INTERNATIONAL AFFAIRS by Colin TeeseNews Weekly
Straitjacket treaty has led to European insanities
, July 4, 2015
Is there risk writing about Greece at this time?
No quick fix for Greece
Most definitely. It is possible that by the time this article reaches its audience the long-running crisis involving Greece and the European Union will have reached a decisive conclusion. For me that means Greece will have decided to default on its debts in one manner or another.
That is, however, far from the most likely scenario. More probable is some less decisive outcome, which will have the effect of prolonging the crisis.
For the EU, whatever happens, resolution or not, may prove unsatisfactory. More on that later.
The most important question of all is whether the Greek population should be obliged to bear the cost of repaying the debt. That question remains to be resolved. Should the Greek people, some might insist, have to endure the personal hardship associated with the total strangulation of its economy, possibly for decades ahead?
Especially when, inside the straitjacket imposed by the Troika (the European Union, the European Central Bank and the International Monetary Fund) Greece has been rendered incapable of repaying its borrowings.
All of these complexities remain to be confronted. But before doing that we need to go back a bit and understand how Europe managed to get itself into this mess.
Moves towards the U.S. of E.
The Brussels bureaucracy of the EU, together with the European Central Bank, had, for the first time, taken what it believed to be an iron grip on the economics and politics of the union, with the conclusion of the Maastricht Treaty in 1991.
That treaty created the European Union. Technically this amounted to no more than a name change; until 1991 the institution was called the European Community, having assumed that title after abandoning the initial appellation of European Economic Community.
But much more than a name change was intended. Without fully understanding it, the member states had signed on to the idea cooked up by the EU’s Brussels-based bureaucracy that the power of the EU should extend beyond economics. Few states recognised how deeply this would disturb the long-standing political, legal and even cultural differences that divide Europe.
Ignoring all this, the EU was committed to taking a decisive step towards its dream of a United States of Europe.
New financial arrangements would pave the way for a single currency, and impose disciplines upon how countries in the EU managed their finances. Member countries were bound to keep public debt below 60 per cent of gross domestic product (GDP) and annual deficits within 3 per cent of GDP. The common currency was introduced in 2000 when 11 member states agreed to accept the euro as their currency. The Eurozone has since expanded to 19 member states.
Poster child of built-in crisis
The combination of these three disciplines, common currency along with debt and budgetary constraints, led directly to the crisis the EU now faces; and of which Greece is, for the moment, the most shining example.
At the time many economists warned that Maastricht was too ambitious a step towards a United States of Europe (always the purpose of the administration in Brussels). It was pointed out that the idea of a common currency was incompatible with the notion that individual countries would continue to manage their own financial affairs – tax collection, revenue distributions and the like.
The system was unsustainable while countries were constrained as to budgetary and debt levels, as if they were states within the United States of America. Quite apart from the economic, political and cultural differences, the EU has no central government collecting and distributing taxation revenue.
Then there was the single currency. This would prove unmanageable ahead of political union under a central government, economists pointed out.
A single currency for say, Greece and Germany, was absurd. For Germany, a country far more developed than Greece, a common currency would be undervalued for Germany and overvalued for Greece. German exports would be cheaper. As for Greece – the weaker economy – its exports would be more expensive. Exactly the opposite of what should prevail.
This disadvantage was made worse by the fact that Maastricht required countries to underwrite losses of the lender banks. How could countries like Greece, with an overvalued currency, possibly obtain the foreign currency needed to repay the debts accumulated by foreign banks?
Greece has become the banner economy for all that is wrong with the EU. But the same problem in greater or lesser degree afflicts the other troubled economies of the zone, in particular, Italy, Spain and Portugal.
To understand what is going on and why fixing it is so difficult, it is necessary to dismiss all the glib phrases fed to the media. Lazy, indolent, overpaid Greeks, and their profligate government; frugal hard-working Germans. Actually the Greeks work longer hours for less money. But that is not the point. Put another way, the glibness might read irresponsible, greedy, German banks lending money in amounts they well knew could not be paid back “by the lazy indolent borrowers”.
From the banks’ point of view, of course, all was well. They relied on the fact that the treaty arrangements provided, in the last resort, that the Greek Government would cover any losses they incurred.
But how could this happen? The Greek Government needed to export before it could accumulate the necessary euros to pay the debt. And it was precluded from exporting, or attracting tourists, because for Greece, the euro was an overvalued currency.
And don’t forget that the purpose of these loans from German banks was to finance Greeks in the purchase of German exports made more competitive by the common currency!
And what is the solution to this problem proposed by the Troika mentioned earlier? Cut pensions, wages and government spending and use the surpluses to pay down the debt owed to foreign banks.
Successive Greek governments have agreed to these provisions, but the result has been a huge reduction in the size of the Greek economy, and huge increases in unemployment, not merely youth unemployment, which recently reached around 50 per cent, while the debt has grown larger.
The present Prime Minister of Greece, Alexis Tsipras, was elected on January 26 2015 to the dismay of the Troika. Tsipras is the leader of a left party called Syriza, which obtained 36 per cent of the popular vote. With the help of a right-wing group, Syriza was able to gather the few extra votes necessary for it to control the Greek parliament.
Greek voters, dissatisfied with the efforts of recent previous governments to negotiate a reasonable deal for Greece, handed Tsipras a challenging mandate. His government was to negotiate better bailout terms to deal with the Greek debt problem, but the electorate made it clear that Greece was to remain in the Eurozone.
Thus Tsipras had been denied access to his only persuasive negotiating tool likely to have any impact on the Troika. (Incidentally, that group prefers, these days, not to go by that name).
As negotiations have proceeded the situation has drifted closer towards deadlock. The Troika has given no ground on the price for bailout: a continuation of the austerity program of budget cuts along with wage and pension freezes. These conditions, Tsipras must know, will be unacceptable to his constituency.
But his hands are tied. The most he can do is point to the possibility of default. Whether this results in any softening of the terms insisted on by the Troika remains to be seen, but it seems unlikely.
From the Greek electors’ perspective, it may seem that Tsipras has already given more ground than he should have. Certainly he can concede no more and retain credibility with the electors. Whether EU negotiators understand this is unclear. In any event they seem to be pushing for all or nothing.
Endgame still uncertain
Trying to predict how things will end is impossible. There are several possibilities.
Tsipras could accept the hard line position of the Troika. That, almost certainly, would end his prime-ministership. If that occurs, the Troika will be jubilant. It will have seen off Greek elected leaders from across the political spectrum and emerged with its negotiating position undisturbed.
But any display of triumphalism would be premature. The fact is that all the problems of Greece will remain. Certainly, Greece will be in no better position to repay its debts, and the country might be drifting towards total political and economic chaos.
Perhaps the Troika knows this and is happy to have the Greek Government committed to repay the debts and accept commitment to the so-called reforms.
Another possibility is that Tsipras wants this negotiation to fail in order to demonstrate to his electorate that there can be no solution that allows Greece to remain in the Eurozone. He may be angling for a new mandate that would give him the bargaining chip of leaving the euro.
How much is that worth? Actually, a great deal. Suppose Greece defaults and abandons the euro, weathers the storm of reverting to the drachma, and actually sees a resurgence of its tourist industry and some prosperity. This could develop a domino effect involving Italy, Spain and Portugal. The entire political and economic strategy of the EU would be in tatters.
All of this is, of course, speculation. In the real world, default, with all its consequences, remains the only option for Greece – and perhaps for the EU.