Role reversal in the Greek crisis

Illustration by Manos Symeonakis for Cartoon Movement http://www.cartoonmovement.com/p/6035

So, let’s get this straight: When Antonis Samaras was the leader of New Democracy in opposition, he resisted the terms of the EU-IMF bailout to such an extent that it destabilized one government and checked the progress of another. When Evangelos Venizelos was finance minister, he opposed the austerity measures demanded by the troika but found that he had to abandon his theoretical objections when faced with the real intransigence of Greece’s lenders.

A few months on and Samaras — now prime minister — is having to accept a new round of spending cuts to satisfy the troika, while Venizelos — now PASOK leader — is the one arguing that further austerity will exacerbate the recession, even though he approved the size of the cuts when he was finance minister.

Confused? It doesn’t stop there. For the last two-and-a-half years, no top representative of the eurozone or International Monetary Fund has visited Greece. Over the past few days, European Commission President Jose Manuel Barroso has been to Athens and Eurogroup chief Jean-Claude Juncker has made plans to visit on August 22.

Wait, it gets curioser and curioser. A few months ago, IMF Managing Director Christine Lagarde expressed doubts about Greece’s commitment to its fiscal adjustment program. Last week, she described the country’s efforts as “impressive”. In the past it seemed an ill wind carried the IMF’s representative in the troika, Poul Thomsen, to Greece for regular inspections. But he breezed out of Athens on Sunday after hailing meetings with government officials as “excellent.”

Even by the disorientating standards of the euro crisis, the last few days have been particularly dizzying. It would be tempting to think that this flurry of perplexing activity points to a sea change, a moment when eurozone leaders would slice through the nexus between short-sighted decision-making and a crisis that, Lernaean Hydra-like, sprouts new heads at an alarming rate. But this would not be in keeping with the way this crisis has been handled, when giant leaps forward have been followed by furious shuffling backward.

Samaras and Venizelos have not had a sudden change of heart; they have simply traded roles. As prime minister, Samaras has scant choice but to appease the troika. He heads a political system and is in charge of a bureaucracy that has consistently failed to offer any alternative to the program offered by the European Commission, European Central Bank and IMF. From this position, he can do little but pin his hopes on convincing Greece’s lenders to allow Athens to buy more time, albeit at a great — perhaps even unbearable — cost. Although correct to express concern about the impact a new round of spending cuts would have on the depressed Greek economy, Venizelos does so knowing he has more license to play to a domestic audience while Samaras must carry the burden of these impossible decisions, just as he did the PASOK veteran did as finance minister a few months ago.

On a European level, the sudden sympathy for Greece must also be taken with a pinch of salt. Visits by Barroso and Juncker are notable but are a mere counterweight to the daily torrent of negative and speculative comments springing forth from all corners of Europe regarding Greece’s efforts and its chances of remaining in the eurozone. On Tuesday, Juncker even managed to personify both good and bad cop in a single sentence, when he told a German television station that a Greek euro exit would be “manageable” but not “desirable.”

That leading European politicians, not just attention-seeking charlatans, should be regurgitating banalities about Greece at this crucial stage underlines that too many decision-makers in the eurozone have yet to comprehend the Greek case. It also shows a willful ignorance of the fiscal efforts made by the country: the 20-billion-euro reduction in primary expenditure between 2009 and 2011, the fact that the general government primary deficit now stands at 490 million euros — a year-on-year reduction of almost 90 percent — and the state budget primary deficit at 3.3 billion euros, down almost 50 percent y-o-y.

This is the Europe that has cut off Greek banks from ECB funding for August but has raised the monthly limit on the value of T-bills the Bank of Greece can accept as collateral for loans as part of the Emergency Liquidity Assistance. This allows Greece to tap funding so it can pay off a maturing 3.2-billion-euro bond, held by the ECB. This is the Europe that is keeping Athens dangling, possibly even inadvertently, in a bureaucratic purgatory while it extracts commitments to more spending cuts.

