“The eurozone is now held together by little except fear”

The superb Daniel Altman examines the economics of the recently agreed deal between the EU and Greece, “Greece’s latest bailout proposal, now accepted by the Greek parliament, and currently being scrutinised at length by eurozone finance ministers, make sense? It’s pretty much the same deal that was soundly rejected by Greek voters less than a week ago. The voters clearly knew something that the government didn’t — this is a lousy plan for the Greek economy, and a government stacked with economists surely could have come up with something better. In order to receive more money from the European Union and an extended payment schedule (or even, — gasp — debt relief) from the International Monetary Fund, Greece once again has agreed to a laundry list of new policies, some of them implying yet more sacrifices in the short term. In talks this weekend, the eurozone’s finance ministers have asked for more as a show of good faith. To borrow a metaphor from a story told in ancient Greek, there are many stations of the cross on this road — yet salvation may seem just as distant at the end. Even if Greece promises to submit to this new ordeal, the growth and debt relief it really needs may not arrive in time”.

He adds that  there are some “general points of the proposals and what they’re likely to do for Greek’s economy and its fiscal position”.

Altman writes  concerning the primary budget surpluses until 2018, “The Greek government would commit to spending less than it collects from taxpayers and lenders in each year: 1 percent of gross domestic product in 2015, then 2 percent, 3 percent, and 3.5 percent in 2016, 2017, and 2018 respectively. With modest growth, even that 3.5 percent surplus would amount to about 10 billion euros. But for its latest bailout, Greece is requesting 53 billion euros in new loans spread over three years. Essentially, the bailout lenders are providing the surpluses; they’re giving money to the Greek government conditional on the promise that the government will not spend all of it. This is obviously ridiculous; it’s like a test to see if a child can resist eating a cookie placed in front of him. It’s also economically toxic. Greece should only run budget surpluses if its economy is growing at a healthy pace, and there’s no guarantee that it will be growing in the next couple of years — especially given the rest of the points on the list”.

Altman goes on to discuss tax reform noting that “Greece has a complex tax system that has helped to create a large shadow economy. The proposal includes a bevy of changes designed to streamline the system and raise more revenue. From an economic perspective, anything that makes paying taxes easier — and avoiding them more difficult — will raise revenue somewhat while potentially freeing up taxpayers’ time for more productive activities. So making the system simpler and more transparent, for example by instituting an almost-uniform value-added tax rate, may raise revenue without harming economic growth. But the proposal also includes a number of tax increases, not just to the value-added tax, but also the tax on corporate profits and the tonnage tax on shipping. The value-added tax, at 23 percent for most goods and services, will be one of the highest in the European Union”.

On the issue of pensions he goes on to mention that “Greece’s public pension system, like its public debt, is unsustainable. The retirement age has already risen twice since the crisis began, from 57 to 66. The new proposal would increase it to 67 and inflict more cuts on benefits while attempting to collect more contributions from working Greeks. Raising the retirement age could increase economic output if it boosts the total number of employed people. But if keeping older Greeks in their jobs longer just makes it harder for younger Greeks to find work, then the effect could be the opposite.”

Altman goes on to write about privatisation, “Airports, seaports, and several other assets would be sold to private investors under the proposal. These sales could raise several billion euros, but that would only be enough to take a few chips out of Greece’s enormous public debt. The significance of these sales would rest more on the potential of private owners to encourage greater economic activity through more dynamic management of these assets and further investment in their development. Of course, this is no sure thing”.

Pointedly he notes that “The eurozone’s finance ministers are discussing Greece’s proposal late into the night on Saturday, with some, including the group’s leader, having expressed skepticism already — despite the fact that the proposal is so similar to the one put forward earlier by the creditors themselves. Then, if they are satisfied, there will be more talks, perhaps on debt relief as well. But these delays are for political posturing and little else; the reality remains that the proposal, whoever wrote it, is far from optimal in economic terms”.

He ends the piece, “Yet Greece will have to keep suffering under austerity and repaying its creditors for several years before these and other pro-growth policies have their full effect. Too many points in the proposal imply short-term pain for long-term gain; the most important step toward the control of Greece’s debt is a return to rapid growth as soon as possible. Ideally, the timing of the reforms would put the least costly policies first and make the most costly policies contingent on growth rates in the future. The last thing Greece needs is another bundle of policies whose immediate effect will be to deepen its depression”.

He concludes, “Greece’s submission to the conditions that Germany demanded, merely to start negotiations about further funding to refinance its unsustainable debts, may stave off the prospect of imminent bank collapse and Greece’s exit from the eurozone. But far from solving the Greek problem, doubling down on the creditors’ disastrous strategy of the past five years will only further depress the economy, increase the unbearable debt burden, and trample on democracy. Even Deutsche Bank, one of the German banks bailed out by European taxpayers’ forced loans to the Greek government in 2010, says Greece is now tantamount to a vassal state”.

He ends making the vital point, “But this is much bigger than Greece. It is clearer than ever that Europe’s dysfunctional monetary union has a German problem, too. As creditor in chief in a monetary union bereft of common political institutions, Germany is proving to be a calamitous hegemon. Paris may have tempered Berlin’s petulant threat to force Greece out of the euro, but German Chancellor Angela Merkel undoubtedly calls the shots. The deal that Greek Prime Minister Alexis Tsipras capitulated to mirrored German demands, not the proposals he drafted with French help last week. By pointing out the futility of resistance if Greece wished to remain in the euro, Paris has, in a sense, acted as Berlin’s agent in securing Athens’s acquiescence”.

He finishes “That’s the point of brutalizing Greece: to deter anyone else from getting out of line. Why vote for parties that challenge the Berlin Consensus if they will be beaten into submission, too? Created to bring Europeans closer together, the eurozone is now held together by little except fear”.

Altman correctly notes that this is not the end of the crisis, “many Greeks believe any deal is worth doing to keep Greece in the euro. But as depression bites and the reality of German-imposed technocratic rule sinks in, the political backlash will surely grow. So the prospect of default and Grexit are hardly gone. Greeks ought to use their extended stay in debtors’ prison to better plan their escape. To default safely within the eurozone, Greece needs to secure its banks. On prudential grounds, of course, Athens ought to force them to keep their holdings of bonds guaranteed by the Greek government to a minimum and recapitalize them with assets more tangible than tax credits on future profits. That way the ECB cannot shut them down again. The eurozone as a whole remains an economic basket case and a democratic disgrace. It is trapped in a nightmarish limbo where politics precludes the creation of common institutions that would cage German power and put the ECB in its place, while fear prevents its victims from leaving. So much for the European dream”.



2 Responses to ““The eurozone is now held together by little except fear””

  1. Merkel’s ideological view | Order and Tradition Says:

    […] by the established rules is both fair and wise, a growing international consensus contends that the third bailout, a package of 86 billion euros ($93 billion) in exchange for more austerity, is no deal but […]

  2. “Mockery of the EU’s innovative community” | Order and Tradition Says:

    […] one reading of the particular situation of the Greek crisis. Another is that the Germans wished to make a deal so punitive that the Greeks would be forced to leave the euro and thus the EU. If this is true it […]

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