“Greece has been the recipient over the past five years of an unprecedented level of European solidarity” – German Chancellor Angela Merkel
“The reduction initiatives of the last years have led to nothing other than problem-deepening recession” – Greek Prime Minister Alexis Tsipras
In a special session of the German Bundestag this morning, Chancellor Merkel reiterated her willingness to unlock a further round of financing for Greece – as long as Greece agreed to major structural reforms and budget caps.
In an op-ed in the German newspaper Tagesspiegel that was also published this morning, Greek Prime Minister Alexis Tsipras said that these structural reforms had led to a deepening of Greece’s economic crisis, and that a further reduction in the Greek social safety net will lead to needless suffering.
What these two statements indicate is that very little has changed since I last wrote about the Europe/Greece crisis back in February. The Europeans want Greece to implement structural reforms that should allow sustainable economic growth in the long run. The Greeks want relief from a crushing debt burden, and they do not want to further cut social insurance payments to satisfy strict European budgetary requirements.
What has changed since February is that, according to Greek officials, the government in Greece is about to run out of money, and will be unable to make payments on some of its obligations beginning in July. Should Greece fail to make these payments, its government would be in default. This would lead to a cascading sequence of events with unknowable consequences, but would most likely also lead to a Greek exit from the European Union: the Grexit.
The Two Arguments…
The two quotes at the top show that, even after four months of intense negotiations, the two sides haven’t even managed to agree on the nature of the problem. The Europeans, led by the Germans, see Greece’s economic weaknesses as being caused by structural deficiencies: a bloated civil service, too-generous retirement payouts, bad tax collection, distorted public budgets. By reforming these structures, the thinking goes, Greece can build a functioning economic that will eventually grow and be able to avoid the kind of catastrophic collapse it has experienced over the past 7-8 years.
For the Greeks, the problem is one of demand. Unemployment is around 25%, people are living in the streets, the economy has shrunk by a quarter over the past several years. What’s needed now is stimulus that can strengthen demand, which will then lead to economic growth. Structural reforms that include cutting government spending will have the exact wrong impact. By curbing demand, the economy will get even weaker, and the people will suffer even more.
…are both true!
As an outside observer, the most frustrating thing is that both of these ideas are probably true. Greece’s economic structure was distorted, and that is partially what caused its debt crisis. Implementing reforms is probably necessary to avoid debt problems in the long run. But we are not in the long run! We are living in the very short run! Greece desperately needs to stimulate demand in order to grow its economy. There can be no long term stability in Greece without short term growth. And the measures that Europe is proposing will prevent short term growth.
I just do not understand why Greece’s European creditors are not giving in to these essential economic facts. I am sure that they do understand what’s going on – they are not stupid people, after all.
But I’m convinced that there are other, non-economic reasons why Europe is bargaining such a hard line. The Europeans don’t want to set a bad precedent for countries being able to renegotiate on agreements, even if facts on the ground have made past agreements harmful. They do not want to be seen as “rewarding” Greece for bad behavior, even though a massive recession and 25% unemployment hardly seems like a reward to me. And there is also a real sense of personal antipathy between the negotiators – particularly between the German and Greek finance ministers.
I hope – and, for the record, I still think – that the two sides will find an agreement that both helps Greece’s economy in the short run (or at least doesn’t hurt it even more), while gradually implementing structural reforms that can ensure sustainable long-term growth.
Remember, negotiators: you need to take care of the short term before you worry about the long term!