Thursday, 15 October 2015

How Have Politics and Economics Clashed During the Greek Debt Crisis?

by Lauren Robson-Skeete

Finding a resolution to the Greek debt crisis has not been straightforward. There have been several Greek governments in place. Instead of the government of the day agreeing terms directly with its creditors, it decided to consult the Greek people first, through a series of referendums. The Greek electorate strongly rejected the conditions for the bailout imposed. In particular those terms involving austerity and yet seemingly wanted to remain a part of the Eurozone. The memory of the past dictatorships in Greece and the role of Germany during the second world war have been brought to the surface. The lenders, the International monetary fund, the European union and the European central bank have jostled amongst themselves to obtain the most favourable terms. The need to find an economic solution has clashed with this political background. 

Problems in Greece can be traced back to a culmination of triggers; the global recession of 2008, corruption in government, and an entrenched generous social welfare system. This was further exacerbated by Greece's relaxed economic policy, for example not robustly tackling tax evasion and overspending elsewhere. Previously, before the recession, the economy in Greece was strong enough to become a member of the Eurozone. After adopting the euro in 2001, Greece's GDP per capita nearly tripled in the ensuing 7 years. A confident Greece was then encouraged to take out loans for a wide variety of projects including the 2004 Olympics in Athens. Despite this period of large investment and over borrowing it was discovered that the deficit in Greece was alarmingly underreported. The economic crash in 2008 catapulted Greece’s economy into the forefront and exposed corruption further. Subsequently, this led to concern from the lenders about Greece's capability to repay the money it owes.  

The Prime Minister (George Papandreou) requested a formal bailout in 2010 with a sum of $143 billion to be paid back over 3 years to the European Central Bank (ECB), the European Union (EU) and the International Monetary Fund (IMF) also referred to as the ‘troika’. The terms imposed for the bailout meant austerity measures were introduced and Greece's economic situation came under the spotlight. Following this, riots ensued and this anger would remain throughout the crisis. In reaction to this, the public turned to more extreme parties on the left and right. The increased numbers of votes gained by the right wing party ‘Golden Dawn’ can be see as an example of this. In 2009 they received 0.3% of the vote, whilst in 2015 this soared to 6.3%. This correlation seems to emerge throughout history in times of economic turmoil, no longer do the Greek public want a conservative approach to government. Instead, they desire those who express audacious ideas and assert radical solutions. 

During the economic crisis there was a considerable amount of reshuffling in the government as the crisis progressed and worsened. Before Tsipras, there were four Prime Ministers between 2009 and 2015: George Papandreou, Lucas Papademos, Panagiotis Pikrammenos, and Antonis Samaras. In January 2015, the Syriza party was elected and later formed a coalition with the Independent Greeks. The coalition under the leadership of Alexis Tsipras with their manifesto to end austerity is what the Greeks wanted. The newly elected parliament represented a party progressive enough to try to fight on the public’s behalf. In the eyes of the Greek public this was unlike any of the other prime ministers who agreed to the previous austerity measures. The bailout programme expired in February 2015 and without an extension to this Greece was in a vulnerable position. However, Tsipras’ support was proven in the referendum in July 2015 concerning the Eurozone’s terms for Greece. The Greeks rallied in Tsipras’ favour with 61% voting no and rejecting the lenders’ terms. This referendum result challenged the rest of the Eurozone. In turn, this increased the instability of the situation as Greece had defaulted on a loan payment that was due on the 30th June 2015 and political upheaval followed. The lenders had no part in the referendum and thus holding it was completely naïve as in reality it had no impact on the lenders proposals. This is an example of the politics unsuccessfully attempting to influence the economic outcome.

