Greece and the future of the Eurozone
Paweł Świeboda
A sense of drama has returned to the Eurozone. Although the immediate focus is on preventing Greek insolvency, the bigger battle has to do with the future logic of Eurozone reconstruction. The political and economic cycles are diverging at exactly the point in time when conditions have become ripe for a modest recovery. Hard-won of stability, coupled with the euro’s devaluation, fall in oil prices and the ECB’s monetary expansionism, should under normal circumstances translate into renewed investor and consumer optimism. But then comes Greece…
The new Athens government knows that a simple turning of the table will not take it anywhere apart from the risky waters of Grexit that it seems determined to avoid. Assuming it is not suicidal or intent on awakening the worst demons of nationalism at home, Syriza will therefore seek an arrangement which allows Greece to continue being a Eurozone member. The mandate it had received from the Greek people is for playing hardball but avoiding a crash.
The sense of frustration in Berlin is understandable. The whole logic of its policy line in the last couple of years has been based on creating market confidence to enable growth. Remember the stability union? German policy-makers and analysts used to revel in the virtues of giving investors and consumers a clear sense of direction. The way to do so was not only by defusing all the remaining ticking bombs such as the unreformed banking sector but also putting a lock on excessive spending. The cream on the top was meant to come from contractual arrangements allowing for a modest degree of fiscal transfers in exchange for structural reforms. That idea never took off the ground, provoking outrage among the programme countries but also unease among the more fiscally conservative Northern peers.
At first sight, the arrival of the Syriza government seems to deal a death blow to the attempts at creating a common fiscal policy in the Eurozone. In the light of events, the prospect of debt mutualisation seems further detached from the realm of the feasible than ever before. If trust is its necessary ingredient, it has rarely been more wanting. And yet substance-wise, the Eurozone has been grudgingly moving the goalpost, even if in a not entirely consensual manner. Austerity has been loosened up, as reflected in the revised guidelines for the application of the Stability and Growth Pact. The difference to the previous phase of the crisis has to do with Germany’s tacit acceptance of the change of course as well as other actors’ improved ability to make Germany go along with them.
What the arrival of Syriza changes is two-fold. On the debt front, it brings up the issue of the linkage between the debt burden and growth. Although the interest payments on Greece’s debt have been substantially reduced in the past years, and are now lower than those of France and only minimally higher than those of Germany, the arrangement covers only an eight-year-period and can be seen by some investors as inadequate from the point of view of the country’s longer-term solvency. The GDP-indexed debt relief arrangement might be a way to allay these concerns. Similar arrangements would naturally be demanded by other indebted countries.
On the fiscal management front, the claim of the new Greek government is both to a more generous budgetary space, which it says is needed to avoid a “humanitarian” crisis, as well as to having more autonomy in policy execution. An effort to recognise the validity of that claim will have to be made. The troika experience was necessary at the height of the crisis when commitment to reform seemed vague. Previous Greek governments proved unable to tackle the beasts of nepotism, cronyism and vested interests. The jury is entirely out whether the Syriza government will be able to tackle them with more success but the determination in doing so is what will make or break its tenure in the eyes of the Greek public. The one reassurance that its Eurozone partners can therefore count on is that if Syriza does not deliver on its promises, it will be swept from power more quickly than its predecessors. Creditors’ red lines will still be needed but they can always be reformulated in a less intrusive manner, allowing the Greek government to assume more immediate responsibility for its policy choices.
The temptation in Germany and in Brussels might be to isolate Greece for the simple reason that other elements of the Eurozone equation seem to be falling in place. And yet, it would be a mistake to dismiss the Greek imbroglio too easily. It does mean that the Eurozone reconstruction is moving into a new phase, in which systemic stability will come first and ways will be sought to limit mechanisms of contagion between individual countries. More effort will be put to ensuring that the overall environment becomes conducive to growth with efforts to improve productivity and funding. More space will also be created for arrangements in which individual countries have an opportunity to take more risk, at higher reward, without impacting on others. Trust will need to be placed afresh in the electorates’ ability to hold their governments to account. Whether one wants it or not, the question should not be whether to isolate Greece but how to make sure that the solution to the Greek puzzle fits the bigger picture of shaping the Eurozone’s future.
