One of the themes discussed during the OIM dialogue in January 2015 in Mauritius was the possibility of Grexit and its implications for the rest of the world. With the results of the referendum confirming that the Greeks do not want to be dictated terms by the rest of Europe we are entering uncharted territory. In this context we would like to share a reflection by Percy Mistry on the mistakes made by the Troika in dealing with the Greek issue, reflection triggered by two articles (“All We Are Saying Is give Greece A Chance!” by Frank Offer and “Why Greece Never Got A Fair Chance” by Sony Kapoor) which dispassionately convey very well the reality of what has happened.
The Troika’s mistakes
by Percy Mistry , 2 July 2015
It seems extraordinary to me that the IMF/EC/ECB Troika has repeated (in spades) all the mistakes made by the World Bank/IMF in dealing with the emerging markets debt crisis of 1982-92, and even amplified some of those mistakes with peculiarly Teutonic/IMF touches of hubris (i.e. only we know what is right), rectitude and rigidity (despite the Germans being willing to show some flexibility earlier on in 2009-10, which they were unfortunately argued out of by the ECB and IMF!!). Was nothing learned from past mishaps?
The main repeated mistake was bailing out irresponsible private creditors (mainly French and German banks which were in bad shape) at multilateral and EU taxpayer expense by EU creditor government taking over almost all Greek debt and not reducing the outstanding amount, as well as annual debt service, as quickly as they should have. Compound interest and repeated re-lending to repay creditors took care of the rest.
The second repeated mistake was applying, in draconian fashion, adjustment prescriptions that were not just toxic but near fatal. Result: the Greek economy (GNI) has shrunk by 26% from €305 billion in 2008 to €227 billion in 2015 (and is still shrinking) while Greek external debt has risen from €172 billion to €310 billion over that period and continues to increase at a rate of €3 billion a month! Real wages have fallen dramatically, unemployment has soared, disinvestment and capital flight have been encouraged, as has a hollowing out of the domestic Greek economy (save the tourism sector which is also now in jeopardy until the crisis is resolved). How anyone imagines the present debt can ever be serviced is beyond human comprehension.
I have little truck with Syriza or Tsipras and Varounakis given the breathtaking incompetence, irresponsibility and idiocy they have demonstrated in supposedly negotiating a better deal for Greece but achieving the opposite outcome and hurting their country almost irreparably in the process. This seems a case where the international community does need to step in to get the EC/EU to behave more responsively and less counter-productively in hurting not just Greece but all of Europe and the emerging world (which could be hit indirectly).
The fault in handling this debacle should be equally shared between creditors and debtor. Yet, at the present time, the pain is being borne entirely by a debtor whose capacity for further forbearance/absorption of austerity-orientated adjustment has shrunk to almost nothing. Considerable structural reform is undoubtedly needed in Greece, but not the kind of reform that the Troika is pressing for in a compressed time-frame.
In the corporate world of legally permitted, organized bankruptcy what Greece is going through would be considered cruel, unusual and unjustifiable punishment. In the sovereign debt world of the Eurozone it is just internal politics and the bullying of a poor debtor by much richer creditors who ought to know better. They seem to be on a treadmill rather than operating with genuine intelligence. So much for solidarity -- a ridiculously overused and devalued word in the EU context!
This now seems to be a case for independent arbitration by credible parties (US/Japan/Canada/Australia or Switzerland?) rather than leaving it to the parties concerned within the EU or the IMF to resolve.
Given the EU's pressing concerns about: Russia, ISIS, Iran, Turkey, the integrity/security of its eastern and southern borders, uncontrollable illegal migration, revival of growth and stability, and the survival of the Euro and the Euro-project, the geo-strategic and political stakes are much too high to contemplate losing Greece at this juncture for all the wrong reasons simply because of incompetent political management in Greece and the EU.
All We Are Saying Is give Greece A Chance!
by Frank Hoffer on 1 July 2015
Greek unit labour costs are down to the level of 2006, pensions have been slashed, the budget deficit largely eliminated, public sector employment has been reduced by 25%, determination to improve tax collection and deal with tax evasion is stronger than ever before, labour markets have been liberalised, bureaucratic barriers for entrepreneurship have been lowered.
