50% in the EU, adds to the reasons why the EU and its member states should be embarrassed. Because emissions testing is in the hands of national agencies who are close to the manufacturers themselves rather than independent bodies nationally or EU-wide means that it is unlikely that the ploy would have ever been uncovered in the EU. The cheating carried out by VW and more broadly the fact that, for all cars, there are major differences between emissions in laboratory tests and what is actually emitted in normal driving conditions are a major factor why member states are flouting EU legislation on air pollution but unable to comply short of drastic measures such as driving bans.

Given these facts, it might be expected that the Commission would be highly concerned and be proposing measures to require vehicles to be recalled and adjusted to comply with the law after the removal of defeat devices. In fact, it has almost completely ignored the scandal, apart from a Fact Sheet released on September 25th. A search on the Commission’s website for VW produces its latest result in 2013 (which boasts that VW was then the global company with the highest spending on research). The environment commissioner, Karmenu Vella, has not mentioned the subject in recent speeches. By contrast, the transport, internal market, industry and environment committees of the European Parliament and even the UK transport minister, Patrick Mcloughlin, have called on the Commission to investigate. If anyone in the Commission is doing so, it is being kept very quiet. From its lack of response so far, it can be surmised that Jean-Claude Juncker, the Commission and his fellow commissioners do not want to do anything that might upset the largest member state, Germany, or to give the impression that it is throwing its weight around. The commissioner for better regulation, Frans Timmermans, has not seemed concerned about the failure of EU regulation to achieve its aims, which suggests that for him better regulation means less regulation. We can conclude that the UK government’s campaign for a less interventionist Commission, helped by business lobbying and similar if less strongly expressed views on the part of other member states, is proving highly successful at least in the field of environment legislation.

 

 

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.

 

 

EU’s neighbourhood policy has to include Russia

In 2003 the EU put in place a neighbourhood policy in preparation for its enlargement in 2004 to include ten additional members extending its new border eastwards. It was realised that by including those countries accepted as members into the EU, a new dividing line across the European continent could emerge between countries that as communist and then transition economies had previously had fairly close relations. The neighbourhood policy was designed to mitigate the new border by means of trade policies and a reasonably open visa regime and also to promote some of the political, legal and economic reforms which had been set as criteria for EU accession. It was not applied to Russia which would not have agreed to being monitored for progress towards standards set by the EU.

In theory pre-existing policies towards southern Mediterranean countries were incorporated into the neighbourhood policy but in practice they have remained different and this post is about the eastern neighbourhood and specifically Ukraine. Armenia, Azerbaijan and Georgia are important but do not border the EU. Belarus has been permanently under the grip of its dictator, Aleksander Lukashenko, who has not been interested in closer relations with the EU except on his own terms. Moldova is a small, albeit complicated, country.

With the Orange Revolution of 2004 which saw the election of Viktor Yevtushenko, who favoured liberalising reforms, as president defeating Viktor Yanukovych who resisted such changes. However President Yevtushenko was not a successful president and Yanukovych, after serving a period as prime minister,r was elected president six years later. Nevertheless Yanukovych did seem amenable to negotiating with the EU on its proposed Deep and Comprehensive Free Trade Agreement in 2013 and the outline of such an agreement was concluded in late 2013. Unfortunately this coincided with an attempt by President Putin to expand and deepen a Eurasian economic  and customs union between former Soviet countries, of which Ukraine was intended to be a key part. Both the EU and Russia considered that Ukraine had to choose rather than pursue a balanced policy of deepening economic relations with both its neighbours and Putin put pressure on Yanukovych to abandon the EU agreement in favour of the Eurasian economic customs union. Doing so angered much of civil society and led to the occupation of central Kiev by protestors and after violent confrontations in March 2014 Yanukovych fled to Russia. This was a deep humiliation to President Putin and Russia, which led to the reaction that has followed.

EU policy stumbled partly due to bad luck but also a flawed strategy

The ensuing conflict was to some extent bad luck as the unexpectedly strong support by much of the Ukrainian public for the EU agreement coincided with precisely opposite plans by President Putin. But there was also a flaw in the EU strategy. It had rightly looked at how to tackle the impact of EU enlargement on the EU’s new neighbours as a consequence of the enlargement but then failed to prepare for the impact of closer relations with the new neighbour Ukraine with that country’s own neighbour, Russia. It is possible that the democratic will of the majority of the Ukrainian people would have anyway brought it into conflict with Russi, and a minority of its population who feel themselves Russians, but the EU did not by any means do as much as it could have to make its agreement compatible with ongoing close economic relations between Ukraine, especially eastern Ukraine, with Russia. For example, the agreement provided for symmetrical opening of the Ukraine market to EU companies in relation to EU markets to Ukrainian companies, despite the much greater strength of the EU economy. This not only would be very tough for Ukrainian companies in trying to hold onto domestic markets but also make it more difficult for Russian companies to compete.

This is not to excuse the Russian response, which was effectively to annexe Crimea and then provoke a rebellion helped by Russian troops in the Donetsk and Lugansk regions of eastern Ukraine. However, the Russia led by Putin is the reality that the EU has to deal with and it now has to deal with a Ukraine whose territorial integrity has been violated and the best prospect in the medium term would seem to be that the Minsk agreement of February 2015 holds, and that the ongoing reduced level conflict since then reduces further rather than flares up again. For that to happen requires Ukraine to observe its side of the agreement as near perfectly as possible despite the fact that the other side is not doing so, so as not to provide any excuse for a major new conflict, and that it the government leans over backward to conciliate any sections of the population in the territory under its control that might be tempted to sympathise with the rebels. Rightly the EU is now including a Russian representative in ongoing discussions on the proposed trade agreement between Ukraine and the EU, whose implementation has been postponed.

At the same time, the EU should do much more through debt write-offs[1] and economic support to enable the government of Ukraine to put in place the reforms needed to create the kind of country that the electorate voted for in the 2014 elections, one where all, including powerful oligarchs, are equal before the law, there is a level playing field new businesses to grow and where trade with both the EU and wider world economy can expand.



[1] Writing in the Financial Times on May 18th, the former US Treasury secretary, Lawrence Summers, argued that the case for a debt reduction was as strong as any he had encountered in the last 25 years.