Saving Greece, Saving Europe
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.
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