Real output, at the end of 2014, was below its 2000 level, marking a more than 26 per cent plunge from its peak in 2007, while an even larger fall—30 per cent—in employment has been recorded. More than one million workers have lost their jobs relative to the previous peak in 2008, with an increase of 800,000 in the unemployed – the total now stands above 1.2m – while the active population is shrinking, as workers leave the country in search of better opportunities abroad. Real wages have fallen by more than 30 per cent during the last five years.
Whatever one thinks about the austerity policies of the Troika, there can be no doubt that many of them have been implemented in Greece. To say Greece has done nothing is propaganda, pure and simple.
Sure, there is much that can be improved in Greece; the remaining reforms cannot, however, be implemented overnight. At least Athens – unlike Berlin – does not have an airport that has overrun budgeted costs by €5bn and, instead of opening in 2012, is now set to open in 2018 only. Incompetence and mismanagement are not a Greek privilege.
The patient has swallowed most of the medicine, but is sicker than ever. The doctors, while highly paid, have proven themselves to be utterly incompetent. Their prognosis was wrong: recovery did not happen. Not all of the medicine was mis-prescribed. The Greek pension system needed streamlining, public administration needs to be improved, tax collection needs to be strengthened etc… But there was a clear over-prescription of austerity measures and an accompanying lack of the investment needed to restart the economy.
In January 2015 the patient revolted. Thank God most Greek people turned to a pro-European, pro-democracy and anti-poverty party and not towards a xenophobic fascist alternative. The new government naively assumed that the crisis was about economics and that after five years of failure there would be some willingness to consider that more of the same was not the solution.
Prolonging the current failed programme, extend(ing) economic hardship beyond reason and prolong(ing) the agony and the divisive tensions between debtors and creditors would be disastrous.
This is not the conclusion of Yanis Varoufakis or Alexis Tsipras, but a recent comment from Dominique Strauss-Kahn, whose economic competence as a former head of the IMF is – despite his moral failures – never questioned. It seems that keeping Greece in the Euro will be impossible with a continuation of the failed policies of the past. The Greek government needs a genuine chance, one which it has not been given so far.
The Greek government, voted into power by a majority of its citizens, is being humiliated by the creditors’ demands; the Eurogroup is annoyed that the government is rejecting its “generous” offer. The last few weeks have been a dialogue of the deaf and the level of misunderstanding is high. Reading the latest proposals and counter-proposals, some of the Eurogroup’s proposals do not look as generous as claimed. On 22 June the Greek government, for example, proposed to the creditors :
The authorities will review through a consultation process the existing frameworks for collective bargaining and industrial relations taking into account best practices elsewhere in Europe. Further input to the review described above will be provided by international organisations including the ILO.
And that is how it reads in the famous “take it or leave it” proposal of the Eurogroup four days later:
Launch a consultation process similar to that foreseen for the determination of the level of the minimum wage (Art. 103 of Law 4172/2013) to review the existing frameworks of collective dismissals, industrial action, and collective bargaining, taking into account best practices elsewhere in Europe. Further input to the review described above will be provided by international organisations, including the ILO. The organization and timelines shall be drawn up in consultation with the institutions. No changes to the current collective bargaining framework will be made prior to the conclusion of the review and in any case not before end-2015. Any proposed changes to legislative frameworks will only be adopted in agreement with the EC/ECB/IMF. (italics FH)
This does not really show a spirit of compromise, but seems prescriptive, restricting the policy space of an elected government. The narrow micromanagement of Greece is neither economically necessary nor democratic. It is justified by the argument that external technocrats can impose better policies upon Greece. Having failed for five years, one wonders what it is that gives them the confidence to deny the democratically elected Greek government the possibility to review and – if they deem necessary – to change their labour market regulations.
Angela Merkel repeated on Monday her statement: “if the Euro fails, Europe fails”. But if that is the case, why is she acting as she does? Greece is only the tip of the iceberg. A common currency without coordinated fiscal, taxation and economic policies and yes, without transfers between countries, is not sustainable. Grexit will do unforeseen damage to the Euro and to European integration. It will show that what was meant to be an irreversible process of closer integration is, in fact, reversible.
A future historian might ask why the larger European governments and in particular Angela Merkel and her social democratic partners in Germany allowed a tiny country such as Greece to trigger the unravelling of the European project. Was it lack of economic understanding, narrowly defined national interests, political hostility towards Syriza, semi-religious belief in the magic of “ordo-liberalism”, fear of an electoral backlash or incompetence?
