The Greek time bomb

Financial Mirror (Cyprus) - - FRONT PAGE -

Much is at stake in Greece’s up­com­ing elec­tion. In­deed, the out­come could de­ter­mine whether the coun­try re­mains in the eu­ro­zone, with far-reach­ing im­pli­ca­tions for the rest of the mon­e­tary union.

Syriza, a rad­i­cal left-wing party whose pop­u­lar­ity has sky­rock­eted amid the coun­try’s eco­nomic cri­sis, is the favourite to win, though it is un­likely to gain enough par­lia­men­tary seats to gov­ern alone. In­stead, it will prob­a­bly lead a coali­tion gov­ern­ment, though with which other par­ties re­mains un­clear.

Fun­da­men­tal to Syriza’s plat­form its eco­nomic pro­gramme, de­signed to coun­ter­act the im­pact of the ex­ces­sively strict aus­ter­ity that Greeks have en­dured for the last four and a half years, in ex­change for bailouts from the “troika” of the Euro­pean Cen­tral Bank, the In­ter­na­tional Mon­e­tary Fund, and the Euro­pean Com­mis­sion. Pen­sions have been re­duced by 40%, on av­er­age, while the mid­dle class is suf­fer­ing un­der the weight of crip­pling new prop­erty taxes.

As a re­sult, Greece has fallen into a deep and pro­longed re­ces­sion, with out­put down 25% from pre-cri­sis lev­els. Worse, un­em­ploy­ment stands at nearly 26% – and more than 50% among young peo­ple. Yet most un­em­ploy­ment ben­e­fits are now be­ing elim­i­nated after 12 months, with the longterm un­em­ployed of­ten los­ing ac­cess to the state health-care sys­tem. Add to this a 30% in­crease in prices for pre­scrip­tion drugs, and it is easy to see why Greek so­ci­ety is un­rav­el­ing.

Of course,

th­ese

is

sac­ri­fices might

be worth­while were they help­ing Greece re­duce its pub­lic debt to man­age­able lev­els. But, at the end of 2014, pub­lic debt amounted to 175% of GDP, hav­ing in­creased from its 2009 level of 127%. Ser­vic­ing that debt would re­quire pri­mary bud­get sur­pluses equal to at least 4% of GDP un­til 2022 – an out­come that would re­quire a surge in growth. Un­der the weight of re­lent­less fis­cal aus­ter­ity, how­ever, such growth is out of the ques­tion.

That is why Syriza has promised 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 high-in­come earn­ers and large prop­erty own­ers would help to fi­nance th­ese ex­pen­di­tures, while in­creases in the min­i­mum wage would round out in­come re­dis­tri­bu­tion ef­forts.

Syriza has also promised to re­peal labour­mar­ket lib­er­al­i­sa­tion and sus­pend pri­vati­sa­tion. Fi­nally, it plans to rene­go­ti­ate Greece’s debt with lenders, in the hope of writ­ing off the bulk of its li­a­bil­i­ties.

Syriza’s eco­nomic pro­gramme ne­glects the im­por­tant fact that fis­cal con­sol­i­da­tion and struc­tural mea­sures not only form part of Greece’s com­mit­ments; they also serve the coun­try’s long-term in­ter­est. Given this, they can­not – and should not – be abol­ished. In­stead, the prob­lems in their de­sign and im­ple­men­ta­tion should be ad­dressed, in or­der to im­prove their ef­fec­tive­ness within cur­rent eco­nomic cir­cum­stances.

Such an ap­proach would strengthen Syriza’s po­si­tion in debt-re­lief ne­go­ti­a­tions. Nonethe­less, of­fi­cial state­ments sug­gest that the troika would not be in­clined to ac­cept Syriza’s ne­go­ti­at­ing frame­work, in­tend­ing in­stead to com­plete the talks that it had launched with the out­go­ing cen­tre-right gov­ern­ment, the goal be­ing to se­cur­ing fur­ther bud­get cuts and ini­ti­ate new labour­mar­ket and pen­sion re­forms. In short, the troika will in­sist that Greece hon­ors its prior com­mit­ments.

If ne­go­ti­a­tions stall, fi­nan­cial and liq­uid­ity stress, re­sult­ing from Greece’ in­abil­ity to bor­row at cur­rent in­ter­est rates – tenyear bond yields have reached 9.5 % – will weaken the po­si­tion and bank­ing sys­tem fur­ther.

This could lead to a col­lapse in con­fi­dence, trig­ger­ing fi­nan­cial up­heaval and, in turn, forc­ing the coun­try to seek a third bailout – one that would re­quire Greece to leave the eu­ro­zone and in­tro­duce a new, de­val­ued cur­rency.

In that case, Greece’s geopo­lit­i­cal po­si­tion would be weak­ened, its econ­omy would sink fur­ther into re­ces­sion, and so­cial ten­sions would rise. More­over, in­sta­bil­ity would be­come chronic, be­cause the eu­ro­zone would no longer of­fer a back­stop for fis­cal and fi­nan­cial lax­ity.

Eu­ro­zone au­thor­i­ties may claim that a Greek exit no longer poses a sys­temic risk, given the in­tro­duc­tion in re­cent years of var­i­ous in­stru­ments for fight­ing fi­nan­cial crises, in­clud­ing gov­ern­ment-backed res­cue funds, a par­tial bank­ing union, tougher fis­cal

fis­cal con­trols, and the Euro­pean Cen­tral Bank’s new role as lender of last re­sort. But a mem­ber’s exit would still in­di­cate that the eu­ro­zone’s in­tegrity is not guar­an­teed – a mes­sage that the mar­kets are un­likely to miss.

A Greek exit may serve as a warn­ing to coun­tries like Spain, Italy and France, where strong anti-Europe or anti-es­tab­lish­ment par­ties are on the rise. But it would do noth­ing to ad­dress the real prob­lem: the in­creas­ing eco­nomic di­ver­gence among eu­ro­zone coun­tries. So long as per­for­mance gaps con­tinue to widen, vot­ers will con­tinue to chal­lenge Euro­pean in­te­gra­tion. Only fur­ther uni­fi­ca­tion, un­der­pinned by growth-ori­ented poli­cies in the strug­gling coun­tries, can re­verse this trend.

Such an out­come is still pos­si­ble – but only if the rel­e­vant ac­tors recog­nise the risks as­so­ci­ated with a Greek exit from the eu­ro­zone. A Syriza-led gov­ern­ment must mod­er­ate its ap­proach and prom­ise that it will con­tinue to pur­sue re­form and limit spend­ing in ex­change for a sub­stan­tial re­duc­tion to its debt bur­den – a re­duc­tion that the troika must be will­ing to grant.

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