Is Tsipras the new Lula?

Financial Mirror (Cyprus) - - FRONT PAGE -

Greek Prime Min­is­ter Alexis Tsipras has the chance to be­come to his coun­try what South Korean Pres­i­dent Kim Dae-jung and Brazil­ian Pres­i­dent Luiz Iná­cio Lula da Silva were to theirs: a man of the left who moves to­ward fis­cal re­spon­si­bil­ity and freer mar­kets. Like Tsipras, both were elected in the midst of an eco­nomic cri­sis. Both im­me­di­ately con­fronted the in­ter­na­tional fi­nan­cial con­straints that op­po­si­tion politi­cians can af­ford to ig­nore.

On as­sum­ing power, Kim and Lula were able to ad­just, po­lit­i­cally and men­tally, to the new re­al­i­ties that con­fronted them, launch­ing much-needed re­forms. Some re­forms were “con­ser­va­tive” (or “ne­olib­eral”) and might not have been pos­si­ble un­der politi­cians of the right. But oth­ers were con­sis­tent with their life­time com­mit­ments. South Korea un­der Kim be­gan to rein in the chae­bols, the coun­try’s huge fam­ily-owned con­glom­er­ates. Brazil un­der Lula im­ple­mented Bolsa Fa­milia, a sys­tem of di­rect cash pay­ments to house­holds that is cred­ited with lift­ing mil­lions out of poverty.

Tsipras and his Syriza party, how­ever, spent their first six months in of­fice still blink­ered about fi­nan­cial re­al­i­ties, un­able to see things from the per­spec­tive of oth­ers. The de­ci­sion to hold a ref­er­en­dum on the bailout terms set by Greece’s cred­i­tors showed that they were po­lit­i­cally blink­ered as well.

If Tsipras were read­ing from a nor­mal script, he would log­i­cally have asked Greeks to vote yes. But he asked them to vote no, which they did by a sur­pris­ingly wide mar­gin. He ev­i­dently thought that this would strengthen his hand; in­stead, it merely strength­ened the po­si­tion of those Ger­mans con­vinced that the time had come to let Greece drop out of the euro.

Only a week af­ter the ref­er­en­dum, Tsipras fi­nally faced up to re­al­ity: Greece’s euro part­ners are not pre­pared to of­fer eas­ier terms. On the con­trary, they are in­sist­ing on more ex­ten­sive con­ces­sions as the price of a third bailout.

The only pos­si­ble sil­ver lin­ing to this sorry history is that some of Tsipras’s sup­port­ers at home may now be will­ing to swal­low the cred­i­tors’ bit­ter medicine. One should not un­der­es­ti­mate the op­po­si­tion that re­forms con­tinue to face among Greeks. But like Kim and Lula, Tsipras could mar­shal po­lit­i­cal sup­port from some on the left who reckon, “If he now says that these mea­sures are un­avoid­able, there truly must be no al­ter­na­tive.” (The same thing has of course hap­pened on the right: Only Nixon could go to China.)

None of this is to say that the in­ter­na­tional fi­nan­cial re­al­i­ties a coun­try faces are nec­es­sar­ily al­ways rea­son­able. Some­times global fi­nan­cial mar­kets’ ea­ger­ness to lend re­sults in un­rea­son­able booms, fol­lowed by abrupt re­ver­sals.

For­eign cred­i­tor gov­ern­ments can be un­rea­son­able as well. The mis­per­cep­tions and er­rors by lead­ers in Ger­many and other cred­i­tor coun­tries have been as dam­ag­ing as those on the part of the less-ex­pe­ri­enced Greek lead­ers. For ex­am­ple, the belief that fis­cal aus­ter­ity raises in­come, rather than low­er­ing it, even in the short run, was a mis­take, as was the re­fusal in 2010 to write down the debt. These mis­takes ex­plain why Greece’s debt/GDP ra­tio is even higher to­day than it was then.

Each side’s re­fusal to ad­mit its mis­takes re­in­forced the other side’s stub­born­ness. The Ger­mans would have done bet­ter to ad­mit that fis­cal aus­ter­ity is con­trac­tionary in the short run. The Greeks would have done bet­ter to ad­mit that democ­racy does not mean that one coun­try’s peo­ple can vote to give them­selves other coun­tries’ money.

In terms of game the­ory, the fact that the Greeks and Ger­mans have dif­fer­ent eco­nomic in­ter­ests is not enough to ex­plain the poor out­come of ne­go­ti­a­tions to date. The dif­fer­ence in per­cep­tions has been cen­tral. “Get­ting to yes” in a bar­gain­ing sit­u­a­tion re­quires that the ne­go­tia­tors not only have a clear idea of their own top pri­or­i­ties, but also that they un­der­stand what the other side wants most.

A “bad bar­gain” would call on each side to forego its top pri­or­i­ties. The Euro­pean Cen­tral Bank should not have to agree to an ex­plicit write-down of Greek debt. And Greece should not have to run a sub­stan­tial pri­mary bud­get sur­plus for now. Un­der a rel­a­tively “good bar­gain,” the cred­i­tors would mod­ify in­ter­est rates and ex­tend ma­tu­ri­ties fur­ther, as the In­ter­na­tional Mon­e­tary Fund now sug­gests, so that Greece does not have to pay the un­payable over the com­ing years, in ex­change for growth-en­hanc­ing struc­tural re­forms.

One hopes that the aw­ful ex­pe­ri­ence of the last six months has led both sides to a clearer per­cep­tion of eco­nomic re­al­i­ties and pri­or­i­ties. This will be nec­es­sary if the two sides are to ar­rive at a good bar­gain, rather than a bad one – or even an out­right fail­ure to co­op­er­ate, so that Greece ef­fec­tively drops out of the euro.

A re­cur­rent theme of the Greek cri­sis since it erupted in late 2009 is that both the Greeks and the eu­ro­zone’s cred­i­tor coun­tries have been re­luc­tant to con­sider lessons from pre­vi­ous emerg­ing-mar­ket crises. Af­ter all, they said, Greece was a eu­ro­zone mem­ber, not a de­vel­op­ing coun­try. That is why, for ex­am­ple, the ECB and Euro­pean Com­mis­sion ini­tially did not want Greece to go to the IMF and did not want to write down Greek debt.

Emerg­ing mar­ket crises do hold im­por­tant lessons. If Tsipras can now fol­low the course taken by Kim and Lula, he will serve his coun­try well.

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