Germany has gained significant political power during this crisis, but has also lost political sympathy in many crisis-hit countries. This is probably the crucial moment for investing political capital in moving Europe forward and overcoming some of the bitterness and resentment created during this crisis. Forget about the unpleasant negotiations of the last months and some personal animosities. The stakes are too high. It’s time for a pragmatic and open-minded restart.
Given the urgency we need a simple and workable solution instead of endless debates about whether the corporate tax rate in Greece shall be 26, 28 or 29 per cent. There is also no point in the public creditors constantly negotiating with Greece about new credits, the sole purpose of which is to pay back the old credits to the same institutions.
Dominique Strauss-Kahn made a simple suggestion in this respect:
My proposal is the following: Greece should get no more new financing from the EU or the IMF but it should get a generous maturity extension and significant nominal debt reduction from the official sector.
This would still mean tough times ahead for Greece, but it would give the responsibility back to the Greek people and their government(s) to live within their means. It would give them the time and space to implement the changes needed to rebuild their economy. It would also ensure that the creditors do not lose all their money. It is certainly a better alternative than Grexit or continued agony. For the sake of Greece and the sake of Europe they need this chance. Better Syriza succeeds than Europe fails!
In the heated public atmosphere this will be a hard sell to the public in Germany and other countries, but Angela Merkel is a skilled political leader and, together with her coalition partners, she can do it. Otherwise she might end up being known as the women who lost Europe.
About Frank Hoffer
Frank Hoffer is senior research officer at the Bureau for Workers' Activities of the ILO. He writes in a personal capacity.
Why Greece Never Got A Fair Chance
by Sony Kapoor on 1 July 2015
Despite having experienced an angry German government almost push Greece out of the Eurozone in 2012 first hand, I never thought we would be standing at this crossroads again. It took many of us – advisers, EU technocrats, American politicians and some academics several weeks to convince the key-decision makers in Berlin not to pull the trigger, and it was far from obvious we would be successful. In the end Chancellor Merkel took a fateful decision to overrule the finance minister Wolfgang Schäuble, who remained unconvinced.
Living through this process was hell not least because economic arguments, financial calculations and political scenarios are not ideal for changing the minds of often-ideological lawyers that form the core of the German financial policymaking community. For them it was less about the economics and more about rules and morality.
To be fair to them, when Greece first announced in late 2009 that it had been understating its deficit figures for years, German policymakers were amongst the first to seriously countenance debt restructuring for Greece. However, word from Trichet at the ECB as well as active lobbying by large German and French banks convinced them otherwise. They were told that restructuring Greek debt would trigger a major financial crisis through losses that the banking system could not afford to bear and through potential contagion to other Eurozone sovereign bond markets.
Hence that fateful decision not to restructure Greek debts was taken, the best opportunity to offer Greece a fresh start was missed. To be fair to the rest of the Eurozone, the Greek government was also strongly against a restructuring of its own debt, seeing it as a humiliation. But the banks needed to be repaid, Greece needed money to survive and a bailout needed to be arranged in a hurry. This was the original sin. Conceived in a hurry, the bailout was deeply flawed at many different levels.
The initial financial terms offered to Greece were rather onerous, the conditions attached far too prescriptive and the pace of fiscal adjustment too much, as the IMF badly underestimated the impact of austerity on the economy. It has been estimated that of the money lent to Greece more than three-quarters went into paying off existing creditors and less than 10% in supporting citizens through the shock adjustment. In effect, most of the Greek bailout funds were used to bail out Eurozone banks and other creditors.
The ECB, and Greece’s central bank was part of a cumbersome ‘Troika’ arrangement that dictated policy to Greece, when central banks are typically at the receiving end of IMF conditionality. Decisions by the three institutions were taken on the basis of a “least common denominator” and thus many were ill conceived and no Greek government ever really bought into the onerous conditionality. Our suggestion that Greece needed a World Bank program to facilitate state building was summarily dismissed both by Greeks and the Eurozone, which hubristically thought it humiliating.
