Which way now, Prime Minister Papademos?

Illustration by Manos Symeonakis

The late Irish comedian Dave Allen had a great line about why his homeland was his favorite place to ask for directions. “If I were you, I wouldn’t start from here,” was usually the response, Allen said. New Greek Prime Minister Lucas Papademos is unlikely to be familiar with the musings of the irreverent Irish comic but he’ll be fully aware that his premiership is starting from a particularly disadvantageous point.

The new government will need to immediately rebuild the bonds of trust with Greece’s eurozone partners, which were so spectacularly blown sky-high by George Papandreou on his kamikaze referendum mission last week — not that they were that strong before. A steadying of the listing ship Hellas should be enough to secure the next EU-IMF loan installment of 8 billion euros, all of which will be needed to cover maturing bonds over the next few weeks.

With the threat of a disorderly default removed from the table — at least for now — Papademos and his team will have to begin negotiating the nuts and bolts of the next bailout. The outline of the deal achieved on October 26 foresees Greece receiving another 130 billion euros in loans from the EU and IMF and its bondholders accepting a 50 percent haircut. However, the mechanism that will make the wheels go around for the next few years has not been constructed yet. The new prime minister will have to agree with the Europeans what measures Athens must take to ensure the agreement runs smoothly.

Many of the steps for the months ahead, including tax reform and economic liberalization, have been decided and in certain policy areas, such as privatization, a time line has been set until 2015. This will bind this interim government and the one that is elected after that. However, Greece will need to sign up to new — or extra, if you prefer — terms as part of the October 26 deal, which will come with a new memorandum of understanding with the EU and IMF. Despite the demands made by Brussels for Greece’s top government officials to sign up to the principles of the agreement, as well as the latest austerity measures demanded by the EU and IMF, the implementation of the program is somewhat of a movable feast. The so-called troika of the European Central Bank, European Commission and IMF, produces regular reports on Greece’s progress, based on which corrective measures are demanded. However, it also gives Athens the ability to negotiate these measures with the troika, something that the PASOK government was very poor at doing. Given that Greece’s economy is on course for greater contraction than previously forecast by the troika (5.5 percent of GDP this year and 2.8 percent next year according to Commission forecasts published on Thursday), then there are grounds to discuss a realignment of targets and measures.

This is where the interim prime minister could earn his place in history, even if his time in office will only be brief. The measures that Greece will adopt over the next few years — if its membership of the eurozone lasts that long and, indeed, if the euro last that long — will likely define its course, and the quality of life for its citizens, for the next few decades. New Democracy leader Antonis Samaras has long claimed he wants to renegotiate the terms attached to the bailout but offers no revenue-raising or -saving measures to counterbalance his persistent demand for lower taxes. His position is understandable, his economic policies aren’t. It might take someone with Papademos’s experience and knowledge to put forward a credible plan that would allow room for the green shoots of recovery to sprout while not ignoring the effort to root out bad seeds such as public sector waste, ineffectiveness and overspending.

If the 64-year-old ex-banker is unable to shift the eurozone and IMF from their demands for unsustainable austerity and asphyxiating fiscal targets, Greece is destined not to keep up. Instead, it will become a fresh risk to the euro’s stability and will be sent flying out of the single currency and possibly the European Union. Only a viable program would give Athens any chance of meeting targets, preventing the eurozone’s patience being tested and instilling some hope in Greeks. A less oppressive program is the only opportunity that Greece has of working its way back to economic growth and job creation, which would allow it to produce primary budget surpluses and begin paying its own way — a development that would be welcomed just as much by the man on the street in Athens as taxpayers in Berlin, Paris or Helsinki.

Papademos has to stand before a set of 16 highly skeptical eurozone leaders and convince them that for all of Greece’s ills, piling more debt on top of a mountain of the stuff (the Commission predicts it will reach a staggering 198.3 percent of GDP next year and 200% in 2013) while pushing measures that are undermining the country’s growth prospects will have devastating consequences for everyone. He has to leave his counterparts in no doubt that Greece will not be able to survive socially, let alone economically, if unemployment — already at 18.4 percent, according to Thursday’s figures — keeps rising. Maybe last week’s drama helped concentrate a few minds in Europe as well as Greece. Hopefully, Angela Merkel, Nicolas Sarkozy and the others will realize that imposing an austerity program the likes of which Europe last saw during Nicolae Ceausescu’s regime in Romania on an economy that has suffered a deeper recession than the US did during the Great Depression is fiscal madness.

It may be that thanks to his referendum proposal, Papandreou’s parting gift to Greece will be to make Europe realize there are limits to the austerity that can be imposed on the citizens of a eurozone member state and that we have reached them in the Greek case. Putting aside Papandreou’s humiliation last week at the G-20 meeting in Cannes, Sarkozy and Merkel were clearly scared of the prospect that the key decisions affecting the euro would be taken not in Paris, Berlin, Strasbourg or Brussels but in Greek polling booths, or even on Greece’s streets. However, if the eurozone is able to mold the European Financial Stability Facility into a convincing firewall against contagion from a bankrupt Greece, what happens in Athens will not matter much. Also, with the markets homing in on teetering Italy, it may be that Greece soon becomes irrelevant. The time Athens has to leverage a better position is running out fast.

However, it won’t be all high politics for Papademos, who will have to deal with the complexities of the Greek political scene. Negotiating with officials in Brussels may seem like a doll house tea party compared to the parliamentary roughhousing in Athens. The former central banker will be surrounded on all sides by political parties that will be scrambling against their slide into irrelevance and are likely to be mainly interested in serving their own narrow interests rather than the nation’s.

