Aus­ter­ity is the only deal-breaker

Financial Mirror (Cyprus) - - FRONT PAGE -

A com­mon fal­lacy per­vades cov­er­age in the world’s me­dia of the ne­go­ti­a­tions be­tween the Greek gov­ern­ment and its cred­i­tors. The fal­lacy, ex­em­pli­fied in a re­cent com­men­tary by Philip Stephens of the Fi­nan­cial Times, is that, “Athens is un­able or un­will­ing – or both – to im­ple­ment an eco­nomic re­form pro­gramme.” Once this fal­lacy is pre­sented as fact, it is only nat­u­ral that cov­er­age high­lights how our gov­ern­ment is, in Stephens’s words, “squandering the trust and good­will of its eu­ro­zone part­ners.”

But the re­al­ity of the talks is very dif­fer­ent. Our gov­ern­ment is keen to im­ple­ment an agenda that in­cludes all of the eco­nomic re­forms em­pha­sised by Euro­pean eco­nomic think tanks. More­over, we are uniquely able to main­tain the Greek public’s sup­port for a sound eco­nomic pro­gramme.

Con­sider what that means: an in­de­pen­dent tax agency; rea­son­able pri­mary fis­cal sur­pluses for­ever; a sen­si­ble and am­bi­tious pri­vati­sa­tion pro­gramme, com­bined with a devel­op­ment agency that har­nesses public as­sets to cre­ate in­vest­ment flows; gen­uine pen­sion re­form that en­sures the so­cial-se­cu­rity sys­tem’s long-term sus­tain­abil­ity; lib­er­al­i­sa­tion of mar­kets for goods and ser­vices, etc.

So, if our gov­ern­ment is will­ing to em­brace the re­forms that our part­ners ex­pect, why have the ne­go­ti­a­tions not agree­ment? Where is the stick­ing point?

The prob­lem is sim­ple: Greece’s cred­i­tors in­sist on even greater aus­ter­ity for this year and be­yond – an ap­proach that would im­pede re­cov­ery, ob­struct growth, worsen the debt­de­fla­tion­ary cy­cle, and, in the end, erode Greeks’ will­ing­ness and abil­ity to see through the re­form agenda that the coun­try

pro­duced

an so des­per­ately needs. Our gov­ern­ment can­not – and will not – ac­cept a cure that has proven it­self over five long years to be worse than the dis­ease.

Our cred­i­tors’ in­sis­tence on greater aus­ter­ity is sub­tle yet stead­fast. It can be found in their de­mand that Greece main­tain un­sus­tain­ably high pri­mary sur­pluses (more than 2% of GDP in 2016 and ex­ceed­ing 2.5%, or even 3%, for ev­ery year there­after). To achieve this, we are sup­posed to in­crease the over­all bur­den of value-added tax on the pri­vate sec­tor, cut al­ready di­min­ished pen­sions across the board; and com­pen­sate for low pri­vati­sa­tion pro­ceeds (ow­ing to de­pressed as­set prices) with “equiv­a­lent” fis­cal con­sol­i­da­tion mea­sures.

The view that Greece has not achieved suf­fi­cient fis­cal con­sol­i­da­tion is not just false; it is patently ab­surd. The ac­com­pa­ny­ing fig­ure not only il­lus­trates this; it also suc­cinctly ad­dresses the ques­tion of why Greece has not done as well as, say, Spain, Por­tu­gal, Ire­land, or Cyprus in the years since the 2008 fi­nan­cial cri­sis. Rel­a­tive to the rest of the coun­tries on the eu­ro­zone pe­riph­ery, Greece was sub­jected to at least twice the aus­ter­ity. There is noth­ing more to it than that.

Fol­low­ing Prime Min­is­ter David Cameron’s re­cent elec­tion victory in the United King­dom, my good friend Lord Nor­man La­mont, a for­mer chan­cel­lor of the ex­che­quer, re­marked that the UK econ­omy’s re­cov­ery sup­ports our gov­ern­ment’s po­si­tion. Back in 2010, he re­called, Greece and the UK faced fis­cal deficits of more or less sim­i­lar size (rel­a­tive to GDP). Greece re­turned to pri­mary sur­pluses (which ex­clude in­ter­est pay­ments) in 2014, whereas the UK gov­ern­ment con­sol­i­dated much more grad­u­ally and has yet to re­turn to sur­plus.

At the same time, Greece has faced mon­e­tary con­trac­tion (which has re­cently be­come mon­e­tary as­phyx­i­a­tion), in con­trast to the UK, where the Bank of Eng­land has sup­ported the gov­ern­ment ev­ery step of the way. The re­sult is that Greece is con­tin­u­ing to stag­nate, whereas the UK has been grow­ing strongly.

Fair-minded ob­servers of the four­month-long ne­go­ti­a­tions be­tween Greece and its cred­i­tors can­not avoid a sim­ple con­clu­sion: The ma­jor stick­ing point, the only deal-breaker, is the cred­i­tors’ in­sis­tence on even more aus­ter­ity, even at the ex­pense of the re­form agenda that our gov­ern­ment is ea­ger to pur­sue.

Clearly, our cred­i­tors’ de­mand for more aus­ter­ity has noth­ing to do with con­cerns about gen­uine re­form or mov­ing Greece onto a sus­tain­able fis­cal path. Their true mo­ti­va­tion is a ques­tion best left to fu­ture his­to­ri­ans – who, I have no doubt, will take much of the con­tem­po­rary me­dia cov­er­age with a grain of salt.

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