By 2012, the Greek GDP had predictably collapsed, domestic politics was upended, unemployment reached record levels and the IMF could no longer pretend to believe in its own models, thus a new deal was needed. Here again our recommendation for a deep face value haircut for external private creditors, easing the terms of the public bailout and leaving Greek banks and pension funds out of the restructuring were countered by proposals from BNP Paribas and other banks that argued face value haircuts were not necessary. In the end, after an inefficient two-step process, Greece did get a significant reduction in the face value of its debt but it was far too little and too late. Much of the private debt had already been replaced by public debt that could not be haircut.
With that second opportunity missed, Greece’s descent into a great depression continued until more than 25% of GDP was lost and youth unemployment reached 60% driven, in no small measure, by record levels of austerity. Greek citizens, fed-up after five years of public humiliation and economic suffering, voted for the anti-establishment, anti-austerity Syriza in the 2015 elections. As the only party that had not been part of Greece’s clientelist state, Syriza offered to take on the oligarchs domestically and negotiate a new deal with the Eurozone internationally.
But Greece’s answer to Obama’s “Hope and Change” never stood a chance. With no previous experience of government and ill versed in what passes for diplomacy in the EU, Syriza overplayed what was essentially a very weak hand. The day after Syriza was voted in, senior German politicians said “Greeks had voted for a Grexit” and few Eurozone governments were ready to negotiate in good faith.
The good-will towards Greece resulting from the guilt staffers at the IMF and the European Commission felt about their own significant role in Greece’s tragedy was also slowly eroded by the sharp elbows the Greeks brought to the table. Trust was eroded on all sides and it became impossible to triangulate between what the Greeks were willing to accept on the one hand and what the IMF and the Eurozone were planning to concede on the other. Disagreements between the Eurozone and the IMF were at least as big as those between Greece and its Eurozone partners.
On pure economics, Syriza got it mostly right both in terms of the diagnoses of the crisis and on what micro and macro level steps were needed to restore the Greek economy. But its big mistake was to assume that economic arguments could prevail over ideology and realpolitik. Another was its failure to convince its Eurozone counterparts that it would actually deliver on the promises it made. While Syriza could be excused for its naiveté’, its creditors get no such free pass. Their unwillingness to admit mistakes, keep promises for further debt relief and focus on petty parochial politics has once again trampled upon Greek democracy and sensible economic policy, and caused great harm to the European project.
Unless they are willing to give Greece a fair chance over the next few days, the damage will be irreparable. And it is not just Greeks who will have to live with the consequences.
About Sony Kapoor
Sony Kapoor is Managing Director of the think tank Re-Define and a Senior Visiting Fellow at the London School of Economics and Political Science.
The Troika’s mistakes
by Percy Mistry , 2 July 2015
It seems extraordinary to me that the IMF/EC/ECB Troika has repeated (in spades) all the mistakes made by the World Bank/IMF in dealing with the emerging markets debt crisis of 1982-92, and even amplified some of those mistakes with peculiarly Teutonic/IMF touches of hubris (i.e. only we know what is right), rectitude and rigidity (despite the Germans being willing to show some flexibility earlier on in 2009-10, which they were unfortunately argued out of by the ECB and IMF!!). Was nothing learned from past mishaps?
The main repeated mistake was bailing out irresponsible private creditors (mainly French and German banks which were in bad shape) at multilateral and EU taxpayer expense by EU creditor government taking over almost all Greek debt and not reducing the outstanding amount, as well as annual debt service, as quickly as they should have. Compound interest and repeated re-lending to repay creditors took care of the rest.
The second repeated mistake was applying, in draconian fashion, adjustment prescriptions that were not just toxic but near fatal. Result: the Greek economy (GNI) has shrunk by 26% from €305 billion in 2008 to €227 billion in 2015 (and is still shrinking) while Greek external debt has risen from €172 billion to €310 billion over that period and continues to increase at a rate of €3 billion a month! Real wages have fallen dramatically, unemployment has soared, disinvestment and capital flight have been encouraged, as has a hollowing out of the domestic Greek economy (save the tourism sector which is also now in jeopardy until the crisis is resolved). How anyone imagines the present debt can ever be serviced is beyond human comprehension.
I have little truck with Syriza or Tsipras and Varounakis given the breathtaking incompetence, irresponsibility and idiocy they have demonstrated in supposedly negotiating a better deal for Greece but achieving the opposite outcome and hurting their country almost irreparably in the process. This seems a case where the international community does need to step in to get the EC/EU to behave more responsively and less counter-productively in hurting not just Greece but all of Europe and the emerging world (which could be hit indirectly).
