Greece’s no-win scenario

Suppose for a moment that the European Union gets what it’s demanding from Greek Prime Minister Alexis Tsipras. It doesn’t look as though that will happen, but let’s imagine that Tsipras surrenders. How long, I’m wondering, would this smell like victory?

Tsipras has agreed to the EU’s new, less demanding targets for Greece’s primary budget surplus over the next few years. The sticking point is that the measures he would use to hit those targets aren’t enough.

Instead of raising the rate of the value-added tax (a kind of sales tax) and/or collecting it on a wider range of goods, Tsipras says he’ll attack tax evasion and fraud. That won’t raise enough money, says Europe. The EU wants more cuts to public spending on pensions as well, which Tsipras refuses to consider. For some reason, Europe has also been insisting on further labour-market reforms. These would doubtless be desirable, but they’re unlikely to yield extra growth in the short term, and therefore have no fiscal implications in the relevant time scale.

Tsipras’s numbers don’t add up, says Europe: they aren’t credible.

Suppose, as I say, he did agree to raise the VAT and cut pension spending. How credible would that be? Chances are good that it would be his last act as prime minister. He’d be breaking election promises and, aside from that, would enrage the faction of his own party that thinks he’s already conceded too much. Good riddance, you might say. Yet with Tsipras gone, would the next Greek government be any more pliable — any more inclined to maintain the new rate of VAT or persist with the new round of pension cuts? I see no reason to think so.

In short, if Tsipras capitulated and gave the EU what it wants, that wouldn’t be credible either.

Let’s pursue this “Europe wins” thought experiment one step further.

What Europe is demanding of the country can’t be done — a government cannot credibly commit to do the politically impossible

Suppose that Tsipras capitulated and that he was able somehow to stay in power long enough to keep his promises — or that the successor government was reliably conservative on fiscal policy. Would this be sufficient to put Greek public finances on the path to sustainability? The sustainability of Greek debt, you may recall, is Europe’s main purpose in all this.

The answer is no, it wouldn’t — and my authority here is the International Monetary Fund, one of Greece’s main creditors and partner of the European Commission and European Central Bank in what used to be called the troika.

The fund’s chief economist, Olivier Blanchard, published an article on Sunday, which said that for the new budget targets to achieve sustainability, significant new financing and debt relief would also be needed. But Europe won’t discuss debt relief until Greece has put its public finances on a sustainable footing.

The IMF says Greece can’t put its finances on a sustainable footing without more debt relief; Europe says it has to. That’s the agreed position of the creditors. Clear?

Tsipras is, of course, infuriating. His recent claim that Europe is “pillaging” his country is remarkable even by his standards. (Since this crisis began, Europe has put vastly more money into Greece than it has taken out.) But the obduracy and provocations of Tsipras and his team are a poor excuse for a European policy that is, in its own right, nonsensical.

What Europe is demanding of Greece can’t be done — a government cannot credibly commit to do the politically impossible. And, according to the IMF, even if it could be done, it wouldn’t work. Aside from this, Europe’s position is eminently reasonable.