A Greek Deal Could Be In The Offing – Given The Will!

The key thing now is to keep a cool head. For the differences can be bridged – if there’s the will to do so. 

Time is getting tight and the debate is agonising. Will there be a #Grexit or not: that’s the all-consuming question dominating Athens, Brussels and Berlin. Already, uncertainty about the future of the Eurozone – given the path-breaking importance of the pending decision – has caused economic and political damage to a tangible extent. So, investment intentions even beyond the miserable situation in Greece are dampened in the entire Eurozone, showing the degree of scepticism that exists about the Euro’s economic future. Politically, too, the Eurozone, with its unravelling party political landscape and the rise of its fundamentalist opponents, appears anything but stable to outsiders.

Negotiations Could Collapse Out Of Sheer Exhaustion

Everything speaks in favour of a rapid agreement that works for the longer term. All the more it is depressing to see how hardened the fronts appear in public opinion and how intellectually exhausted the main negotiators seem. The fear now is that the negotiations could collapse because of this exhaustion and a Grexit that nobody wants, a “Graccident”, could come about. What we can see and hear is the assertion that the Greek government is not behaving co-operatively and is rejecting all sensible proposals that might improve the situation. So the urgent need is to examine soberly precisely those proposals put forward by the Greek government and critically test them for their viability.

A core element of the Greek demand is for a lower primary surplus or budget surplus without taking account of interest payments on outstanding debts. There is no controversy over the fact that Greece needs such a primary surplus in order not to jack up current debts even higher. The only question is how high this surplus should be. The Greek government offer is for 0.6% of GDP in 2015 rising to 3.5% by 2022. The counter-demand is to start at 1%. This difference is not worth talking about. All it means is that Greece, according to its government, should cut spending a little bit less. You can even regard this as an advantage. If, for instance, this might mean no cut in investment spending, economic growth would end up a good 0.5% higher than under the institutions’ proposal and that would also help cut the burden of debt. So why not accede to the Greek proposal but, at the same time, oblige the government to use this greater room for manoeuvre to boost investments.

There’s a similar situation arising with regard to tax reforms. Both sides agree on the need for such reforms. They even agree about the direction of travel: the effective VAT rate should go up. The argument is about social modulation: the Greek government wants to set the VAT rate for some basic necessities at a very low 6% but raise it for other goods to as much as 23%. These differences can be bridged if the will is there. What’s more, the Greek position has weight in so far as lower incomes have been hit especially hard and any further tax rise would simply bring more poverty and lower demand.

Europeanisation Of The Debt Problem

But there are obvious areas of conflict where a solution appears much harder to find: that’s the management of debt. The Greek government views the transposition of its debts from the IMF/ECB to the European emergency fund (ESM) as a central pre-condition for future growth. This should be tied to a prolongation of the repayment periods so investors enjoy a longer prospect of economic security. The outcome would be a Europeanisation of the debt problem.

The IMF can accommodate this as it would like to get rid of these obligations for constitutional reasons and because of the accusation of being too Eurocentric. This would, moreover, be a step giving Greece the necessary breathing space via these delayed deadlines to recover. And if the repayment schedule were linked in turn to growth, a long-term, sustainable way would have been found. Greece would make high repayments when it was growing strongly and lower ones when this wasn’t the case. This is how banks treat their creditors because they know they will get their money back. This solution would come with two very positive side-effects.

The transposition of the debts from the ECB to the ESM would, first, give the ECB the opportunity of looking at the situation as a whole, on which it can decide to take up Greek government bonds within their QE programme – from which these have been excluded for now. This and long-term sustainable debt-repayment might persuade private investors to start re-purchasing Greek equities. Greece could go back to financial markets for refinancing purposes and would no longer be so reliant on public lenders. That too is in the interests of German taxpayers.

In Ancient Tragedy There’s No Exit

That still leaves areas of conflict over pension reforms, labour market and free collective bargaining. A solution must be found over the longer term and requires trust on both sides; further ad hoc cuts would, however, have damaging effects.

Trust is the decisive factor for reaching a deal now as the Greek proposals come over as eminently plausible and reasonable, including in Germany. But one doesn’t believe Athens when it says it really wants to implement reforms. On the other hand, the Greek government views the demand for further spending cuts as inimical to any economic recovery plan. In such a classical dilemma one needs mutually recognised people and institutions which can overcome the breakdown in trust – like an arbitrator in a strike. Here one might bring in the OECD with its general secretary Angel Gurria or the ILO and ask them to work with Greece to jointly draw up solutions. Equally, this would meet a proposal from Athens.

In ancient Greek tragedy there was no escape because the actors were set against each other by an implacable fate and therefore had to perish. The EU cannot and must not afford such fatalism. Because, judging by content, a deal is not that hard. The entire point now is to keep cool heads in the face of over-heated public opinion and create sustainable solutions rather than short-term bridging exercises.