The ramifications of the referendum resulted in the closure of banks with limited bank withdrawals of €60 a day leading Greece to the cusp of anarchy with pensioners being particularly affected. Despite their best efforts to refute the terms, Tsipras finally accepted an even worse deal to the dismay of his people because the lenders held firm on their demands for austerity measures to be introduced. The current measures stipulate; increasing VAT from 13% to 23% in hotels and restaurants and eliminating the 30% VAT discount enjoyed by most Greek islands. A reduction in defence spending by €100 million in 2015 and €200 million by 2016. Greece is also required to phase out the special supplement for poorer pensioners and raise the retirement age to 67 by 2022. A further requirement was to achieve a primary budget surplus of 3.5% GDP by 2018. Finally, increasing corporation tax from 26% to 28% and increasing luxury tax from 10% to 13%. On top of these measures Greece still needs to pay back its mounting loans as the total debt amounts to €323bn. This splits to 10% going to the IMF, 6% to the ECB, and 60% to the Eurozone (currently owes around €56bn to Germany, €42bn to France, €37bn to Italy, and €25bn to Spain) and the remaining to other countries. The Greek government also owes private investors in the country around €39bn, and another €120bn to institutions including Greek banks.  The extensive amount owed to a diverse group of countries and institutions, each with their own political agendas, makes the route to finding an acceptable solution for all particularly difficult. 

Although there is a necessity to construct an economic solution, Greece seems to have focused on the political implications. The current crisis has left Greece in political turmoil. Democracy in Greece was reintroduced in 1974 after many years of dictatorship. As a result, this newfound political consciousness has shaped Greece and could offer an explanation for present attitudes of dissatisfaction towards austerity. Alexis Tsipras gained an overwhelming amount of support as he attempted to realise his aims to end austerity. Thus, democracy became a tool that was used by the Greeks as they tried to get better terms for the loans. The Greek government with the support of the electorate seemed to believe that democracy and ‘power of the people’ represented suitable political means to buy time and would also be enough to rebuke the proposed terms. The result of the referendum in July 2015 declared that 61% of voters said ‘no’ to more austerity measures and an eruption of temporary celebration emerged in Greece at this result. However, in this case it was a pyrrhic victory and the Greeks had to accept an even worse deal irrespective of the referendum. It is hard to disagree with the view that the third rescue package highlights the limitations of democracy as the Greek people had previously denounced a much less onerous programme of economic reforms. Thus, this referendum was futile and if anything it heightened tensions between Greece and its lenders.

The tribulations of Greece suggest that quite frankly it has no other option than to accept this lifeline. Moreover, the consistent implementation of holding referendums seems all too late as ultimately the situation is out of Greece's hands. In this instance, the political ideal of democracy has had to take a back seat and can no longer be used to influence the outcome because it is up to the international powers to try and find a way through the political turmoil Greece has created. Primarily this is due to the fact that they are the ones capable of rescuing Greece and will only do so provided they can be confident it will work. However, whenever Greece disrupts this with democratic means it pushes Greece further into being seen as a liability. With the benefit of hindsight it is all to easy to argue that perhaps Tsipras exploited his democratic influential guise to try and coax a better deal from the hands of troika without being accused of repeating former Greek prime ministers mistakes, as he wanted to make sure he had the Greek electorate with him. Although Alexis Tsipras was unable to end austerity, for the Greeks he certainly gave every effort in trying and they appreciated this immensely. Additionally, the Greek public seem to prefer to be lead by Alexis Tsipras rather than any other leader during these measures as they know he fully sympathises with their plight. 

There is an imbalance between the usefulness of democracy and economics, and in this instance economics is superior. Perhaps turning towards democracy as a political tool reflects the heart of the crisis and economics is the mind that should be followed.  

On the other hand, it could be argued that to an extent democracy has succeeded for the Greeks, but this success was contained to within Greece and ironically has caused a lot of their problems. It could be argued that they brought the situation on themselves. It was the Greek electorate who voted in the preceding governments, and they enjoyed the fruits of lower taxation, higher and earlier pension benefits than much of the rest of Europe, all without consideration as to whether or not it could be afforded. Resultantly, the other EU countries feel that they are subsidising Greece unnecessarily because Greece’s living standards appear greater than theirs. Conversely, the Greek people feel that the austerity measures are far too crippling and that their present living standards are bad enough so could not imagine something even worse. During the crisis, they did receive some support from outside, the French National Party summed up the Greek public’s fears. The leader Marine Le Pen said it was “European horror” and “Greece is free no more.” Whilst the deputy leader Florian Philippot had a more scathing view “The Greek people have been cast into slavery.”

