Extremism is prevailing in Eurozone Negotiations

The negotiations between the newly elected Greek Government and the other Eurozone states have been a battle between pragmatism and extremism. On the one side we have the far-left Greek Government headed by Alexis Tsipiras and Finance Minister Yaris Varoufakis. Their aim has been to secure a short term loan whilst negotiations continue over a deal that would honor the country’s obligations to its creditors but end the austerity imposed on them by the Troika, (IMF, ECB, and European Commission), which has led to the disintegration of the Greek economy.

On the other hand we have the extremists, a group of countries who for ideological reasons refuse to give any ground and are adamant that Greece must continue with the conditions of the bailout agreed by the previous Greek Government, despite the inestimable harm they have done. The Greek side has tried to come up with reasonable ways in which both sides can get what they want. For example the suggestion of bonds being issued that are based on GDP growth, hence making Greek growth in the interest of everyone. However with the recent renewal of the previous agreement the hardline extremists are getting their way.

The agreement between Syriza and the Eurozone extends the current bailout for the next four months. The IMF, ECB and European Commission will continue to oversee the implementation of the reforms demanded by the existing deal, which is quite a defeat for the Greek Prime Minister Alexis Tsipras who had claimed the Troika was dead. Although they won the election on an anti-austerity ballot the Greeks also appear to have yielded on this point, with the Eurozone statement claiming “The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions”. It is unclear at the time of writing exactly how big a surplus they will be required to run, but it seems clear that there will be little room for new public spending. Also to add insult to injury the agreement stipulates that funds, which have been earmarked for bank recapitalization, will be taken out of Greek hands to remove the temptation to use these funds for other purposes.

Although Tsipiras and Varoufakis may use the four-month extension of the current agreement to negotiate a fairer deal in the long term, for now their task of relieving the Greek people of the draconian form of austerity that has been thrust upon them is not going well. The imposition of austerity on Greece thus far has had quite disastrous consequences. In 2010 Greek public debt stood at about 130% of GDP, after 5 years of austerity it is now pushing towards the 180% mark. This is a quite damming indictment of austerity when you consider the whole point of the policy is to balance the Governments books. The reason this has happened is as austerity measures have sent the economy into a deflationary spiral, with the inflation rate falling from under 6% at its height in 2011, to deflation since 2013. This explains why in the five-year time period unemployment has gone from around 10% to over 25%. To give a further idea of the social costs of austerity, disposable income in Greece has decreased by more than a third and youth unemployment currently stands at above half.

However it has been argued that Greece has a moral and legal duty to repay its creditors promptly regardless of the consequences for the domestic economy and the general population. This view however is based on a distorted idea of what happened prior to the crisis. Yes the Greek Government borrowed recklessly, but that also means their creditors lent recklessly. It is naïve to assume that some of the biggest financial institutions in Europe lent money without realizing the Greek house was not in order. Such lenders would have been very aware of the situation but the presence of the IMF as a lender of last resort to heavily indebted states creates a moral hazard. Best-case scenario the Greeks pay you back, however if things go wrong the IMF bails the Government out and you get your money back that way. It is important to remember this when you hear claims that the Greece’s obligations to its creditors must come first. Their creditors lent recklessly and were then bailed out. To add to this the recklessness of these creditors means a cessation of funds to Greece would cause a panic within the European banking system, which lent so uninhibitedly. So the claims by the Eurozone states that they would cut Greece off if the old agreement is not honoured is incredibly dangerous.

It is also worth noting that the leader of the austerity pack, Germany, has benefitted from the Greek demise. The downward pressure the faltering Greek economy has put on the Euro has given German exports a boost, which has certainly contributed towards their strong recovery. This is a perfect example of a currency union gone wrong, with the strong benefitting due to the problems of the weak. The countries with a trade surplus (e.g Germany) are benefitting from a weaker currency, but are reluctant to recycle some of the gains from that surplus to the deficit states (e.g Greece).

It is apparent then that for now extremism is prevailing over pragmatism. What the Greek economy needs is breathing space. I personally see no way for the Greek economy to recover without some debt relief but for the moment this does not seem politically feasible. The most we can hope is that the Greek electorate will give Syriza more time to negotiate a better deal, but if they do not it is likely we will see real extremists emerge in Greece, and this would benefit no one.

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This post was written by Joe Walters