A new deal for Greece

Financial Mirror (Cyprus) - - FRONT PAGE - By Ya­nis Varo­ufakis

Three months of ne­go­ti­a­tions be­tween the Greek gov­ern­ment and our Euro­pean and in­ter­na­tional part­ners have brought about much con­ver­gence on the steps needed to over­come years of eco­nomic cri­sis and to bring about sus­tained re­cov­ery in Greece. But they have not yet pro­duced a deal. Why? What steps are needed to pro­duce a vi­able, mu­tu­ally agreed re­form agenda?

We and our part­ners al­ready agree on much. Greece’s tax sys­tem needs to be re­vamped, and the rev­enue au­thor­i­ties must be freed from po­lit­i­cal and cor­po­rate in­flu­ence. The pen­sion sys­tem is ail­ing. The econ­omy’s credit cir­cuits are bro­ken. The labour mar­ket has been dev­as­tated by the cri­sis and is deeply seg­mented, with pro­duc­tiv­ity growth stalled. Public ad­min­is­tra­tion is in ur­gent need of mod­ern­iza­tion, and public re­sources must be used more ef­fi­ciently. Over­whelm­ing ob­sta­cles block the for­ma­tion of new com­pa­nies. Com­pe­ti­tion in prod­uct mar­kets is far too cir­cum­scribed. And in­equal­ity has reached out­ra­geous lev­els, pre­vent­ing so­ci­ety from unit­ing be­hind es­sen­tial re­forms.

This con­sen­sus aside, agree­ment on a new devel­op­ment model for Greece re­quires over­com­ing two hur­dles. First, we must con­cur on how to ap­proach Greece’s fis­cal con­sol­i­da­tion. Sec­ond, we need a com­pre­hen­sive, com­monly agreed re­form agenda that will un­der­pin that con­sol­i­da­tion path and in­spire the con­fi­dence of Greek so­ci­ety.

Be­gin­ning with fis­cal con­sol­i­da­tion, the is­sue at hand con­cerns the method. The “troika” in­sti­tu­tions (the Euro­pean Com­mis­sion, the Euro­pean Cen­tral Bank, and the In­ter­na­tional Mon­e­tary Fund) have, over the years, re­lied on a process of back­ward in­duc­tion: they set a date (say, the year 2020) and a tar­get for the ra­tio of nom­i­nal debt to na­tional in­come (say, 120%) that must be achieved be­fore money mar­kets are deemed ready to lend to Greece at rea­son­able rates. Then, un­der ar­bi­trary as­sump­tions re­gard­ing growth rates, in­fla­tion, pri­vati­sa­tion re­ceipts, and so forth, they com­pute what pri­mary sur­pluses are nec­es­sary in ev­ery year, work­ing back­ward to the present.

The re­sult of this method, in our gov­ern­ment’s opin­ion, is an “aus­ter­ity trap.” When fis­cal con­sol­i­da­tion turns on a pre­de­ter­mined debt ra­tio to be achieved at a pre­de­ter­mined point in the fu­ture, the pri­mary sur­pluses needed to hit those tar­gets are such that the ef­fect on the pri­vate sec­tor un­der­mines the as­sumed growth rates and thus de­rails the planned fis­cal path. In­deed, this is pre­cisely why pre­vi­ous fis­cal­con­sol­i­da­tion plans for Greece missed their tar­gets so spec­tac­u­larly.

Our gov­ern­ment’s po­si­tion is that back­ward in­duc­tion should be ditched. In­stead, we should map out a for­ward­look­ing plan based on rea­son­able as­sump­tions about the pri­mary sur­pluses con­sis­tent with the rates of out­put growth, net in­vest­ment, and ex­port ex­pan­sion that can sta­bilise Greece’s econ­omy and debt ra­tio. If this means that the debt-to-GDP ra­tio will be higher than 120% in 2020, we de­vise smart ways to ra­tio­nal­ize, re-pro­file, or re­struc­ture the debt – keep­ing in mind the aim of max­imis­ing the ef­fec­tive present value that will be re­turned to Greece’s cred­i­tors.

Be­sides con­vinc­ing the troika that our debt sus­tain­abil­ity anal­y­sis should avoid the aus­ter­ity trap, we must over­come the sec­ond hur­dle: the “re­form trap.” The pre­vi­ous re­form pro­gramme, which our part­ners are so adamant should not be “rolled back” by our gov­ern­ment, was founded on in­ter­nal de­val­u­a­tion, wage and pen­sion cuts, loss of la­bor pro­tec­tions, and price-max­imis­ing pri­vati­sa­tion of public as­sets.

Our part­ners be­lieve that, given time, this agenda will work. If wages fall fur­ther, em­ploy­ment will rise. The way to cure an ail­ing pen­sion sys­tem is to cut pen­sions. And pri­vati­sa­tions should aim at higher sale prices to pay off debt that many (pri­vately) agree is un­sus­tain­able.

By con­trast, our gov­ern­ment be­lieves that this pro­gramme has failed, leav­ing the pop­u­la­tion weary of re­form. The best ev­i­dence of this fail­ure is that, de­spite a huge drop in wages and costs, ex­port growth has been flat (the elim­i­na­tion of the cur­rent- ac­count deficit be­ing due ex­clu­sively to the col­lapse of im­ports).

Ad­di­tional wage cuts will not help ex­por­to­ri­ented com­pa­nies, which are mired in a credit crunch. And fur­ther cuts in pen­sions will not ad­dress the true causes of the pen­sion sys­tem’s trou­bles (low em­ploy­ment and vast un­de­clared la­bor). Such mea­sures will merely cause fur­ther dam­age to Greece’s al­ready-stressed so­cial fab­ric, ren­der­ing it in­ca­pable of pro­vid­ing the sup­port that our re­form agenda des­per­ately needs.

The cur­rent dis­agree­ments with our part­ners are not un­bridge­able. Our gov­ern­ment is ea­ger to ra­tio­nalise the pen­sion sys­tem (for ex­am­ple, by lim­it­ing early re­tire­ment), pro­ceed with par­tial pri­vati­sa­tion of public as­sets, ad­dress the non-per­form­ing loans that are clog­ging the econ­omy’s credit cir­cuits, cre­ate a fully in­de­pen­dent tax com­mis­sion, and boost en­trepreneur­ship.

The dif­fer­ences that re­main con­cern how we un­der­stand the re­la­tion­ships be­tween the var­i­ous re­forms and the macro en­vi­ron­ment.

None of this means that com­mon ground can­not be achieved im­me­di­ately. The Greek gov­ern­ment wants a fis­cal-con­sol­i­da­tion path that makes sense, and we want re­forms that all sides be­lieve are im­por­tant.

Our task is to con­vince our part­ners that our un­der­tak­ings are strate­gic, rather than tac­ti­cal, and that our logic is sound.

Their task is to let go of an ap­proach that has failed.

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