28 October 2016
A Syriza supporter carries the party's flag during a May Day march in Athens. The EU has itself to blame for the rise of Syriza. Photo: Bloomberg
A Syriza supporter carries the party's flag during a May Day march in Athens. The EU has itself to blame for the rise of Syriza. Photo: Bloomberg

Greek crisis could be a once-in-a-lifetime chance for eurozone

The Greek crisis has reached a showdown stage.

Eurozone heads of governments are meeting on Monday to decide Athens’ fate and that of the great European experiment.

This could be a once-in-a-lifetime opportunity for all, if Europe decides to seize it.

For too long, negotiations between Greece and its creditors have been bogged down in detail, squandering political and financial capital on endless bickering over, say, an exact figure for Greece’s primary budget surplus.

Their positions are irreconcilable because their differences are political, not technical.

Even if they reach a compromise of the “usual” kind on Monday, they will merely be “surprised” that another “crisis” will break out in the near future.

It is time for a grand bargain.

A grand bargain can put an end to years of quarrels within the eurozone and regenerate positive momentum for the European project.

With a grand bargain, Greece would no longer rebel; this is already the best the far-left Syriza could ever ask for.

A failure to strike such a bargain would bring about a happy divorce and remove much of the uncertainty.

But first, we need to ask what the Greek problem is anyway.

Greece has two problems — one short-term, the other long-term.

Greece’s short-term problem is debt sustainability resulting from fiscal profligacy before the crisis; its long-term problem is the absence of “convergence” to the productive capacity of other eurozone member states.

On debt, fiscal consolidation has been the answer.

Between 2009 and 2014, the country’s structural fiscal deficit fell by as much as 20 per cent of gross domestic product.

Five years of belt tightening have not delivered much: Greece’s debt burden relative to GDP has doubled since the crisis.

However, real GDP has contracted by 27 per cent and the unemployment rate has peaked at 28 per cent.

The state of affairs has been to “extend and pretend” — extending debt maturities and pretending Greece can repay at some point in the future, perhaps in the next decade. This is wishful thinking.

Unfortunately, the European Union is not a strategic union: even it does not know where Greece is headed.

The EU, therefore, has itself to blame for the rise of Syriza.

On convergence, Greece is undergoing a series of structural reform to enhance its competitiveness relative to other eurozone members.

It includes measures to stamp out tax evasion, corruption and, most importantly, crony capitalism.

The argument for convergence is twofold.

The first is to reduce external imbalances within the eurozone. The second is to foster wage and price adjustments in Greece in the event of asymmetric economic shocks.

Both reduce the likelihood of a next eurozone crisis.

Convergence is difficult because Greece has to become more like Germany, not the other way round.

What is problematic is that Syriza has not shown enough commitment to structural reform.

Why should other eurozone member states come to the rescue if Athens does nothing to prevent another crisis?

Worse still, austerity and structural reform are a toxic mix.

Austerity undermines the political support for structural reform while structural reform deepens the pains of austerity.

This leads to my call for a grand bargain.

A grand bargain should include, for Greece, further debt relief, maturity extension and introduction of growth-indexed sovereign bonds.

This would lead to less austerity and more growth.

In exchange, Greece has to commit fully to structural reform. An incentives system, such as one that rewards structural reform with more debt relief, can be put in place.

To allay concerns about moral hazard from other countries, notably Spain, these countries can be invited to Greece to monitor reform, provided that both sides agree.

For the eurozone as a whole, if its leaders are still determined to keep the single currency, a fully fledged fiscal union is simply a logical step, if not the next logical step.

It is not without implications, which I will talk more about in my next article.

The alternative of Grexit is a sub-optimal.

It will not give fiscal room to Greece and it will not bring about a long-awaited export boom as Greece is by and large a closed economy.

Above all, it will reduce the eurozone from an irrevocable currency union to multiple fixed exchange rate pegs.

This is not to deny that Grexit will not happen. History is full of accidents and surprises.

However, I remain cautiously optimistic about the prospect of a deal.

Sources suggest that both German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras want a deal.

True, Tsipras was elected to repudiate austerity but so was he elected to keep the economy afloat, which a Grexit won’t do.

The issue at stake is whether the deal solves or merely prolongs the problem.

It is easy to strike a tactical deal but difficult to strike a strategic bargain.

I hope I am not being overly pessimistic.

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