Greece rides the ghost train

Agora Contributor: Nick Malkoutzis
Photo by Heather R via Flickr https://flic.kr/p/2NPyuG
Photo by Heather R via Flickr https://flic.kr/p/2NPyuG

Greece’s negotiations with its lenders over the last few days have been more like a ride on the ghost train than a roller coaster, producing moments of sheer panic punctuated by brief spells that allow the palpitations to subside.

The news on Thursday that International Monetary Fund officials had departed from the talks due to a lack of progress sent Greece whizzing once more into the darkness with only the ghouls for company. Then there was some respite as a Greek delegation returned to Brussels for talks on Saturday and Sunday, only for foreboding to kick in again as this round of negotiations also ended with no result.

Greece’s European partners and the IMF have suggested that Athens had not made enough of an effort to meet its lenders over the reforms and cuts they are demanding in order to move forward with the bailout programme.

Throughout this crisis (not only over the last few months) Greek governments have suffered from an inability to communicate their side of the story convincingly. The last few days have been no different, as comment after comment from anonymous and eponymous EU officials painted the picture of a recalcitrant administration in Athens, sticking to its “red lines” and election promises.

The truth is that Prime Minister Alexis Tsipras cast off many of his red lines days ago and the pledges he made before votes were cast on January 25 are becoming a distant memory. If one looks at the 47-page document sent by the Greek side to lenders last week, it bears hardly any relation to the policies SYRIZA was advocating a few months ago. Among the proposals are VAT rises, phasing out of early retirement along with further pension reform, measures to further deregulate the product market, primary surplus targets reaching 3.5 percent of GDP from 2018 onwards, an increase in the “solidarity tax” on income, the continuation of privatisations and the liberalisation of the energy market.

While on some points the document falls short of what lenders would have been expecting, it is probably near the maximum that could be squeezed out voluntarily from a country where the political system is shattered, the economy is gasping for air and society is at a loss. The proposal contains more than 2.5 billion euros in fiscal measures over the next two years, which is more than the previous government, led by Antonis Samaras, had been negotiating with lenders.

Tactical errors

Two grave tactical mistakes by Tsipras must be highlighted. By dragging out negotiations, and therefore the prevailing uncertainty, he has allowed the economy to be damaged further. In turn, this has meant that the size of the fiscal adjustment he needs to make to hit whatever primary surplus targets are agreed is even bigger.

Also, by making the measures the previous government was discussing the main theme of his election campaign, he gave himself an impossible task. SYRIZA constantly referred to proposals sent to creditors by ex-Finance Minister Gikas Hardouvelis as evidence of the new austerity blows that would rain down on the Greek people. Hardouvelis had pledged up to 1.5 billion euros in new measures and by deeming this unacceptable, SYRIZA set the pain threshold much lower. The problem, though, was that

Hardouvelis’s email was never accepted as a deal clincher by the troika. Had negotiations with the New Democracy–PASOK coalition continued, lenders are certain to have asked for more.

So a mixture of poor strategy and false expectations have led Tsipras to the point where even proposals that represent a huge leap from what he was advocating only in January (and more than what Samaras offered) is still not enough to clinch an agreement with creditors.

The other side

Here, though, questions also have to be asked about the institutions’ position. The document presented to Tsipras represents a softer stance on some issues, such as lower fiscal targets for the next few years (1 percent of GDP for 2015, 2 percent for 2016, 3 percent for 2017 and 3.5 percent for 2018 and beyond) and abandoning its demands for further deregulation of the labour market.

Beyond that, though, there is nothing from the lenders’ side that suggests that they are willing to alter their stance on Greece despite five years of recession, political turmoil and failed policies. Nor could there be a change as long as the Europeans resist the IMF’s calls for Greece to be given debt relief, leading to the Fund to demand that Athens then make the onerous fiscal and structural adjustments needed to make its debt sustainable. The IMF’s chief economist Olivier Blanchard spelled this out in a blog post on Sunday.

Lenders are demanding 3 billion euros of fiscal measures this year alone and another substantial overhaul of the pension system, yielding savings of up to 900 million euros (0.5 percent of GDP) this year and 1.8 billion euros (1 percent of GDP) next year. We must be clear that this is a package that no Greek government in the current situation, let alone SYRIZA which was voted to power on a platform of an – albeit unachievable – opposite promise, could present to Parliament and expect with any certainty that it would be approved or that it would remain in power the following day.

So, we have come down to negotiating over the details. Tsipras hopes he can eke out something at the last minute that would make such an agreement a little more palatable. He has increased his primary surplus offer to 0.75 for this year and 1.75 for next year but is still resisting on pensions. At the same time, lenders have apparently refused to even countenance a proposal by Greece for the European Stability Mechanism to help buy up the Greek bonds the European Central Bank bought on the secondary market, with a face value of 27 billion euros. Athens argues this would also allow it to repay the IMF early and reduce its short-term funding needs.

Greece, the eurozone and the IMF have over the last five years displayed a remarkable capacity to push themselves into corners and this time is no different. Through a mixture of amateurishness, dogmatic rigidity, political cowardice and lack of vision Greece stands on the brink once more. The best that can be hoped for now is an unsatisfactory last-minute fudge that will do nothing to solve the Greek problem, nor to settle lenders’ reservations about Greece’s place in the euro area. Nevertheless, if those involved don’t even manage that, they run the risk of going down as the men and women who couldn’t avert an unravelling due to differences of 0.25 percentage points over the primary surplus. History will not look upon them kindly.

*You can follow Nick on Twitter: @NickMalkoutzis. A version of this article appeared in last week's e-newsletter, which is available to subscribers online or via our free mobile apps (App Store and Google Play). 

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