Commentary | 24 February 2015

Greek politicians have to learn to break promises

Greek politicians have to learn to break promises

Stephen Grenville

The Australian Financial Review

24 February 2015

  • Stephen Grenville

Greek politicians have to learn to break promises

Stephen Grenville

The Australian Financial Review

24 February 2015

  • Stephen Grenville

Executive Summary

On Friday the European authorities reached agreement with the new Greek government to extend the terms of Greece's debt a little further into the future.

We shouldn't be surprised that the preceding weeks resembled a game of "chicken" between the two sides. But as time ran out on the debt repayment schedule, the underlying fundamentals asserted themselves.

The first of these fundamentals is that Greece has more official debt than it can ever hope to pay back, but there is no realistic prospect that this debt can be written off (or even written down to a manageable figure) in the current negotiations.

Europe is not yet ready to face this unpalatable reality. The second is that there has to be a continuation of "conditionality" - the reform requirements that keep Greece's "feet to the fire". But Greece should be given some latitude, because the current budget constraints offer no prospect of growth. The third basic fact is that all parties at the negotiating table would rather Greece continue as part of the euro, because "Grexit" would be such a disruptive mess.

On the first element, the repayments have been pushed even further into the future but have not been reduced. Greek Prime Minister Alexis Tsipras promised his electorate he would get a fundamental resolution of the debt, not a simple extension. This was, however, too much to ask for.

By asking for too much, the negotiators might have missed an opportunity to improve Greece's position, even without any reduction of the nominal debt figure. Interest on the debt is low, so the current burden is sustainable. It could, however, have been trimmed a little more.

This would be achieved by the Europeans taking over the International Monetary Fund share of the debt (12 per cent of total debt), replacing it with the cheaper lending from the European Financial Stability Facility. Of course, the Europeans would be unhappy to end up with even more Greek debt, but it would make amends for the way the Europeans conned and ramrodded the IMF into providing its share in the 2010 rescue, contrary to the IMF's sensible principle that it shouldn't lend when there is no good prospect of being repaid.

The reform "conditionality" was left unsettled in Friday's agreement, awaiting specific Greek proposals this week. The terms should be calibrated to the needs of growth, not as a punishment for debt recalcitrance.

A strongly growing Greek economy would be the best outcome, not just for the Greeks but for the other Europeans, who will get more back when the debt eventually comes to be resolved.

There will be instances where external pressure will actually help the Greek administration to do the things it knows it has to do. The left-wing Syriza party might be ideologically readier than its predecessors to take on the plutocratic-capitalists among Greek's vested interests.

The Greeks need to understand that they can't adopt the terms of their electoral victory as the immutable basis for renegotiation.

One of the required skills of successful politicians is knowing how to get away with breaking electoral promises. Prime Minister Tsipras needs to be given time to do the necessary back-tracking and reformulating of his electoral promises.

The Europeans seem to hold the stronger negotiating hand, but those European countries (such as Finland) that focus on the sanctity of debt should understand that this debt is not worth anything like its face value.

If the negotiations do go over the edge, the creditors won't get back much at all.

It is in both sides' interests to help the other achieve an electorally palatable outcome. It was unhelpful of German Finance Minister Wolfgang Schaeuble to observe, after Friday's agreement, that "the Greeks will certainly have a difficult time explaining the deal to their voters".

A pretty good story can be told of the Greek reform process, especially on budget expenditure, which has been cut far more drastically than in any other crisis county.

The Greek basic budget (ie, excluding interest) is in comfortable surplus. The missing part of the narrative so far is an economic recovery: Greek gross domestic product is down by a quarter, instead of the modest 6 per cent reduction anticipated by the IMF in 2010. The task now is to tackle the harder structural reforms, like selling government assets and getting the rich to pay tax.

 

Stephen Grenville is a former deputy governor at the Reserve Bank of Australia and a visiting fellow at the Lowy Institute for International Policy in Sydney.