The fault in handling this debacle should be equally shared between creditors and debtor. Yet, at the present time, the pain is being borne entirely by a debtor whose capacity for further forbearance/absorption of austerity-orientated adjustment has shrunk to almost nothing. Considerable structural reform is undoubtedly needed in Greece, but not the kind of reform that the Troika is pressing for in a compressed time-frame.
In the corporate world of legally permitted, organized bankruptcy what Greece is going through would be considered cruel, unusual and unjustifiable punishment. In the sovereign debt world of the Eurozone it is just internal politics and the bullying of a poor debtor by much richer creditors who ought to know better. They seem to be on a treadmill rather than operating with genuine intelligence. So much for solidarity -- a ridiculously overused and devalued word in the EU context!
This now seems to be a case for independent arbitration by credible parties (US/Japan/Canada/Australia or Switzerland?) rather than leaving it to the parties concerned within the EU or the IMF to resolve.
Given the EU's pressing concerns about: Russia, ISIS, Iran, Turkey, the integrity/security of its eastern and southern borders, uncontrollable illegal migration, revival of growth and stability, and the survival of the Euro and the Euro-project, the geo-strategic and political stakes are much too high to contemplate losing Greece at this juncture for all the wrong reasons simply because of incompetent political management in Greece and the EU.
All We Are Saying Is give Greece A Chance!
by Frank Hoffer on 1 July 2015
Greek unit labour costs are down to the level of 2006, pensions have been slashed, the budget deficit largely eliminated, public sector employment has been reduced by 25%, determination to improve tax collection and deal with tax evasion is stronger than ever before, labour markets have been liberalised, bureaucratic barriers for entrepreneurship have been lowered.
Real output, at the end of 2014, was below its 2000 level, marking a more than 26 per cent plunge from its peak in 2007, while an even larger fall—30 per cent—in employment has been recorded. More than one million workers have lost their jobs relative to the previous peak in 2008, with an increase of 800,000 in the unemployed – the total now stands above 1.2m – while the active population is shrinking, as workers leave the country in search of better opportunities abroad. Real wages have fallen by more than 30 per cent during the last five years.
Whatever one thinks about the austerity policies of the Troika, there can be no doubt that many of them have been implemented in Greece. To say Greece has done nothing is propaganda, pure and simple.
Sure, there is much that can be improved in Greece; the remaining reforms cannot, however, be implemented overnight. At least Athens – unlike Berlin – does not have an airport that has overrun budgeted costs by €5bn and, instead of opening in 2012, is now set to open in 2018 only. Incompetence and mismanagement are not a Greek privilege.
The patient has swallowed most of the medicine, but is sicker than ever. The doctors, while highly paid, have proven themselves to be utterly incompetent. Their prognosis was wrong: recovery did not happen. Not all of the medicine was mis-prescribed. The Greek pension system needed streamlining, public administration needs to be improved, tax collection needs to be strengthened etc… But there was a clear over-prescription of austerity measures and an accompanying lack of the investment needed to restart the economy.
In January 2015 the patient revolted. Thank God most Greek people turned to a pro-European, pro-democracy and anti-poverty party and not towards a xenophobic fascist alternative. The new government naively assumed that the crisis was about economics and that after five years of failure there would be some willingness to consider that more of the same was not the solution.
Prolonging the current failed programme, extend(ing) economic hardship beyond reason and prolong(ing) the agony and the divisive tensions between debtors and creditors would be disastrous.
This is not the conclusion of Yanis Varoufakis or Alexis Tsipras, but a recent comment from Dominique Strauss-Kahn, whose economic competence as a former head of the IMF is – despite his moral failures – never questioned. It seems that keeping Greece in the Euro will be impossible with a continuation of the failed policies of the past. The Greek government needs a genuine chance, one which it has not been given so far.
The Greek government, voted into power by a majority of its citizens, is being humiliated by the creditors’ demands; the Eurogroup is annoyed that the government is rejecting its “generous” offer. The last few weeks have been a dialogue of the deaf and the level of misunderstanding is high. Reading the latest proposals and counter-proposals, some of the Eurogroup’s proposals do not look as generous as claimed. On 22 June the Greek government, for example, proposed to the creditors :
The authorities will review through a consultation process the existing frameworks for collective bargaining and industrial relations taking into account best practices elsewhere in Europe. Further input to the review described above will be provided by international organisations including the ILO.
