Greece’s coalition government appears to be paring down its expectations for any substantial renegotiation of its bailout terms. Athens is concerned about the absence of the necessary goodwill among its eurozone partners to support an overhaul of the loan agreement. Yet, all Greek economic indicators, including the ones that point to another worse-than-expected contraction this year, scream for a substantial reworking of the package. The government’s only hope is that after almost three years of talking at cross purposes, Greece and the key European players quickly discover a way to speak a common language.
Ahead of this week’s European Union leaders’ summit and the latest visit from the troika inspectors, due to start on Sunday, the nascent coalition was steeling itself for tough negotiations with its lenders. There was a fundamental flaw to its strategy, though. Greece was preparing for political bartering when its partners were only interested in an economic discussion.
The policy framework agreed by the three-party coalition last weekend set out clearly the parts of the bailout deal it would like to change. The three parties agreed to ask Greece’s lenders for two more years, up to 2016, to bring the public deficit under 3 percent of gross domestic product. This would negate the need for further cuts to wages, pensions and the public investment program. The coalition also said it intended to ask to extend unemployment benefit from one year to two and to reduce VAT. It also proposed there should be no more firings in the public sector.
Whether New Democracy, PASOK and Democratic Left thought achieving these concessions was actually possible is a moot point. The proposals could only have been designed for a domestic audience, one in uproar over failed policies and an economy in freefall, and unsettled by a drawn-out electoral battle during which SYRIZA’s staunch opposition to the bailout conditions drew burgeoning support. The coalition’s suggestions certainly could not have been an opening gambit in the game of renegotiation with the eurozone. When the climate surrounding Greece is so negative, to plead for more time to meet fiscal targets is one thing but to propose that you could meet these goals by cutting taxes and leaving the public sector untouched sends all the wrong signals. In fact, it simply compounds the negative impression that has been formed about Greece and how it has been applying its program since 2010, which would have Athens receiving European taxpayers’ money and not doing anything to fix its structural problems – a misinterpretation that Greek politicians have never adequately challenged.
To undermine your negotiating position in the build-up to a round of talks that could decide the country’s future is beyond amateur. It is in keeping, though, with the freshman mistakes of an administration that was unaware EU protocol prevented it from sending Foreign Minister Dimitris Avaramopoulos to represent Greece at the Brussels summit while Prime Minister Antonis Samaras recuperated from his eye operation. It is difficult to have faith in the negotiating ability of a government when it is unsure about who it can send to the negotiations.
Samaras has attempted to make up for these faux pas with a brief and to-the-point letter to his EU counterparts in which he accepts “ownership” of the fiscal adjustment program and its targets but suggests that some “modifications” would be needed due to the unravelling of the country’s economy. This was a much more suitable tone to strike ahead of the talks. Government sources, meanwhile, have been underlining that the goals set out in the coalition policy statement are to be achieved during the course of the four-year term, rather than overnight.
Greece’s argument with its eurozone partners must be a very simple one: trying to meet its fiscal targets when its economy is going through a virtually unprecedented recession is like wading through treacle and means those goals will always be out of reach. Adjusting these targets is not a matter of lenience; it is a question of pragmatism. It is also in the interests of all sides to display some economic realism now rather than to go through more months of missed targets and fraught last-minute haggling over make-do measures that simply sink the Greek economy further into the mire. Among other things, this would destabilize the very government that key European decision-makers chose as their preferred option at the recent general elections.
Speaking to the Wall Street Journal on Thursday, Alternate Finance Minister Christos Staikouras made the point succinctly. “The recession is estimated to be worse than 9 percent in the third quarter of 2012 and around 6.7 percent for the whole of 2012,” he said. “The most impressive element is that the medium-term plan projection, conducted a year earlier, spoke of a 1 percent growth rate for 2012. And instead of that, we’re looking at a recession of about 7 percent. This means that something has to change.”
All official predictions of how badly the Greek economy would react to this crisis and the austerity measures adopted since 2010 have been way off the target and have undermined the basis of the program.
German Finance Minister Wolfgang Schaueble has shown himself to be quite adept at making predictions. Last week he forecast that Germany would beat Greece 3-1 in the Euro2012 quarterfinals. The game ended 4-2 to the Germans. But the troika, whose report on the Greek economy Schaueble will be relying on in a few weeks time to assess Greece’s position, has been less fortunate with its predictions. It initially forecast a 2.6 percent contraction of the Greek economy for 2011. In the summer, this was revised to 3.5 percent. In fact, Greece’s GDP contracted by 6.9 percent. This year, the troika predicted growth of 0.8 percent. As Staikouiras suggested, the recession is expected to reach about 7 percent again. Forecasts regarding the rise in unemployment have been equally wildly off target.
This underlined that the basis for the program, if not the program itself, is fundamentally flawed and must be re-examined and adjusted. Greece is suffering an economic collapse which Germany can only envision in its worst nightmares. An unpublished report by Schauble’s ministry suggests, according to Der Spiegel magazine, that the German economy would shrink by 10 percent of GDP and unemployment would double if the euro broke up. Greece’s economy is on course for a contraction of more than 20 percent due to the crisis and unemployment has more than doubled already. This dire reality cannot be ignored.
Some will point to the lack of structural reforms having exacerbated the economic crisis. They might be right to some extent but this debate often degenerates into one where Greece is accused of having totally wasted the last two years. This position is also divorced from reality. While the last two governments have fallen well short of doing what was needed to improve efficiency in the public sector and remove obstacles to competitiveness and growth in the private sector, some steps have been taken.
Contrary to reports, the size of the country’s unwieldy civil service is shrinking. Greece is on course to reduce the number of people employed in its public sector by more than 100,000 by the end of this year, compared to 2010 figures. Just a few years ago, even hinting at this reduction would have been unthinkable. It is short of the efficiency drive needed in the public administration but a taboo is being broken.
Equally, bureaucracy and unfair privileges remain barriers to growth but dismantling these monuments to insularism will take time. The Organization for Economic Cooperation and Development (OECD) rated Greece as the leading country in terms of reforms in 2010 and 2011 among its member states. Rather than an indication of the rapid rate of reforms, this underlines how far back Greece started from. It is conducting reforms that other countries enacted years ago. This means that resistance to change in Greece is much more deep-rooted than in other eurozone countries and the process is painstaking.
It is in this area that Greece should be focussing its attention to convince both its people and its European partners that the country is not a lost cause. A government that believes in reforms – not just the privatizations Samaras referred to in his letter – and is determined to implement them has a chance of sitting at the negotiating table with the troika and its eurozone counterparts and speaking the same language. This is where economic and political reality can meet. The problem for Greece is that the language of reforms is not one in which its governments have ever been particularly well versed.