By Michael Smith.
Newly elected Syriza has told voters it will end the era of austerity in Greece (and beyond). It has pledged to stop what its 40-year-old leader, Alexis Tsipras, has called the “fiscal waterboarding” policies that have turned Greece into a debt colony.
It is the first time in more than 40 years that neither New Democracy nor the Pasok socialist party will be in power and Syriza has a mandate for fresh and feel-good policies, including tax cuts, a public-sector hiring spree, and a slashing of Greece’s debt, which stands at an unpayable 170% of GDP.
It will govern in coalition with the right-wing Independent Greeks which shares little with it politically except a determination to repudiate the debt and end Greece’s status as a “laboratory animal” for austerty.
Greek voters remain outraged that GDP has shrunk by almost 20% since 2010 and that unemployment is still as high as 26%. The social safety net that was perhaps the biggest achievement of the post-1974 democratic era was the by-product of the prosperity spurred by EU membership after the junta (1967-74). But it had almost collapsed since the onset of the debt crisis in 2009 and the austerity measures demanded by the EU and International Monetary Fund in return for €245bn in bailouts.
Pensions had been reduced by an average of 40 per cent; most unemployment benefits were cut after 12 months; and charges for prescription drugs were up by more than 30 per cent. Many long-term unemployed lost access to the state healthcare service. Middle-class Greeks faced stringent new levies on property, the default investment for them given the nation’s historically high inflation.
Cynicism about the squeeze is wide-ranging and high-powered. Economist James Galbraith says: “It is clear that the policies that were specified as a condition were at bottom not recuperative, but punitive in character. Punitive in character against the whole Greek nation, and on an improper principle of collective responsibility for the admitted mismanagement of the affairs of the Greek state by previous governments and by the Greek political class…. If you read Timothy Geithner’s memoir, it’s clear that he was very struck by this attitude [in Germany, particularly articulated by its CDU finance Minister Wolfgang Schauble], which reflected a moralizing indifference to the future of Europe”.
Paul Krugman believes that if the troika had been truly realistic, it would have acknowledged it was demanding the impossible. Writing in the New York Times, he declares that:
“Two years after the programme began, the IMF looked for historical examples where Greek-type programmes, attempts to pay down debt through austerity without major debt relief or inflation, had been successful. It didn’t find any”. And he entirely sympathises with Syriza’s radical agenda:
“If anything, the problem with Syriza’s plans may be that they’re not radical enough. But it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that. Still, in calling for a major change, Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare”.
Writing in the European press on 23 January Alex Tsipras took a swing for the good guys, albeit a measured one: “Greece changes on January 25th, the day of the election. My party, Syriza, guarantees a new social contract for political stability and economic security…We must end austerity so as not to let fear kill democracy. Unless the forces of progress and democracy change Europe, it will be Marine Le Pen and her far-right allies that change it for us…Austerity is not part of the European treaties; democracy and the principle of popular sovereignty are. If the Greek people entrust us with their votes, implementing our economic programme will not be a “unilateral” act, but a democratic obligation. Is there any logical reason to continue with a prescription that helps the disease metastasize?”.
A Syriza advisor recently told the Wall Street Journal the party’s platform is “a Keynesian program with redistribution attached, with some Marxist view of the world”. He added: “We are not ashamed of that”.
Syriza seems to have most in common with the parties of the radical left here, even down to nervousness about taxing the family home. Paul Murphy TD of the Anti-Austerity Alliance – speaking breathlessly from the electoral centre in Athens claimed “the ideological wall saying ‘There Is No Alternative’ to austerity has been decisively breached”. But in fact Tsipras spent his recent visit to Dublin canvassing for Sinn Féin.
Modelling themselves on Syriza, which is an alliance of 13 parties, Sinn Féin and People Before Profit are looking to collaborate with unions and other activists, though the Socialist Party is standoffish about Sinn Féin’s leftist credentials, and hostile to its fetishisation of nationalism. What any of them think of the new Greek government’s indulging of Russia’s breaches of Ukranian sovereignty and the irredentist helicoptor flight of the new Defence Minister over the Turkish islets of Imia, is not yet recorded.
In Ireland, perhaps the emphasis for the Left needs to be a little different: to equalise pre-tax wages and impose greater taxes on wealth. This is because taxes on income here are actually quite progressive and we have a much smaller black economy.
It is notable too from some of Syriza’s prioritised reforms how much deeper austerity bit in Greece. Many of its ministers are jazz-loving academics, a type not known in this jurisdiction since the heyday of the Labour Party in the 1970s; and they’re going to have some political fun.
The estimated total cost of the “Thessaloniki Programme” is €11.4bn, while it proposed to raise a concomitant €12bn in new revenues. If it pulls the Programme off it might become a template all over Europe, including in Ireland.