While the EU struggles to come to terms with the cause-and-effect of a crisis that is undermining unity, the apparent shift in the language used by IMF officials is perhaps the most significant recent development. On July 3, the IMF published a staff report that called on the eurozone to make a “determined move toward amore complete union” that would “break the adverse loops between sovereigns and banks” and urged the ECB to deploy “additional unconventional measures [that] would relieve severe stress in some markets.” The Washington-based fund also highlighted the effect fiscal consolidation has on demand and suggested: “The pace of adjustment should be guided by structural targets.”

The IMF summed up the weaknesses of the eurozone’s crisis response and identified areas where immediate and effective action can be taken. In light of this wake-up call, comments by its officials with regard to Greece seem to reflect a realization that the eurozone is in danger of losing its weakest member with potentially disastrous consequences given the difficulties that Spain and Italy find themselves in at the moment. A Wall Street Journal report on Tuesday appeared to confirm this — it suggested that IMF officials have been putting pressure on their eurozone counterparts to take into account the deepening recession in Greece and ease the terms of the bailout. The fund is also urging the Europeans to agree on a substantive way to make Greek debt “sustainable,” as the IMF’s regulations demand in order for it to continue co-funding the program.

The IMF, of course, does not have to take into account the political differences within the eurozone and delicate domestic balances that many of its governments have to maintain. Reducing the interest rate on Greece’s bailout installments, agreeing a haircut for its bilateral loans, the ECB or national central banks accepting a reduction on Greek bonds or the European Stability Mechanism taking on the 50 billion euros or more in debt for the recapitalization of Greek banks, are all moves that require a unity of purpose that is absent at the moment.

Nevertheless, it’s clear Europe is gradually moving toward the point where it will have to provide responses to the existential and economic questions it has dodged leaden-footedly over the past few years. The statement by ECB President Mario Draghi last month that he was prepared to do “anything it takes” to save the euro has set down a marker. The fact that Bundesbank President Jens Weidmann is the only one on the 23-member ECB governing council that opposes the bank buying Spanish and Italian bonds on the secondary market adds another telling dimension. A potential positive decision by Germany’s Constitutional Court on the legality of the European Stability Mechanism — a possible game changer in this crisis — on September 12, could add to the pressure on German Chancellor Angela Merkel to stabilize the euro and underscore it with convincing political, fiscal and banking union. The Social Democratic Party (SPD) — a likely grand coalition partner for Merkel after national elections next year — has already upped the stakes by declaring this week that it would back jointly-guaranteed Eurobonds. And, if the carrot doesn’t work, there’s always the stick. A threat by the IMF to walk away from the Greek, or other bailouts, could force the eurozone’s hand. Without the fund, a greater burden would fall on Europeans already reluctant to commit anything extra to the existing packages. The likelihood in this situation is that Greece would fall and others could come tumbling after it.

For Greece then, there is a specific role to play for the short-term, at least. It has to convince its partners that if they are to ultimately adopt a holistic approach to this crisis, Greece must also benefit from the new treatment. For the time being, the only criteria the eurozone is looking at is the 11.5 billion euros in spending cuts for 2013-14, the structural reforms and privatizations Greece has agreed to. Of course, there is an absurdity in the fact that the only path to recovery being offered to Greece is for it to implement savings worth 6 percent of its GDP, or roughly 15 percent of its primary government spending, at a time when its economy is on course to shrink by more than 20 percent after a five-year recession. But it’s consisent with the past couple of years, when a game of charades has been disguised as crisis management. This won’t change over the next few weeks.

In this respect, it seems that the Greek government has performed convincingly so far. Regardless of the fact that the coalition partners have not agreed on the details of the cuts and a lot of reform pledges have been taken on good faith, the troika seems to have left Athens more confident than in the past. It is likely that the presence of Finance Minister Yannis Stournaras, whom Greece’s lenders appear to regard as a reliable interlocutor, has played a part in this, as has the fact that Prime Minister Antonis Samaras has so far staunchly supported the former think-tank chief, at the expense of ruffling feathers in his coalition. Style has played a significant part in this fledgling three-party alliance being given the benefit of the doubt by its lenders, but substance will soon have to follow.

