Thursday, February 05, 2015

A Greek drama: part 3 with SYRIZA at the helm.

A third option besides a Grexit or renegation: concentrate the European investment plan on (post) crisis countries and release the Euro constraints on innovation.

Jo Ritzen, IZA Bonn, Maastricht University, Vibrant Europe Forum


The Greeks have voted massively for SYRIZA, the party that promised renegotiations between the EU (and the IMF) and the Greek State to roll back austerity. The appeal of SYRIZA to the voter is clear: Greece is suffering: (youth) unemployment is high, good health care is no longer available for many Greeks and there is a lot of poverty, while the expected economic recovery seems to remain around the corner.

It was a mammoth task to get Greece back on track after in the first part of this Greek drama in 2009 it became clear that successive Greek Governments had cheated. The Greek Government debt was almost twice as high as officially communicated. The financing deficit of the Government was 3 to 4 times higher than hitherto communicated. The country had - according to current standards- already been bankrupt for many years .

How then to return to normality? Grexit was an option: Greece leaving the European Monetary Union (not the EU) and a restructuring of Greek debt (written off in part and for another part put on the back burner). For Greece Grexit would have amounted to “cold turkey” where all cuts in Government spending which now have been spread out over a number of years would have been applied instantaneously. There are no creditors to give new loans to a bankrupt country which has not reformed.

Instead of a Grexit the EU and Greece chose for another option: an infusion of funds of the EU and the IMF, such Greek could finance its debt with an interest rate of about 2%, while the funding of the running deficit (expenditure minus government revenue) would be covered by a emergency fund. Greece promised in return that it would enact the necessary austerity measures for the deficit to decline gradually to the 3% norm of the Euro-union. That was part 2 of the drama.

And now part 3. Renegotiation on the debt is not necessary: this is not the main problem. Negotiations for additional financial help in order to reverse the budget cuts are completely unthinkable: this would not fly with the citizens of the member states who had already trouble with the funding of the emergency fund out of their pockets, however dire the Greek situation is. Grexit is looming again with disastrous consequences for Greece.

There is a third option next to Grexit or renegotiation, which may be face-saving for SYRIZA and is found in Juncker’s 300 billion Euro investment plan (with a hoped for multiplier of 3), together with a relaxation for the 3% rule for budget deficits of the Euro-union for extra expenditures for innovation. This investment plan led by vice president Kaitanen of the European Commission may help Greece to find again the way towards economic growth and towards more private sector employment. It would also help if the EU would widen its investment plan by allowing additional investments in R&D to be placed outside the 3% rule for government deficits, as advocated by the Vibrant Europe Forum. In this option the agreement between Greece and the EU needs not be changed. In particular, Greece needs to continue with the agreed terms in levying taxes especially for higher incomes, in ensuring the independence of the judiciary and in the transformation of the loss-making state-owned enterprises (a job machine for former politicians) into profitable or at least self-supporting companies. These are essential for sustainable economic growth in Greece.

Greek dramas generally have five parts. Perhaps this drama can be limited to three.

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