Late last week and early this week we had the negotiations between Greece and the Eurogroup in relation to the extension of Greece’s financial rescue. Greece had initially asked for a six-month extension while the Eurogroup conceded four in exchange for a package of reforms that the new Greek government led by left wing radical Alexis Tsipras is willing to put in place.
This package was eventually agreed to last Tuesday and Greece lives on to fight another day. It lives on to fight another day as most key decision-makers on the EU side have said that the package of reforms prepared by Greece is a good start but does not go far enough. Both Mario Draghi, president of the European Central Bank, and Angela Merkel, the German Chancellor, have said so.
The Eurogroup may still come to the conclusion that a well-managed Greek exit from the eurozone may yet prove to be healthy both for the euro and Greece itself
The negotiations were tough as Germany had asked for significant improvements in reforms before accepting an extension for funding by the eurozone. In the meantime, leading political figures kept claiming that Greece should not leave the eurozone and that some form of compromise was possible. However, is there light at the end of the tunnel? Have the various members of the Eurogroup simply postponed a decision, which would eventually have to be taken, namely that Greece would end up having to leave the euro?
Three considerations come to mind.
The first is a concern expressed by some that Greece was trying to win time but would eventually dodge on its commitments. The point about these commitments is not necessarily the specific measures that the previous Greek government had agreed to.
In fact, I very much doubt whether the heads of government of the eurozone members were happy with these measures given the social havoc they have created. They were after the ultimate objective – that Greece pays back its creditors and that the fiscal deficit is brought down to sustainable levels.
These two objectives could have been reached through other measures and what the new Greek government sought to do was to present a set of proposals that could achieve the same result without creating a heavy social cost.
The reforms that seek to fight tax evasion and corruption, reduce the size of the state sector, reduce wasteful public sector expenditure and remove privileges that are unsustainable (such as incentives for persons to go into early retirement) can yield good results as much as reducing the minimum wage or reducing the salaries of public sector employees.
Economic austerity and economic virtuousness do not have the same meaning even though they can lead to the same result.
The second consideration is the extent to which lenders could accept to waive part or all of the Greek debt. No country was willing to do this as it would have made their own debt situation worse. It would have been tantamount to a bailout by the taxpayers of the creditor countries (including Malta), which governments could not accept.
On the other hand, Greece could have taken the easy way out and defaulted. However, it could not do that, as it knew that a default would have destroyed any consumer and investor confidence in the country. Yet the Greek government had to honour its election promises.
So both the creditor countries and Greece knew that they were facing a lose-lose situation, which somehow they had to turn into a win-win situation. If Greece does indeed set itself on the path of economic virtuousness, then we will have a win-win situation.
This leads to the third consideration. Is a Grexit (Greece leaving the eurozone) as impossible as it is claimed to be? History does show that currency unions are not permanent and only reflect the political thought of the time. A Grexit would present a challenge for the technocrats; but nothing that the experts at the ECB and the International Monetary Fund would not be able to handle. The Eurogroup may still come to the conclusion that a well-managed Greek exit from the eurozone may yet prove to be healthy both for the euro and Greece itself.
The proverbial expression that one should fear Greeks when they bring gifts has been evoked in recent days. Greece has been given another opportunity to set its house in order and should exploit it fully to fight another day and not to repeat the Trojan Horse story.