All Told, Greece Regained Some Economic Sovereignty Last Week

If a week is a long time in politics, it is a geological age in the life of the modern financial markets and digital communications.  Just over a week ago, the markets were on edge to know whether Greece would exit the euro zone and whether such an event would lead to a global meltdown.  Crucial talks were in train in Brussels between Yanis Varoufakis, the Greek finance minister, and his opposite numbers in the Euro Group.  Would the new Greek government cave in to its creditors’ demands that it should extend the bailout and accept austerity, or would the Euro Group, fearful of Grexit, make substantial concessions to Athens?  Might the discussions break down entirely without agreement, with Grexit occurring by default?  

A week on, the second question has been answered in a manner satisfying the markets that Greece’s relations with the euro zone can be restored to the back burner.  There will be no Grexit in the next week or the next month.  That there might be within the next year is a worry for another day.  Because Greece is no longer central to the markets’ concern, they have lost interest in the answer to the first question.  This is just as well because an answer is not easy to give.   We might well think this was by design, to make sure that none of the participants in the talks need take public umbrage at their outcome.

If we view the question objectively, the starting-point must be the commitments that the previous government of Antonis Samaras had undertaken in exchange for financial support from the troika of the European Union, the European Central Bank and the International Monetary Fund, henceforth to be known as the ‘institutions’.  These included a fiscal policy that aimed for a primary budget surplus of 1.5 percent of gross domestic product in 2014, rising to 3 percent of GDP in 2015.  It was forecast that the latter target would require €2 billion of budget savings to be made in 2015; that was an amount equivalent to 1.1 percent of GDP.  

Greece may re-emerge as a threat to stability sooner than many are anticipating

There was also a pledge to continue reforming the fiscal structure and to strengthen and maintain the banking system’s capital underpinning. Additional measures promised by the Samaras government aimed to open restricted professions, improve competition in the energy sector and ease administrative burdens on business.  The programme assumed there would be €2.2 billion in privatisation proceeds in the current year, rising to €3.4 billion next year.  Greece’s creditors entered negotiations with the incoming Syriza Government defending these specific conditions.  Even more staunchly, they were defending the principle that the troika had the right to set the conditions that the Greek government would be required to observe.

Mr Varoufakis has claimed a victory of sorts in obliging the creditors to concede the point that the Greek government should be co-author of the economic policies that underpin the ‘institutions’’ loans to Greece.  They did this when they invited the Greek ministry of finance to present its ideas on how a reform programme should be structured and then agreed the text formed a viable basis for discussions.  

These talks, they hope, will result in a firm agreement on measures by the end of April, well before the current four-month loan extension expires.  Mr Varoufakis’s proposals, presented in a memorandum last week, certainly differ in their tone from the pledges Greek governments have previously made.

There is an emphasis on social justice which had so far been missing. Thus, in modernising the income tax code, which Mr Samaras had also promised, the feisty finance minister now stresses he will replace exemptions with social justice-enhancing provisions.  Again, in undertaking to reform revenue collection, Mr Varoufakis specified increasing the level of staffing in the high wealth and large debtors units of the revenue administration.  

Less has changed than many suppose

Further, he wants to turn the fight against corruption into a national priority.  On privatisations, he undertakes not to roll back transactions that have been completed but insists on reviewing those that have not yet been launched.  In terms of modifying the loan conditions also, then, it seems Mr Varoufakis has made modest progress. There is no mention in the memorandum of specific budget targets.  These could yet prove contentious.  Mr Varoufakis has been speaking as if a cut in the targeted primary surplus for this year from 3.0 percent to 1.5 percent of GDP is a ‘done deal’, though he does not have that on paper yet.  He is probably right in thinking that 3.0 percent is no longer realistic.  The political uncertainty in Greece over recent months appears to have damaged the country’s fiscal position.  

Were the creditors to insist on a 3 percent surplus, Mr Varoufakis would be bound to resist.  All the same, in his submission to Brussels, the Greek finance minister noted that an ‘astounding’ 58 percent of government departments’ outlays constituted non-salary and non-pension expenditures.  He will be on weak ground if he argues that no more cuts can be made without harming the Greek economy.

Greece may well re-emerge as a threat to stability sooner than many are anticipating.  Whereas the general view seems to be that questions relating to Greece’s bailout will be in abeyance for the next four months, the Euro Group hopes to have outstanding issues tied up by the end of April.  If they press for this, the markets may become uncomfortably aware of the distance between Greece and its creditors within a matter of weeks from now.  Last week’s violent protests on the streets of Athens, though relatively small-scale, serve as a reminder to the Greek government, should it be needed, that there is little room to make concessions to the ‘institutions’.  

Less has changed than many suppose with last week’s agreement to differ between Mr Varoufakis and the Euro Group.  Further, the small concessions Greece has been able so far to wring out of the creditors will in no way discourage populists elsewhere in the euro zone.  Voters are likely to judge crumbs are better than no bread at all.  This particularly concerns Spain, even though that economy has been showing more positive signs recently, thanks to the effect of falling prices in boosting real incomes.  The familiar historical pattern is that popular discontent most likely bursts forth after recovery from hardship has begun.  That is the time of greatest danger for the existing regime.

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About the author

Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.

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