The Greek cri­sis and the clash of philoso­phies within the EU

Financial Mirror (Cyprus) - - FRONT PAGE -

Lis­ten­ing to Ger­man Fi­nance Min­is­ter Wolf­gang Schäu­ble and his Greek coun­ter­part Ya­nis Varo­ufakis speak­ing about the re­cent Eu­rogroup agree­ment on Greece, one could be for­given for think­ing that they were talk­ing about two com­pletely dif­fer­ent texts.

There are ob­vi­ously deep dif­fer­ences be­tween them over sub­stance and sta­tus that are far from be­ing re­solved.

The out­come is un­clear. Both sides have bought time as Greece’s pro­posed rev­enue rais­ing mea­sures un­dergo fur­ther scru­tiny in the Eu­rogroup. Greece can claim that it has achieved suc­cess by win­ning more flex­i­bil­ity on de­mands that it run a 4.5% pri­mary sur­plus. It can also point to in­creased un­der­stand­ing from Eu­rogroup part­ners on con­di­tional fi­nanc­ing for so­cial mea­sures and the need to avoid ad­di­tional aus­ter­ity mea­sures as steps in the right di­rec­tion. Ger­many can stress Greece’s com­mit­ments on debt re­pay­ment; the fact that its eco­nomic ad­just­ment pro­gramme will con­tinue to be as­sessed by the Euro­pean Com­mis­sion, Euro­pean Cen­tral Bank and the In­ter­na­tional Mon­e­tary Fund; and an un­der­tak­ing from Athens to avoid uni­lat­eral mea­sures.

Greece con­tin­ues to em­pha­sise the need for a fun­da­men­tal change in the Euro­pean Union’s eco­nomic phi­los­o­phy. It in­sists that Troika-in­spired aus­ter­ity pro­grammes have left the coun­try with un­ac­cept­able lev­els of poverty. Re­gard­less of ide­ol­ogy, the the level of dis­sat­is­fac­tion in the coun­try means the new Greek gov­ern­ment will find it im­pos­si­ble to pur­sue sim­i­lar poli­cies to its pre­de­ces­sor.

In con­trast, a hege­monic Ger­many in­sists on main­tain­ing the cur­rent eco­nomic phi­los­o­phy, not be­cause it is good for Europe, but be­cause it con­sid­ers it ben­e­fi­cial for its own in­ter­ests. This is de­spite the re­ces­sion now knock­ing on Ger­many’s door. For Ber­lin, it seems, ide­ol­ogy and sta­tus are the top pri­or­i­ties.

In­evitably, the clash of the two philoso­phies will con­tinue. One could hope the phi­los­o­phy underpinning cur­rent eu­ro­zone pol­icy changes to en­cour­age growth with­out los­ing sight of the need for eco­nomic re­struc­tur­ing and ra­tio­nal­i­sa­tion. The years of cri­sis have laid bare deep flaws in the eu­ro­zone’s ar­chi­tec­ture, and not just be­cause of Greece.

Ire­land, Spain, Por­tu­gal and Cyprus are in essence con­fronting dif­fer­ent facets of the same prob­lem. Change will re­quire Ger­many to adapt its phi­los­o­phy and per­spec­tive, but un­for­tu­nately, Ger­man think­ing con­tin­ues to con­fuse house­hold eco­nomic man­age­ment with macroe­co­nomics. In the short term, the most likely sce­nario is more fric­tion and de­mands for aus­ter­ity mea­sures aimed at strict fis­cal dis­ci­pline. It is doubt­ful whether this can be sus­tained over time.

As things stand, it is im­pos­si­ble for Greece to pay off its debts and meet its broader eco­nomic pol­icy obligations. The pri­vate and public debts can­not be re­paid un­der con­di­tions of a deep and sus­tained re­ces­sion. Th­ese con­di­tions risk lead­ing Athens to fi­nan­cial col­lapse and exit from the eu­ro­zone, de­spite dec­la­ra­tions by of­fi­cials on all sides on the im­por­tance of Greece stay­ing in the cur­rency bloc. Even de­fault within the eu­ro­zone would cre­ate se­ri­ous com­pli­ca­tions well be­yond Greece.

The Greek gov­ern­ment is em­pha­sis­ing the ne­ces­sity to step up mea­sures against fraud, cor­rup­tion and tax eva­sion. The im­ple­men­ta­tion of th­ese mea­sures will be very ef­fec­tive, if ac­com­pa­nied by a pol­icy of sub­stan­tial tax cuts at all lev­els and se­vere penal­ties for non-com­pli­ance. Oth­er­wise, it will be very dif­fi­cult for the gov­ern­ment to raise the nec­es­sary public rev­enues.

While the de­bate about Greece con­tin­ues, forth­com­ing elec­tions in sev­eral other eu­ro­zone coun­tries will fur­ther in­flu­ence de­vel­op­ments. The con­tin­u­a­tion of Ger­many’s ob­ses­sive pol­icy ap­proach will re­sult in more fric­tion and in­creased risk of eu­ro­zone ex­its, by de­sign or ac­ci­dent. Re­cent re­crim­i­na­tory state­ments at in­ter­gov­ern­men­tal and Euro­pean level make it ob­vi­ous that sol­i­dar­ity has evap­o­rated and the EU has de­gen­er­ated into a mod­ern Tower of Ba­bel. It is un­for­tu­nate that ECB Gover­nor Mario Draghi put spe­cific con­di­tions on the in­clu­sion of Greece in the bank’s mon­e­tary ex­pan­sion pro­gramme. In this, the ECB ap­pears to be act­ing more as a mem­ber of the troika, rather than re­spect­ing its cen­tral bank man­date.

De­vel­op­ments in the com­ing months will be de­ci­sive for Greece and the rest of the eu­ro­zone. If the EU does not un­der­stand the broader im­pli­ca­tions of the Greek cri­sis and the need for a deep re­flec­tion on its fu­ture course, the Union will miss a golden op­por­tu­nity to re­store its rep­u­ta­tion, both do­mes­ti­cally and on the in­ter­na­tional stage.

The eu­ro­zone cri­sis con­sti­tutes the most se­ri­ous chal­lenge fac­ing the EU since its estab­lish­ment. Many tech­nocrats, diplo­mats, aca­demics and politi­cians were aware of the weak­nesses un­der­ly­ing the eu­ro­zone’s foun­da­tions, but they could not fore­see the depth and the ex­tent of the prob­lems ex­posed by the cri­sis.

It is no sur­prise that the con­ven­tional eco­nomic phi­los­o­phy be­hind aus­ter­ity is be­ing se­ri­ously chal­lenged way be­yond Greece, in the United States, Bri­tain and in Brussels it­self. It is es­sen­tial that the short­com­ings of this phi­los­o­phy are ad­dressed quickly and ef­fec­tively. If not, the prob­lems will only get worse. There is a grow­ing risk that the ide­o­log­i­cal ob­ses­sion with aus­ter­ity will en­dan­ger the en­tire Euro­pean project.

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