Berlin v. Athens: the battle of wills has become a battle of principle


Picture of Yannos Papantoniou
Yannos Papantoniou

President of the Centre for Progressive Policy Research (KEPP)

The battle of wills between Germany and Greece is well under way, but the Goliath-David analogy only applies if smartness proves to be inversely related to size. It is too early to predict even though time is measured in days not weeks.

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.

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.

If Greece ends up outside any programme framework, its banks will be left short of finance

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.

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.

Reversing productivity-enhancing structural reforms is clearly not conducive to economic recovery

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.

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