In PASOK, he will be left with the dregs of a crumbling party whose future may depend on whether George Papandreou is determined to maintain an active role in the party or whether he will slip into the background. A departing Papandreou that will act as a magnet for all the public’s negativity means that the Socialists will begin from tomorrow their effort to rebuild the party ahead of the next election. If Papandreou stays on the scene, an internal battle for power will ensue. Either way, PASOK’s focus is unlikely to be on helping steer Greece through the storm.

New Democracy, meanwhile, could only wait for a few hours after Samaras and Papandreou reached a tentative coalition agreement on Sunday night before distancing themselves from the yet-to-be-created administration. The conservatives wanted their members to be kept in some kind of quarantine, as far away from the interim government as possible, so they would not be tainted before the next election. It doesn’t bode well for your vacation with your new girlfriend if she wants to stay in a different hotel to you.

Papademos will also have to deal with the fact that since the nationalist Popular Orthodox Rally (LAOS) is part of the triumvirate government, the Communist Party (KKE) will be the main parliamentary opposition. KKE and the Coalition of the Radical Left (SYRIZA) have recently enjoyed a rise in their poll ratings. With elections just a few months away, Papademos can expect nothing but militant resistance to reforms and austerity from KKE and SYRIZA. A few minutes before he arrived at the Presidential Palace on Thursday to begin talks on assuming the premiership, the Public Power Corporation’s militant GENOP union issued a statement that any attempt to privatize the firm would be treated as “war.” Papademos had better suit up because he is unlikely to find many politicians standing in the trenches with him when the barrage from the interim government’s opponents begins.

The former central banker will also be forced to confront the issue of political legitimacy. For all his knowledge of economic and financial issues, Papademos will be the unelected leader of a government that has the half-hearted support of two crumbling parties that will struggle to garner a combined backing of 50 percent at the next elections. When it comes to signing up to the next set of unpopular austerity measures, this democratic deficit could become a key rallying tool for opponents to the deal.

There are also those who will remind him that he was governor of the Bank of Greece when the country entered the euro, seemingly based on flawed economic thinking and statistics. Some within PASOK who are close to Papandreou or Evangelos Venizelos will not forget that Papademos worked closely with former Prime Minister Costas Simitis, who still has enemies within the party. Others might point out that while he served at the ECB between 2002 and 2010, the Frankfurt-based bank failed to react to the emerging weaknesses in the eurozone and instead remained focused on maintaining price stability at the expense of tackling other growing problems. For some, Papademos will be an unrepentant representative of Europe’s politico-financial system, the same system at the heart of today’s crisis. They will believe that the 64-year-old is more likely to guarantee the interests of Germany and others rather than protect Greece’s.

Minutes after being named as the new prime minister on Thursday, Papademos said Greece stands at a crossroad. Papademos is at the front of the queue and in whichever direction he looks, he’ll see treacherous roads ahead. Their incline is steep and their surfaces marked by potholes. The path to safer ground will be difficult to follow. If we’re honest, none of us would want to start our journey from here.

Nick Malkoutzis

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2 responses to “Which way now, Prime Minister Papademos?

  1. Let me offer an alternative set of priorities for the new Prime Minister: spend less resources on the financial engineering of the debt and spend most of the resources on developing specific action plans to revive the economy. Not to revive the economy with more government expenditures or with more funding from official sources like EU/ECB. Instead, revive it with new financial investment from abroad. Away from the debt-financed consumption-boom since the Euro and towards an equity-financed investment drive in value-generating projects which lead to sustained revenue streams for new employees and for the state.

    When corporations get into financial trouble, the first thing which banks ask for is a Business Plan showing the future viability of the company. When that plan is convincing, the financing is normally restructured without problems. With Greece it has been the other way around so far: no Business Plan but a lot of discussion about the financing. This is like saying “I don’t know where I am going but the faster I drive, the sooner I will get there”.

    A Business Plan for Greece will undoubtedly have to include some form of import reductions (special taxes on imports which Greece doesn’t desperately need) and prohibition of official capital flight via bank accounts (capital controls). The EU will probably cry “foul play” about violating the EU-freedoms of movement of goods and capital, but so be it. The surplus countries can either continue to export freely to Greece and send Greece the money for paying for those imports or – if they no longer want to send money – accept to export less and allow Greece to produce more on her own. To me, that is algebra and not economics.

    And the new investment in production should focus on import substitution because that is where one can get off to the quickest start. Solar energy projects and the likes of that can come later.

    Make a new Foreign Investment Law which offers the foreign investors all the political security they need to have and the competitive business framework and return potential which they desire. Have the EU guarantee this law so that investors don’t have to worry about Greeks breaking it. And get started with public bids for new projects! Below are some ideas as to how one could proceed.

    http://klauskastner.blogspot.com/2011/11/appeal-to-financial-engineers.html

    http://klauskastner.blogspot.com/2011/09/endgame-for-greece.html

  2. The McKinsey report linked below has now been out for quite some time (500.000 new jobs within 10 years and 50 billion EUR new GDP). Why is Greek brainpower not discussing this kind of thing? Why is one not asking other institutions to come up with more reports like this? These are the kinds of things which the debates should be about. The salvation of the Euro can be left to others!

    If Greece started to take real initiatives along such lines (not only words; actions please!), she would quickly have a lot of friends between Paris, Brussels and Berlin and there would be much less resistance to help with financing. As a matter of fact: if Greece came up with some really convincing growth plans like in the above report, I would love to see that EU-politician who would stand up and object to it! No one in his right mind would object and most everyone would problably be supportive.

    http://www.grreporter.info/en/mckinsey_company_proved_it_possible_open_500_thousand_new_jobs_greece_next_10_years/5042

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