Quantitative Easing is as much as Germany's Merkel can stand; negotiating with Greece's Syriza and Tsipras is probably too much to expect without serious Greek reforms.
WASHINGTON, February 2, 2015 – The decision of the European Central Bank (ECB) to begin a round of quantitative easing is a tacit admission that the earlier austerity program was too austere. Unemployment in the 19-member Eurozone is 11.4 percent, and the inflation rate is -0.6 percent. The rage in Greece over austerity is, to that extent, justified.
The Greek resentment towards austerity is justified on another point as well. Under the austerity measures imposed by the International Monetary Fund and ECB five years ago, the Greek economy has contracted by 25 percent; public debt has ballooned to 175 percent of GDP; living standards have fallen from 85 percent of the European average to 60 percent. Under these conditions, Greece can’t possibly repay its debt. Measures designed to extract every last owed euro might as well demand that Greeks squeeze blood from the Acropolis rocks.
Justified resentment is a dangerous indulgence, though. Prime Minister Alexis Tsipras has to decide whether to press for concessions from Europe while pursuing serious reforms at home, or whether to rip up reforms and austerity at the same time.
“The deliberation with our European partners has just begun.
“Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole. No side is seeking conflict and it has never been our intention to act unilaterally on Greek debt.
“My obligation to respect the clear mandate of the Greek people with respect to ending the policies of austerity and returning to a growth agenda, in no way entails that we will not fulfill our loan obligations to the ECB or the IMF.
“On the contrary, it means that we need time to breathe and create our own medium-term recovery program, which amongst other things will incorporate the targets of primary balanced budgets and radical reforms to address the issues of tax evasion, corruption and clientelistic policies.
“I am convinced that an agreement on these lines will be acceptable to our partners, because our common interest is the economic stability and recovery for our common home, Europe.”
Bloomberg interpreted this as a capitulation to the “Troika” of the IMF, ECB, and the European Council, a reversal of Greece’s “initial defiance” of the Troika. It was not. It was a call for Europe to support Greek policies.
German Chancellor Angela Merkel must find quantitative easing itself a bitter pill to swallow; Germany resisted the idea of the ECB buying bonds of EU governments, and Germany’s Bundesbank and history have instilled in Germans the virtues of a strong currency. Adding concessions to Greece on top of QE could make Merkel choke.
But if the Greeks can’t pay their debt, demanding that they do it will result in default and in Greek departure from the euro. This is not the result desired by the Greek people or the Tsipras government, but it is the result Europe will get if it doesn’t bend on debt restructuring.
Though restructuring is imperative, it must be contingent on reform. Tsipras may not want to default, but some of his government’s decisions seem designed to bring about that result. The government has already moved to start hiring back some of the thousands of civil servants the previous government fired under Troika austerity terms, and it has raised the minimum wage. It has also abandoned its privatization plans. That is a mistake.
The restoration of democracy in Greece after the fall of the military junta has been a wobbly affair. Rather than a democracy, Greece has really had an oligarchy dominated by two families: the Papandreou and the Karamanlis families. Andreas Papandreou founded the Panhellenic Socialist Movement (PASOK), a socialist democratic party on the left, and Konstantinos Karamanlis founded New Democracy (ND), a center right party. Between them, PASOK and ND dominated Greek politics for over 30 years.
The victory of Syriza and its allies is a break with the oligarchy, and it offers Tsipras a chance to break the domination of the two families, something that socialists should appreciate. At the same time, he could fight political corruption and strengthen property rights, something that the oligarchy has resisted, as a way of putting more of the economy out of their control. It doesn’t appear that this is his agenda, though.
While Greeks want an end to austerity, polls show that they also want to stay in the EU and in the Eurozone. That means that Tsipras has to negotiate with Germany and the Troika, not walk away from it. But if he backs away from reforms, he has nothing to offer Merkel.
On Saturday, hundreds of thousands of supporters of Podemos (“We Can”), a new radical leftist party, marched in Madrid. Podemos leaders support some of the policies of the left-wing governments in Venezuela and Bolivia, and Podemos is in the lead to win Spain’s general election this year. If it does, it promises the same anti-austerity zeal offered by Syriza. And just as Syriza’s victory upended Greek politics, a Podemos victory would upend Spanish politics, which has been dominated by two political parties since Spanish democracy was restored in 1978.
Podemos supports Syriza, and it pledges to join Syriza in fighting the austerity measures imposed by the Troika on the weak EU economies. Those measures have produced heavy unemployment in Spain, just as they have in Greece.
This complicates the problems facing the EU. If they negotiate with Greece, Spain will want concessions as well, and so will Portugal and Italy. That is why, unless Tsipras makes dramatic and compelling improvements in his country’s politics and economy, Germany can’t afford to budge. In addition, concessions would need to be voted on in national parliaments.
Merkel and the EU are in a stronger position than Tsipras and Greece. Four years ago, the dangers of a Greek exit from the euro terrified EU governments into bailing out Greece. Now they are much better prepared for Greece to go. They don’t want it to happen, but the Greek economy is small, and they’ve worked to limit potential damage from a so-called “Grexit.”
Greece, on the other hand, needs money. It’s now suffering from capital flight, and no sane European would deposit money in a Greek bank with the real possibility that the Greek government would replace the euros with cheap drachmae. Greek banks are dependent on the ECB; if the Greek government doesn’t stick to the bailout terms, the ECB won’t be inclined to keep on propping up Greek banks.
Greece has a primary surplus; that is, its government revenues exceed its outlays, excluding interest on its debt. If it defaults on its debt, it won’t need to go immediately onto capital markets for loans, which it probably wouldn’t get. But that would force it out of the Eurozone. And it would mean the end of Syriza’s promise of expanded social benefits.
Tsipras and Syriza would have a real, if small, chance of avoiding default, if this were just between them and the Troika. But it is not. The appearance of radical left parties like Podemos has complicated things,. and Tsipras’ coalition partners are a polarizing element that makes negotiation even harder.
Syriza’s coalition partners, the Independent Greeks, are extreme, anti-Semitic, right wing nationalists who make Syriza’s socialists look like the soul of reason. They are also strongly anti-German. The only thing they share with Syriza is hatred of the austerity measures and the demand that Greece’s debts to the IMF and EU be written off.
This coalition will hold if Tsipras’ policy is to default and commit to the Grexit. They make it almost impossible for Syriza to follow the path of reform-for-concessions that it needs to stay in the Eurozone. Their presence in the government pushes Tsipras to move seriously to tell the Germans, “cut our debt or shove it.” If Tsipras is serious about negotiating with the Troika and staying in Europe, he will need to move to find new coalition partners.
Greece should never have been allowed to join the euro, itself is an ill-conceived experiment. That was bad for the Eurozone and even worse for Greece. If it is to have any hope of long-term survival, the Eurozone should expel Greece. When push comes to shove, Germany should shove it. If Syriza remains in partnership with the Independent Greeks, it will be clear that his government wants to be shoved.
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