Its first pillar is “social”. The party’s spending priorities are food and electricity subsidies for impoverished households including free electricity supplies to 300, 000, to implement a Programme of meal subsidies to 300,000 families without income via a public agency of coordination, in cooperation with the local authorities, the Church and solidarity organisations, a Programme of housing guarantee for 30,000 new apartments by subsidising rent at €3 per m², free medical and pharmaceutical care for the uninsured unemployed, a special public transport card for the long-term unemployed and those who are under the poverty line, a pension boost for the poorest retirees, a hike in the minimum wage and tax cuts for low earners. The party promises to restore the minimum monthly wage to the pre-crisis level of €750 ($1,020), an increase of 50%, hand out cash incentives to revive farming, renationalise companies that have been privatised, offer free medicine and hospital care for the unemployed.
The second pillar is “restarting the economy and promoting tax justice”. It includes: settlement of financial obligations to the state and social security funds in 84 instalments, immediate abolition of the current unified property tax (ENFIA), introduction of a tax on large property, immediate downward adjustment of property zone rates per m². The new tax will not apply on primary residence and will not affect small and medium property.
It proposes restitution of the €12,000 annual income-tax threshold, an increase in the number of tax brackets to ensure progressive taxation, personal debt relief by restructuring non-performing loans (“red loans”) by individuals and enterprises. Tsipras believes in imposing a 75 per cent tax on the rich and nationalising public services (including the banking system, which he argues should be operated for the public good and not for profits), and an end to privatisations sucha s those of energy companies and ports.
The third pillar is “a national plan to regain employment”. It entails an employment programme for 300,000 new jobs.
The fourth pillar is “transforming the political system to deepen democracy” and embraces regional organisation of the state, empowerment of citizens’ democratic participation, empowerment of the parliament and regulation of the radio/television landscape.
Reflecting the environmental component of its alliance, Syriza is eco-friendly on renewables, energy efficiency and decentralised energy production but it faces internal tensions over plans for new coal plants and, potentially, the world biggest gas pipeline. Syriza also proposes withdrawing from NATO.
For the moment of course dysfunction remains a staple in Greek politics and economics. Its debt stands at €317bn, or 175 per cent of gross domestic product. €1bn of income and property tax goes uncollected every month. Its banks hang by a thread even before the election. Their shares led the stock-market plunge after the election. The ratings agencies are inevitably now trending negative. The bailout hasn’t gone particularly well. In the spring of 2014 the penultimate tranche of EU bailout funds was released after the government enacted reforming legislation that included everything from the pharmaceutical sector to the shelf-life of milk.
In the summer, troika inspectors returned to Athens, but discussions soon broke down as the government pleaded for more leeway.
In December, euro finance ministers granted Greece a two-month extension on the EU portion of its bailout loans but warned Athens that it still needed to implement further measures in order to get the final €1.8bn of EU money.
A central theme for Syriza thinking is that political and economic dysfunctionality are inextricably linked and symbiotic, and it is not possible to succeed in reducing the latter without tackling the former. This might actually play well in Berlin and Brussels, unimpressed with what might disdainfully be called the past Greek model.
However, abandonment of reform along with austerity fails to chime with commitments by Greek governments in exchange for the bailouts. The European Central Bank holds about €7 billion in bonds that mature this summer and could generate Eurodiscord or at least Euroangst. Greece doesn’t have enough cash to repay the bonds but can borrow the money if it complies with the bailout terms.
Though scarified capitalist commentators contrive breeziness when required, there is no doubt the gulf between Syriza and the creditors is wide and fractious. The head of the IMF, Christine Lagarde, has said the country has “no wiggle room”. Channel 4’s economics editor has written “most market analysts before the election that Syriza would be forced into a U-turn. As someone who has grilled all of its economics team on camera, and Alex Tsipras himself, I can report they have no intention of backing down”.
So clearly there’s going to have to be some tough compromise over the vast debt. About 80 per cent of it is owed to the troika, and earlier restructuring has lengthened the average debt maturity to more than 16 years, with an effective interest rate of 2.4 per cent. Still, the burden of debt in a slow-growing, deflating economy remains heavy. In fact, in 2014 Greece’s interest payments amounted to 2.6% of GDP. By contrast, Ireland, which has a much lower gross debt pile, paid the higher amount of 4.1% of GDP.
For these reasons it will be difficult for Syriza to convince sceptics in Berlin, Frankfurt and Brussels that the debt is, indeed, not repayable.
In the short term, it will be in the interests of both sides to take the simple but very useful step of extending Greece’s financial bailout beyond February 28, when it is due to expire.
The Economist suggests an interesting, if unexciting, trade-off: abandonment of left radicalism for write-offs.
An optimistic letter to the Financial Times by Joseph Stiglitz and others noted that “… macro-economic stabilisation can be achieved through growth and increased efficiency in tax collection rather than through public expenditure cuts, which have reduced the revenue base and led to an increase in the debt ratio”.