And that is how it reads in the famous “take it or leave it” proposal of the Eurogroup four days later:
Launch a consultation process similar to that foreseen for the determination of the level of the minimum wage (Art. 103 of Law 4172/2013) to review the existing frameworks of collective dismissals, industrial action, and collective bargaining, taking into account best practices elsewhere in Europe. Further input to the review described above will be provided by international organisations, including the ILO. The organization and timelines shall be drawn up in consultation with the institutions. No changes to the current collective bargaining framework will be made prior to the conclusion of the review and in any case not before end-2015. Any proposed changes to legislative frameworks will only be adopted in agreement with the EC/ECB/IMF. (italics FH)
This does not really show a spirit of compromise, but seems prescriptive, restricting the policy space of an elected government. The narrow micromanagement of Greece is neither economically necessary nor democratic. It is justified by the argument that external technocrats can impose better policies upon Greece. Having failed for five years, one wonders what it is that gives them the confidence to deny the democratically elected Greek government the possibility to review and – if they deem necessary – to change their labour market regulations.
Angela Merkel repeated on Monday her statement: “if the Euro fails, Europe fails”. But if that is the case, why is she acting as she does? Greece is only the tip of the iceberg. A common currency without coordinated fiscal, taxation and economic policies and yes, without transfers between countries, is not sustainable. Grexit will do unforeseen damage to the Euro and to European integration. It will show that what was meant to be an irreversible process of closer integration is, in fact, reversible.
A future historian might ask why the larger European governments and in particular Angela Merkel and her social democratic partners in Germany allowed a tiny country such as Greece to trigger the unravelling of the European project. Was it lack of economic understanding, narrowly defined national interests, political hostility towards Syriza, semi-religious belief in the magic of “ordo-liberalism”, fear of an electoral backlash or incompetence?
Germany has gained significant political power during this crisis, but has also lost political sympathy in many crisis-hit countries. This is probably the crucial moment for investing political capital in moving Europe forward and overcoming some of the bitterness and resentment created during this crisis. Forget about the unpleasant negotiations of the last months and some personal animosities. The stakes are too high. It’s time for a pragmatic and open-minded restart.
Given the urgency we need a simple and workable solution instead of endless debates about whether the corporate tax rate in Greece shall be 26, 28 or 29 per cent. There is also no point in the public creditors constantly negotiating with Greece about new credits, the sole purpose of which is to pay back the old credits to the same institutions.
Dominique Strauss-Kahn made a simple suggestion in this respect:
My proposal is the following: Greece should get no more new financing from the EU or the IMF but it should get a generous maturity extension and significant nominal debt reduction from the official sector.
This would still mean tough times ahead for Greece, but it would give the responsibility back to the Greek people and their government(s) to live within their means. It would give them the time and space to implement the changes needed to rebuild their economy. It would also ensure that the creditors do not lose all their money. It is certainly a better alternative than Grexit or continued agony. For the sake of Greece and the sake of Europe they need this chance. Better Syriza succeeds than Europe fails!
In the heated public atmosphere this will be a hard sell to the public in Germany and other countries, but Angela Merkel is a skilled political leader and, together with her coalition partners, she can do it. Otherwise she might end up being known as the women who lost Europe.
About Frank Hoffer
Frank Hoffer is senior research officer at the Bureau for Workers' Activities of the ILO. He writes in a personal capacity.
Why Greece Never Got A Fair Chance
by Sony Kapoor on 1 July 2015
Despite having experienced an angry German government almost push Greece out of the Eurozone in 2012 first hand, I never thought we would be standing at this crossroads again. It took many of us – advisers, EU technocrats, American politicians and some academics several weeks to convince the key-decision makers in Berlin not to pull the trigger, and it was far from obvious we would be successful. In the end Chancellor Merkel took a fateful decision to overrule the finance minister Wolfgang Schäuble, who remained unconvinced.
Living through this process was hell not least because economic arguments, financial calculations and political scenarios are not ideal for changing the minds of often-ideological lawyers that form the core of the German financial policymaking community. For them it was less about the economics and more about rules and morality.
