So far, I refrained from commenting on Greece. Too often already Europe’s final countdown was playing (pun intended) and, in the end, decisions were again postponed for several months. But now I’m pretty sure that with Tsipras’ announcement of a bailout referendum the fifth act of this drama has begun.
In these days, German media is again full of articles about Greece. Unfortunately however, you hear very little about the concrete proposals that are debated. It’s all about a Grexit that is more likely than ever and whether this will constitute a Eurozone’s Armageddon or rather a “cleaning storm”.* But I’m pretty sure they still debate about a debt repayment plan, the retirement age and commitments to fiscal surpluses.
I’m an opponent of the austerity measures that are demanded from Greece. I believe that, in principle, Varoufakis is right when he says that only economic growth and far-reaching reforms of the Greek state can be a way out of this misery. I don’t share Syriza’s obvious ideological focus on demand side measures. But I recognize the need to drag the people along the road of painful economic policies. To put it mildly, it’s “hard” to push for concessions with an unemployment rate of 26%.
Whether it’s a bailout or the continuing provision of emergency credits, with the outlook on decades of debt repayments, the money is likely to be gone anyways. And I’d say, most of the people in Germany and the other creditor countries**, except of a few Maastricht Orthodox maybe, have realized this by now. I’m all for giving Greece the fresh start it desperately needs. But the problem roots deeper, in a classical agency problem of economic theory.
The first-best solution, indeed what Varoufakis suggests, would be the following deal: a bailout in return for commitments to set up a functioning tax system, fight corruption to enforce the rule of law and establish growth enhancing policies. And with growth enhancing policies I mean what creditors perceive as growth enhancing: increasing the retirement age, lowering minimum wages, cut military budgets to invest it more wisely and abolish tax exemptions.
Of course, these are all measures for which a left-wing party like Syriza got no mandate from voters. Such a deal would seriously undermine the sovereignty of the Greek state. A complaint that was raised numerous times by the Greek side. But it’s crucial to realize that the electorate of the creditor countries have a say as well in this matter. And their foremost interest is that a “fresh start” for Greece would be an exceptional event for the Eurozone. Something that won’t repeat itself because Greece (and other states in the Eurozone as well) will finally find back to a sustainable growth path thanks to successfully implemented reforms.
Unfortunately, such a deal is not feasible because no one can enforce it. Europe simply lacks the necessary institutions. I see the negotiations of the past few months as an attempt to find a second-best solution — a committment by the Greek government to implement painful economic reforms that are going against their political ideology, as a signal of good-will. In the end, this would still be cheap talk, and over the years all these plans could be seriously diluted. But an atmosphere of political trust and, to say it frankly, a certain submissiveness by the Greek government could have served as the sign that would have calmed the European partners.
— Alexis Tsipras (@tsipras_eu) 27. Juni 2015
The announcement of the referendum yesterday made all this obsolete. There can be no doubt about how the Greek people will decide on July 5 (see Tsipras’ tweet). The result will be perceived as the unilateral revocation of all reform plans and, I’m afraid, then there is not much to talk about anymore.
For the Greek side it’s, by now, a question of national dignity. Many commentators have noted that especially Germany should know better. The historical parallels in the Germany history, hard austerity dictated by the victors of WWI in the Weimar Republic compared to economic stimulus by the Marshall Plan after WWII, are indeed strong. The Western Allies allowed their occupation zones to start from zero which finally resulted in the German “Wirtschaftswunder”. Economists like Paul Krugman and Thomas Piketty have argued that way.
That was in the self-interest of the Allies, as the Cold War had just begun. But that’s not the point of the story. The point is that West Germany was occupied by the French, the British and the US Army. Until the foundation of the Federal Republic, it was ruled by a military government. It was this complete (but permanent) lack of political sovereignty that gave victors the reassurance that Germany will undergo an abrupt break with its past and not simply carry on with its old habits.
* A German saying coming from the story of Noah’s Ark in the bible.
** I dislike the reduction of the conflict to a showdown between Greece and Germany. Merkel and Schäuble are undoubtedly a strong voice in this debate but there is a political consensus among the IMF, the ECB and the EC.