“From September, Greece will be under the microscope again,” wrote economics professor and former adviser to the Lucas Papademos government, Giorgos Pagoulatos, in Sunday’s Kathimerini. “Will Greece be sacrificed so there is tangible proof that the euro remains a union of responsibility determined to move on, leaving behind those who don’t want to or are unable to keep up? Or will Greece defend its position at the table of the 17 eurozone member states, proving that it meets its agreements and is implementing the program it committed to?”

Some of the major players in this crisis are reconsidering their roles. Greece has spent much of the past three years being cast as the errant pupil, the unique exception and the lost cause. Maybe one crucial role reversal at the right time by Athens could be enough to ensure a winning performance. But the coalition government is not just playing to an international audience, it has a domestic one as well. Agreeing to further cuts in sensitive areas such as healthcare and more reductions to public sector wages and pensions may appease creditors but it risks destroying the balance within Greece that the coalition needs to maintain to ensure its survival. Cuts of the depth and breadth being demanded by the troika will have to be accompanied by a clear sign within the next few weeks that the futility of Greece’s situation is about to end. If the eurozone does not provide this priceless prop, the curtain could fall prematurely, not only on this government but the whole damn show.

Nick Malkoutzis

8 responses to “Role reversal in the Greek crisis

  1. Nick:

    Couple of points.

    First off, Samaras and Venizelos are neither trading roles nor could they ever.

    The big difference is that Samaras now has to abide by the framework Venizelos has subscribed for Greece (with little or no negotiation of terms). And this framework was very little latitude of freedom. It’s all spelled out to the “t” and no deviations allowed, period.

    The second point is that Greece will receive the 3rd and final package of assistance, the so called OSI (Official Sector Involvement) which the previous German intransigence has prevented from happening but now all experts say that it must. This will result in another 100 Bil. of reduction on the sovereign debt, leaving Greece with an outstanding balance of roughly 130 Bil. which is a sum quite manageable.

    Finally, Stournaras has been exceptional in his new role. Smart, creative, flexible, a true tour de force.

    Comparing Stournaras to Venizelos is a huge quantum leap in performance.

  2. Sorry, I meant to say: And this framework has very little latitude of freedom…

  3. Here is why the 3rd(and final) aid package to Greece known as OSI (Official Sector Involvement) is inevitable:

    http://www.forbes.com/sites/karlwhelan/2012/08/13/europes-needs-to-change-its-disastrous-policy-on-greece-heres-why-and-how/

    • It’s a good piece Dean. I follow Whelan and he is an astute commentator. He sets out all the reasons why an OSI is needed but as he indicates in the piece, some people’s short-sightedness means it is no foregone conclusion.

      • Nick, very true. German intransigence can always be counted on. It’s the only constant factor in the experiment. In some odd way though, it’s needed to expose the hypocrisy.

  4. “There is already a clause in Greece’s 130-billion-euro ($160.7 billion) bailout deal that says the deficit adjustment period could be extended if its recession is deeper than expected.”

    http://www.reuters.com/article/2012/08/18/us-greece-report-idUSBRE87H01R20120818

  5. > German intransigence can always be counted on.
    > It’s the only constant factor in the experiment.
    Just a curious question: Why always asking for help frpm Germany?
    – Why not for help from UK? Because you know they would never help you?
    – Why not ask for help from slovakia? Because you know they are even poorer than greece at income per capita?
    – Why Greece only expects getting money from Germany and at the same time painting the germans as Nazis?
    – If you should be furious toward Germans in becuase of the Euro, so do you remind, that the Germans where even not happy at all to throw away their DeutschMark? That they went afterwards through a stable recession, while greece was living fine?

    This “I hate you, because you are the only one I expect to get more money from” – attidude is quite confusing. Why should the Germans spend money toward people that hate them?

    That behaviour do not really help to assure the German public, Greece is just the place where germany can and should help by giving away more money. As long as the German public is not assured, the german politicians will have to struggle hard, if they should want to further subsidize Greece.

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