Can Greece and Europe avoid an unnecessary and dangerous rupture?

Exiting the euro would be extremely costly in Greece and pose huge political and financial risks for Europe

Protesters in an anti-austerity rally in Athens. Immense sacrifices were supposed to produce recovery but instead the destruction of purchasing power deepened the slump, creating depression-level suffering and a huge humanitarian crisis. Photograph: Milos Bicanski/ Getty Images

Protesters in an anti-austerity rally in Athens. Immense sacrifices were supposed to produce recovery but instead the destruction of purchasing power deepened the slump, creating depression-level suffering and a huge humanitarian crisis. Photograph: Milos Bicanski/ Getty Images

 

‘Don’t you think they want us to fail?” That’s the question I kept hearing during a brief but intense visit to Athens. My answer was that there is no “they” – that Greece does not, in fact, face a solid bloc of implacable creditors who would rather see default and exit from the euro than let a leftist government succeed.

But you can understand why Greeks see things that way. And I fear that Greece and Europe may suffer a terrible accident, an unnecessary rupture that will cast long shadows over the future.

The story so far: at the end of 2009 Greece faced a crisis driven by two factors – high debt, and inflated costs and prices that left the country uncompetitive.

Europe responded with loans that kept the cash flowing, but only on condition that Greece pursues extremely painful policies. These included spending cuts and tax hikes that, if imposed on the US, would amount to $3 trillion a year. There were also wage cuts on a scale that’s hard to fathom, with average wages down 25 per cent from their peak.

These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the slump, creating Depression-level suffering and a huge humanitarian crisis.

On Saturday, I visited a shelter for the homeless and was told heartbreaking tales of a healthcare system in collapse, with patients turned away from hospitals because they couldn’t pay the €5 entrance fee, and more.

It has been a nightmare, yet Greece’s political establishment, determined to stay within Europe and fearing the consequences of default and exit from the euro, stayed with the programme year after year.

Finally, the Greek public could take no more. As creditors demanded yet more austerity – on a scale that might well have pushed the economy down by another 8 per cent and driven unemployment to 30 per cent – the nation voted in Syriza, a genuinely left-wing coalition, which has vowed to change the nation’s course. Can Greek exit from the euro be avoided?

Yes, it can. The irony of Syriza’s victory is that it came just at the point when a workable compromise should be possible.

The key point is that exiting the euro would be extremely costly and disruptive in Greece, and would pose huge political and financial risks for the rest of Europe. It’s therefore something to be avoided if there’s a halfway decent alternative. And there is, or should be.

By late 2014, Greece had managed to eke out a small “primary” budget surplus, with tax receipts exceeding spending, excluding interest payments. That’s all that creditors can reasonably demand, since you can’t keep squeezing blood from a stone. Meanwhile, all those wage cuts have made Greece competitive on world markets – or would make it competitive if some stability can be restored.

The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.

But right now that deal doesn’t seem to be coming together. Maybe it’s true, as the creditors say, that the new Greek government is hard to deal with. But what do you expect when parties that have no previous experience in governing take over from a discredited establishment?

More important, the creditors are demanding things – big cuts in pensions and public employment – that a newly elected government of the left simply can’t agree to, as opposed to reforms like an improvement in tax enforcement that it can. And the Greeks are all too ready to see these demands as part of an effort either to bring down their government or to make their country into an example of what will happen to other debtor countries.

To make things even worse, political uncertainty is hurting tax receipts, probably causing that hard-earned primary surplus to evaporate. The sensible thing, surely, is to show some patience on that front: if and when a deal is reached, uncertainty will subside and the budget should improve. But in this atmosphere of distrust, patience is in short supply.

It doesn’t have to be this way. True, avoiding a full-blown crisis would require creditors to advance significant sums, though it would be recycled into debt payments. But consider the alternative. The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous. – New York Times 2015

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