Hard line position on Greek debt may make crisis worse

Rather than supporting negotiations on the Greek debt crisis, many EU leaders continue to support the austerity programs imposed by lenders even though Greece may very well elect a government on January 25 that will insist on changing terms of the loans.

An article by Nicos E. Devletoglou, Emeritus Professor of Economics at the University of Athens, claims that the actual sovereign debt is not at the level of 350 billion euros. but not more than 150 billion euros, less than half that. Any solution to the problem , he claims, should take into account the damage to Greece both in financial and human terms caused by what he calls the "blind austerity" policies imposed on Greece for the last six years. The German finance minister, Wolfgang Schauble, has been insistent that "all previously agreed Greek debt, must be paid in full regardless of the composition of the next Greek government." According to Devietoglou before Schauble's demand could even be carried out it has to be established what the remaining debt is. Devietoglou claims that the debt should be adjusted downward to take account of the costs of the austerity policies on Greece. He says of Schauble's demand: Such a proposition remains largely untenable, because first, as suggested, we would have to establish institutionally what the net remaining Greek debt is -- after downward-adjusting it to compensate for, say, the shocking and still-rising rates of hunger and suicide and the lethal levels of unemployment that are already practically eviscerating the social and economic fabric of Greece, driven by the devastating momentum of continuing austerity, which is also responsible for the endemically collapsing aggregate demand in the eurozone's longest-suffering country,....and nowadays threatening to bring Europe's Grande Démise yet closer as the euro continues depreciating and the eurozone slides deeper into deflation.

Josef Joffe, a fellow at the Freeman Spogli Institute for International Studies and the Hoover Institution, both at Stanford, and editor of the German newspaper Die Zeit has a quite different take on the situation. His analysis, in the New York Times claims there is a vastly different attitude of Italy and France to the situation and to deficit spending as compared to Germany. They, not Greece, pose the real problem: Forget the Grexit issue: It’s Europe’s historical trends that should worry us. In the decades since the economic miracle days of the ’70s, real growth in the European Union has dropped on average by three-quarters of a percentage point. Productivity growth has likewise slid, to 0.4 percent from about 2 percent per year. These ailments are deeply embedded in economies that lag behind on investment, innovation and competitiveness. According to Joffe, Greece has actually been able to come out of recession by carrying out labor market reforms and liberalizing its economy due to the fiscal discipline imposed upon them. Italy and France have not carried out such reforms and are calling for an end to this fiscal discipline. Both will then resort to lavish deficit spending. Joffe suggests that in "their soberer moments" Greek politicians might point out that after declining about seven per cent a year just three years ago, now Greece's growth is not much worse than that of Germany. Joffe admits that unemployment is still 25 percent but that is also is falling slightly. These conditions represent a huge reserve army of the unemployed that will drive down wages, improve profits, and attract some investment.

However, apparently the austerity measures inflicted on Greece have not been cruel enough since the Greek debt is now increasing again: The debt of Greece’s central government has almost doubled since 2011, and gross external debt has since risen from 370 billion euros to 412 billion over the same period. So Greece is still living beyond its means. Joffe thinks that with its tiny economy Greece will be saved once again. It is too small to fail as he puts it. That remains to be seen. Greece will only be saved if it continues privatization at fire-sale prices, further cuts to public employment, pensions and other social benefits, and institute other "reforms" that are thought to be make conditions better for investors.

Many liberal capitalist economists, following in the footsteps of Keynes, such as Paul Krugman, think that such moves are irrational and counter-productive. The leader of Syriza, Paul Tsipras, has claimed:"We will stick with the euro, no doubt.” It is difficult to see how Tsipras will be able to pull this off when the European Central Bank is threatening to cut off further funding unless the new government accepts conditions imposed by creditors that would no doubt include austerity measures Tsipras has vowed to change.

 The president of the ECU, Mario Draghi, appears to be willing to withdraw $35 billion in funding to Greece that could result in Greece deciding to or being forced to leave the Euro zone. This all may be part of a game of chicken but a very dangerous one if the ECB really wants Greece to stay in the Euro zone. James Nixon, an economist at Oxford Economics, said: “While these things might be threatened, bandied around, it would be remarkable if such a step were actually taken. The negotiation starts off with the threat of mutually assured destruction. But to actually withdraw funding from Greek banks is the sort of thing that would mean Greece is well on the road to exiting the euro.” Greek Finance Minister Gikas Hardouvelis claims that a Greek exit (Grexit) is not necessarily a bluff. The Greek agreement with the Troika, the ECB, European Commission, and IMF, runs out the end of February. The ECB said on January 8: Continuing to suspend normal collateral requirements assumes “a successful conclusion of the current review and an agreement on a follow-up arrangement”. Tsipras claims that he will roll back budget cuts to tackle poverty and that he could write off some Greek debt. Syriza may not win the election, now close, with one poll published on January 10 giving Syriza 28.1 per cent of the vote and 25.5 per cent for New Democracy president Samaras' party.

If he wins the election, Tsipras may decide that he needs to sell out his constituency in order to stay in the Euro zone and receive badly-needed funds. George Pagoulatos, of Athens University of Economics and Business told Bloomberg by phone: “It will not be in Tsipras’ interest to set his government on a collision course with the ECB, But in order for a potential Syriza government to make a U-turn, we’ll first see brinkmanship and edge-of-the-cliff diplomacy.” The Troika may force Tsipras into conflict with them if they keep to their present course. He may very well be forced into an exit from Euro zone, by demands from the Troika whose rejection was the reason he was elected in the first place.

 Pagoulatos makes the debatable assumption that it is not in Tsipras' interest to collide with the Troika. Tsipras' may decide that this is exactly the course that is necessary. He may actually want to exit the Euro zone and gain control over the Greek economy rather than have policy determined by the Troika, even though the adjustment process would be bound to be painful. He knows that a majority of the Greek public want to stay in the zone. He therefore needs to show them that this is impossible. If the Troika rejects his demands for relief from austerity and more social spending he will have shown why it is not possible to stay within the zone.