The Syriza government is right on fiscal policy and debt relief. Too much austerity without compensating measures to reflate demand led to a deep recession which increased the debt/GDP ratio and depressed investment and therefore output.
"If Greece ends up outside any programme framework, its banks will be left short of finance"
The key question is how Syriza’s economic platform, designed to counteract the impact of the excessively strict austerity of the last four and a half years, can be accommodated within the eurozone framework.
Syriza intends to launch a massive new spending programme including free electricity and food coupons for the poor and an increase in state pensions to pre-crisis levels ‒ that would cost about 6.5% of GDP. Tax hikes for the wealthy and for large property owners would help to finance these expenditures, while increases in the minimum wage would round out income redistribution efforts. The government also plans to renegotiate Greece’s debt with lenders with a view to writing off the bulk of its liabilities.
But suspending or even reversing productivity-enhancing structural reforms is clearly not conducive to economic recovery.
A reformed state may improve the economic environment and curb rent-seeking but cannot supplant market incentives as an engine of growth.
Syriza has promised to repeal labour-market liberalisations and suspend privatisations. This neglects the important fact that structural reforms form part of Greece’s commitments and also serve the country’s long-term interest. Given this, they cannot ‒ and should not ‒ be abolished. Instead, their design and implementation problems should be addressed to improve their effectiveness.
"Reversing productivity-enhancing structural reforms is clearly not conducive to economic recovery"
Greece is now demanding that the bailout programme and its supervising mechanism – the so-called Troika composed by representatives of the European Commission, the European Central Bank and the International Monetary Fund – be dismantled.
Syriza’s leaders should therefore focus on renegotiating the terms of the existing agreement to alleviate fiscal and debt constraints and exit the bailout regime. For a successful conclusion, the new government should moderate its spending and debt relief demands and adjust its reform agenda to meet the standards imposed by globalisation. Public opinion in Europe and around the world sympathises increasingly with the huge social costs inflicted on Greece as a result of failed austerity policies and that is strengthening Athens’ negotiating position.
But instead of addressing issues of substance the government is wasting negotiating capital on rejecting all references to the bail-out agreement on the grounds of the democratic mandate it won in the recent elections. This is seen by eurozone authorities as challenging the time-honoured principle of pacta sunt servanda (agreements must be kept).
If Greece ends up outside any programme framework, its banks will be left short of finance and exposed to very serious risks.
The battle of wills is turning into a battle of principle, with an uncertain outcome.
- Greek debt: Syriza cannot win a game of chicken
- Germany’s Goliath versus Greece’s David by Giles Merritt
- Inside the mind of Syriza by Yanis Varoufakis
- Syriza’s big win: The plus and minus sides by Giles Merritt
- The Greek crisis: Be flexible on debt, but intransigent on reforms by Leszek Balcerowicz and Andrzej Rzońca
- High anxiety in Brussels, austerity fatigue in Greece, and the danger of contagion by Howard Davies
- Greece: Are more bailouts inevitable? Not if Syriza wins by Graham Bishop
- Greek crisis: Fire the Troika, and then what? By Michalis Sarris
- Greek showdown: Continue EU’s hard line? Or a middle road with quantitative easing? by Waltraud Schelkle