To be fair to them, when Greece first announced in late 2009 that it had been understating its deficit figures for years, German policymakers were amongst the first to seriously countenance debt restructuring for Greece. However, word from Trichet at the ECB as well as active lobbying by large German and French banks convinced them otherwise. They were told that restructuring Greek debt would trigger a major financial crisis through losses that the banking system could not afford to bear and through potential contagion to other Eurozone sovereign bond markets.
Hence that fateful decision not to restructure Greek debts was taken, the best opportunity to offer Greece a fresh start was missed. To be fair to the rest of the Eurozone, the Greek government was also strongly against a restructuring of its own debt, seeing it as a humiliation. But the banks needed to be repaid, Greece needed money to survive and a bailout needed to be arranged in a hurry. This was the original sin. Conceived in a hurry, the bailout was deeply flawed at many different levels.
The initial financial terms offered to Greece were rather onerous, the conditions attached far too prescriptive and the pace of fiscal adjustment too much, as the IMF badly underestimated the impact of austerity on the economy. It has been estimated that of the money lent to Greece more than three-quarters went into paying off existing creditors and less than 10% in supporting citizens through the shock adjustment. In effect, most of the Greek bailout funds were used to bail out Eurozone banks and other creditors.
The ECB, and Greece’s central bank was part of a cumbersome ‘Troika’ arrangement that dictated policy to Greece, when central banks are typically at the receiving end of IMF conditionality. Decisions by the three institutions were taken on the basis of a “least common denominator” and thus many were ill conceived and no Greek government ever really bought into the onerous conditionality. Our suggestion that Greece needed a World Bank program to facilitate state building was summarily dismissed both by Greeks and the Eurozone, which hubristically thought it humiliating.
By 2012, the Greek GDP had predictably collapsed, domestic politics was upended, unemployment reached record levels and the IMF could no longer pretend to believe in its own models, thus a new deal was needed. Here again our recommendation for a deep face value haircut for external private creditors, easing the terms of the public bailout and leaving Greek banks and pension funds out of the restructuring were countered by proposals from BNP Paribas and other banks that argued face value haircuts were not necessary. In the end, after an inefficient two-step process, Greece did get a significant reduction in the face value of its debt but it was far too little and too late. Much of the private debt had already been replaced by public debt that could not be haircut.
With that second opportunity missed, Greece’s descent into a great depression continued until more than 25% of GDP was lost and youth unemployment reached 60% driven, in no small measure, by record levels of austerity. Greek citizens, fed-up after five years of public humiliation and economic suffering, voted for the anti-establishment, anti-austerity Syriza in the 2015 elections. As the only party that had not been part of Greece’s clientelist state, Syriza offered to take on the oligarchs domestically and negotiate a new deal with the Eurozone internationally.
But Greece’s answer to Obama’s “Hope and Change” never stood a chance. With no previous experience of government and ill versed in what passes for diplomacy in the EU, Syriza overplayed what was essentially a very weak hand. The day after Syriza was voted in, senior German politicians said “Greeks had voted for a Grexit” and few Eurozone governments were ready to negotiate in good faith.
The good-will towards Greece resulting from the guilt staffers at the IMF and the European Commission felt about their own significant role in Greece’s tragedy was also slowly eroded by the sharp elbows the Greeks brought to the table. Trust was eroded on all sides and it became impossible to triangulate between what the Greeks were willing to accept on the one hand and what the IMF and the Eurozone were planning to concede on the other. Disagreements between the Eurozone and the IMF were at least as big as those between Greece and its Eurozone partners.
On pure economics, Syriza got it mostly right both in terms of the diagnoses of the crisis and on what micro and macro level steps were needed to restore the Greek economy. But its big mistake was to assume that economic arguments could prevail over ideology and realpolitik. Another was its failure to convince its Eurozone counterparts that it would actually deliver on the promises it made. While Syriza could be excused for its naiveté’, its creditors get no such free pass. Their unwillingness to admit mistakes, keep promises for further debt relief and focus on petty parochial politics has once again trampled upon Greek democracy and sensible economic policy, and caused great harm to the European project.
Unless they are willing to give Greece a fair chance over the next few days, the damage will be irreparable. And it is not just Greeks who will have to live with the consequences.
About Sony Kapoor
Sony Kapoor is Managing Director of the think tank Re-Define and a Senior Visiting Fellow at the London School of Economics and Political Science.
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