Barry Eichengreen
Whatever one thinks about the tactics of Greek Prime Minister Alexis Tsipras’s government in negotiations with the country’s creditors, the Greek people deserve better than what they are being offered. Germany wants Greece to choose between economic collapse and leaving the eurozone. Both options would mean economic disaster; the first, if not both, would be politically disastrous as well.
When I wrote in 2007 that no member state would voluntarily leave the eurozone, I emphasized the high economic costs of such a decision. The Greek government has shown that it understands this. Following the referendum, it agreed to what it – and the voters – had just rejected: a set of very painful and difficult conditions. Tsipras and his new finance minister, Euclid Tsakalotos, have gone to extraordinary lengths to mollify Greece’s creditors.
But when I concluded that no country would leave the eurozone, I failed to imagine that Germany would force another member out. This, clearly, would be the effect of the politically intolerable and economically perverse conditions tabled by Germany’s finance ministry.
German Finance Minister Wolfgang Schäuble’s idea of a temporary “time out” from the euro is ludicrous. Given Greece’s collapsing economy and growing humanitarian crisis, the government will have no choice, absent an agreement, but to print money to fund basic social services. It is inconceivable that a country in such deep distress could meet the conditions for euro adoption – inflation within 2% of the eurozone average and a stable exchange rate for two years – between now and the end of the decade. If Grexit occurs, it will not be a holiday; it will be a retirement.
Early Monday morning, European leaders agreed to remove the reference to this “time out” from the announcement of the latest bailout deal. But this door, having been opened, will not now be easily closed. The Eurosystem has been rendered more fragile and subject to destabilization. Other European finance ministers will have to answer for agreeing to forward to their leaders a provisional draft containing Schäuble’s destructive language.
Economically, the new program is perverse, because it will plunge Greece deeper into depression. It envisages raising additional taxes, cutting pensions further, and implementing automatic spending cuts if fiscal targets are missed. But it provides no basis for recovery or growth. The Greek economy is already in free-fall, and structural reforms alone will not reverse the downward spiral.
The agreement continues to require primary budget surpluses (net of interest payments), rising to 3.5% of GDP by 2018, which will worsen Greece’s slump. Re-profiling the country’s debt, which is implicitly part of the agreement, will do nothing to ameliorate this, given that interest payments already are minimal through the end of the decade. As the depression deepens, the deficit targets will be missed, triggering further spending cuts and accelerating the economy’s contraction.
Eventually, the agreement will trigger Grexit, either because the creditors withdraw their support after fiscal targets are missed, or because the Greek people rebel. Triggering that exit is transparently Germany’s intent.
Finally, the privatization fund at the center of the new program will do nothing to encourage structural reform. Yes, Greece needs to privatize inefficient public enterprises. But the Greek government is being asked to privatize with a gun held to its head. Privatization at fire-sale prices, with most of the proceeds used to pay down debt, will not put Greek parliamentarians or the public in a mood to press ahead enthusiastically with structural reform.
Greece deserves better. It deserves a program that respects its sovereignty and allows the government to establish its credibility over time. It deserves a program capable of stabilizing its economy rather than bleeding it to death. And it deserves support from the ECB to enable it to remain a eurozone member.
Europe deserves better, too. Other European countries should not in good conscience accede to this politically destructive, economically perverse program. They should remind themselves that Greece had plenty of help from its European partners in getting to this point. They must continue to push for a better deal.
These partners should not allow the European project to be sacrificed on the altar of German public opinion or German leaders’ insistence on “rules.” If Germany’s government refuses to see the light, the others should find a way forward without it. Franco-German solidarity would be irreparably damaged, but Franco-German solidarity is worth nothing if the best it can produce is this agreement.
Last but not least, the German public deserve better. Germans deserve a leader who stands firm in the face of extremism, rather than encouraging it, whether at home or abroad. They deserve a Europe that can play a greater role in global affairs. Above all, given Germany’s stunning political and economic achievements since World War II, they deserve their fellow Europeans’ admiration and respect, not renewed resentment and suspicion.
