3 Jul 2015

Greece crisis: a failure of economics in the face of politics

The IMF’s report yesterday got swamped amid the gloom, despondency and fractiousness of the Greek crisis.

It said, in short, Greece’s debt has become unsustainable. Greece needs an extra €50bn now, a twenty-year holiday from its debt repayments and a substantial write off.


It’s not quite a mea culpa, because the IMF says if Greece had followed the course dictated by the Troika the debt would have been sustainable.

But it comes close. Once you add in politics to the economics, the IMF’s document reads like an early autopsy on the policy of austerity first, debt relief maybe. And it contains a horrible sting for any government – right wing, technocratic or national – that succeeds Syriza if it loses the referendum on Sunday.

‘Whatever it takes’

Let’s first dissect the IMF’s assertion that the old austerity plan was working.

The first precondition was that long-term interest rates fell substantially below those expected in the original agreement. This was the result of global deflationary pressures and a co-ordinated policy of quantitative easing, and implicit state guarantees for south European debt after Mario Draghi’s 2012 “whatever it takes” speech.

Another way of putting this is: the Troika’s 2010 and 2011 austerity programmes for Greece are only sustainable because the ECB in 2012 exposed the governments of the entire Eurozone to the debt of the Eurozone.

But here’s the critical paragraph. To go on using 15 per cent of its GDP to pay down its €320bn debt until 2045 “would require primary surpluses of 4+ per cent of GDP per year and decisive and full implementation of structural reforms that delivers steady state growth of 2 per cent per year (with the best productivity growth in the euro area) and privatization”.

This is IMF speak for “it’s impossible” – for all the reasons the report then points out.

4 per cent surpluses are politically undeliverable by a democratic government in Greece. The conservative-led coalition fell because it could not deliver them. Nor could it deliver the “structural reforms” everybody wants – an end to bureaucracy, corruption and tax evasion – because the existing political establishment is mired in these problems.

Nail in the coffin

As to the solution, the IMF suggests doubling the time Greece gets to pay off it remaining debts, and a €36bn loan, with almost no conditions, to enable it to pay off any debts becoming due before 2018 (which is what the Greeks publicly asked for, presumably once they knew this report was coming).

The IMF’s call then for a write-off of the Greek debt equivalent of 30 per cent of GDP is the final intellectual nail in the coffin of the programme it imposed in 2010 and 2011.

The IMF’s report is not just a piece of analysis. It makes it virtually certain that the IMF will not sign up to any solution for Greece – or indeed the rest of the Euro periphery – that excludes a debt write-off.


But a debt write-off is exactly what the EU governments cannot deliver. As I’ve said here before: it’s not a question of political willpower but of democracy. The Eurozone now includes the perennially right-wing states of Estonia, Finland and Lithuania who will block with Germany; and a German people whose willingness to take the downside of the Euro deal along with the upside seems to be over.

Suppose now Syriza falls on Monday. A government of all the other parties takes over and, waving this IMF report, arrives in Brussels asking for €50bn debt relief, a doubling of repayment times and a €36bn short term loan to see it through to 2018.

That is a substantial hit for European taxpayers. But the same Greek government would also arrive with a bill for rescuing the banking sector – which will collapse as soon as it is reopened without a massive injection of assistance from the European Central Bank, again exposing taxpayers’ money by proxy to the Greek rescue.

After EU parliament President Martin Schulz effectively called for regime change yesterday, conspiracy theorists here are seeing the above as a likely scenario. Get rid of Syriza and we will hand over the cash – effectively improvising a fiscal union on the sly to prevent Greece collapsing into chaos.

Failed state?

But here’s where you begin to see the logic of the behaviour of Tsipras and Varoufakis. If the EU wants to avoid Greece collapsing into chaos, and defaulting on its €320bn debt in whole or in part, it has to do this for any government that turns up in Brussels on Monday.

It has to do so for material and moral reasons. Materially, a Greek collapse now comes on top of a Chinese stock market crash, Puerto Rico’s $72bn default and warning signs of a downturn in the USA. If Greece is “let go” it could trigger the final market rout the pessimists have expected ever since the 2008 crash.

Morally, leave aside all the national stereotyping and bitterness, if the EU allows one of its member states to become a failed state – and I am not exaggerating when I say that is possible – every small country in the union would sensibly begin behaving as if it were the next Greece.

Anti-EU protest in Athens

Geopolitically, the failure to save Greece – I stress again because of a failure of will by electorates as much as their politicians – would signal to America that Europe is a busted concept and, more ominously, it would create the cracked pavement onto which Vladimir Putin could scatter seeds of what he wants to grow there.

The IMF’s document is in the dry, clinical style of all analyst reports. Yet from here, amid the throbbing heat, the graffiti and the return of teargas, it shows the failure of economics in the face of politics.

The austerity programmes of 2010 and 2011 may have worked in a Greece made up of sans-serif numbers in a table. But they could not and did not work in a Greece made up of people: crony politicians, tax evading businessmen and a radical left party whose members are, even now, urging it to bring the whole Euro system crashing down.

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