Some optimism may be justified since, ironically for Syriza and for the rest of Europe, the Greek economy is actually improving giving succour, as in Ireland, to redistributionists. GDP growth is likely to have been 0.6-0.8% in 2014 thanks to a successful summer tourist season, improved exports and increased EU subsidies for infrastructure projects. Greece’s budget deficit has just about been eliminated, while the primary balance is predicted by the IMF to be between 3 and 5 per cent of GDP in 2015. Greece also has an external surplus of about 1 per cent of GDP, compared with a deficit of over 14 per cent in 2008.
More precisely, in fact no further major reductions in public spending are planned under existing programmes, but tax and revenue increases are still expected to leave austerity regnant in an economy that remains in depression. Euro-wide quantitative easing may help, though it is also recognition that austerity has failed.
All in all, Berlin and Brussels are likely to insist that Greece persist on its current course and implement already agreed policies, perhaps with tweaks here and there. A leading concern is to avoid the kind of concessions on debt terms and conditions that could give rise to claims for similar treatment elsewhere, including Spain but also in Ireland which many feel is undeserving anyway due to it lethal melding of profligacy and growth. The fact Ireland has lent Greece €385m as part of the Greek bailout also gives Ireland another dog in the race. After initially supporting it the coalition is now against a debt conference.
Greece is now proposing to end confrontation by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax evaders. A 2009 report by Helvea SA suggested Greeks may have hidden up to $47bn in Swiss bank accounts and in 2011 the European Commission there was €60bn in unpaid taxes because of avoidance and lack of compliance.
Though 74% of Greeks say they want to stay in the euro (the drachma, anyone?), German officials discreetly tell journalists they are prepared to see Greece leave it, while professing the pious opposite in public. They imply that finally the euro zone is reasonably well placed to cope with a Greek departure. An EU bailout mechanism is in place, Europe’s banks are in better shape and, after most private bondholders accepted a short haircut in 2011, over three-quarters of Greek debt is in “official” hands, reducing fears of contagion to other delinquents. Foreign investors are better able to distinguish between euro members. Bond yields outside Greece have remained flat throughout the electoral vicissitudes.
The Breugel research think-tank has done some estimates of the likely losses that Germany would incur if there is a ‘Grexit’, i.e. Greece is forced out of the Eurozone. It notes that the Eurosceptic IFO Institute reckons that Grexit would cost Germany €76bn while a Greek default within the Eurozone would cost €78bn.
Not much difference.
IFO suggests that direct losses can be calculated precisely but it omits three major factors: the different haircuts likely under the two scenarios, private claims, and other second-round losses.
All three factors suggest that direct losses for Germany would be much larger if Greece were to exit the euro. But Breugel also reckons that IFO has ignored the impact of losses for German corporations if there is Grexit and many Greek companies default on their trade debts. German banks and industry could take a big hit if Grexit happens.
It is worth recalling that it was only after substantial debt relief that the German economy was able to grow – and reform itself – in the 1950s.
To concentrate recalcitrant German minds, Tsipras visited a World War II National Resistance Memorial in his first outing as the country’s leader. The memorial is located at the site where the Nazis executed 200 Greek communist resistance fighters in May 1944. During the recent campaign, Tsipras called on Germany to pay Greece reparations for damages incurred during the Nazi occupation. A 2013 governmental study determined Germany owed Greece $170bn.
A further and dangerous uncertainty arises from the condition of Greek banks, which had been experiencing deposit outflows even before the election, and which remain dependent on nearly €50bn of Emergency Liquidity Agreement financing from the Bank of Greece, as approved by the ECB.
If Greece pushed its demands, approval could be withdrawn, triggering a crisis. The ECB could hardly approve loans, where the Greek government guarantor was attempting to dilute or cancel pre-set conditions.
Writing in the Irish Times, Stephen Collins took a predictably polar stance: “What Syriza is hoping for is that other EU bailout states such as Spain, Ireland and Portugal will see the advantages for themselves in an EU debt conference, but it looks as if the reaction will be the exact opposite.
Governments in the countries that have successfully completed their bailouts or are on the point of doing so have no desire to open up the issue again, particularly as it would expose them to the charge that they failed their own citizens by accepting the terms in the first place”. And implicitly open the door to the radical Left.
The most we can say is that if Greece’s creditors blink, there will be economic relief in the south and angst in the north, hardly furthering the cause of political unity.
If, on the other hand, Greece blinks, leaving its economic renewal programme toothless, the eurozone’s narrative of north-south mistrust and perhaps the disenfranchisement of the poorest, and of the angriest, will intensify with fraught consequences for Europe’s citizenry, though not its Left; and least of all Ireland’s resurgent Left.•