The dire situation in Greece is the result of years of corruption coupled with living beyond their means which has left the Greek population shocked by the austerity terms. Most notably pensions triggered further trouble in Greece after the crisis emerged as many decided to take early retirement. This was an easy way to get money quickly and an obvious flaw in the Greek system. The past expenditure on pensions in Greece is far higher than the EU average of roughly 13% of GDP compared to Greece’s 16.2% of GDP. Comparatively, countries like Finland, Germany, Spain, and the United Kingdom are all below the EU average and so this imbalance across Europe contributes to the complexity of the bailout agreements. Despite this, some argue that Greece's pensions are not as generous as might first appear. 45% of pensioners in Greece receive pensions below what is considered the poverty limit of €665 per month. Moreover, the issues surrounding pensions are not limited to the costs, but the dysfunctional and disorganised system. Either way, Greece needs to tackle or accept the measures to increase the pension age in order to satisfy the demands of the other EU members otherwise they will be unwilling to sympathise with Greece and offer them a deal. 

The pinnacle of the fight against austerity was the referendum, with an overwhelming majority voting against the creditors’ plans. This has hindered economic recovery as the Greeks expect too much whilst the lenders believe the Greeks’ expectations are absurd. Intriguingly, 81% of Greeks wish to remain in the Eurozone. This is puzzling, as despite their determination to reject the terms, equally they wish to remain in the euro without having to accept a new deal. It could be argued that the Greeks brought this problem onto themselves, as mentioned previously, and so should therefore face the repercussions like any other EU member would. But, for the Greeks, it is much more than simply fixing their economy. It is about finding a solution amid economic turmoil without having to resort to conventional means.

If Greece were unable to refinance its loans it would face bankruptcy and be unable to pay for social services such as hospitals and pensions. Despite their differing opinions on what constitutes an acceptable living standard, it is essential that Greece and its creditors agree on bailout terms. Otherwise Greece could face a real humanitarian crisis. 

Germany’s involvement in the Greek debt crisis has certainly played an important role in the progress of a third bailout agreement. Interestingly, Germany is taking the most hostile approach towards the terms of the bailout. However, the Greeks were quick to highlight the debt relief Germany enjoyed in respect of their large wartime reparation obligations. These were first reduced with the Marshall Plan that loaned Germany $1448 million which was further relieved in the 1953 Debt agreement. The circumstances under which each country accumulated their debt were vastly different. Comparatively it could be argued that Germany was lucky to receive debt relief despite the atrocities that had occurred. Therefore, out of all the EU members it might be expected that Germany should be most willing to lend as it knows all too well what it is like to undergo such a situation.

The German chancellor’s (Angela Merkel) conflicts with Germany’s finance minister (Wolfgang Schäuble) are complicating efforts at finding a solution to the crisis. Despite both agreeing on a hard line approach by offering no more concessions to Greece, both take differing views on how to tackle Greece’s problems. Wolfgang Schäuble believes that Greece has failed to uphold the rules of being eligible to be an EU member and thus a Greek departure would benefit the remaining EU members. However, Merkel is adamant about Greece staying in the Eurozone. On top of this, Merkel’s party (Christian Democratic Union; CDU) was divided over the approval of a third bailout plan. The result of the vote on the 19th of August 2015 removed one of the many hurdles for Greece gaining another deal with 411 German MPs voting in favour of another deal, whilst 113 voted against it (with 63 of those against coming from Merkel’s party). This result suggests that Merkel’s MPs were more loyal than suggested. There is no denying that this has weakened her position slightly as she does not carry a united party with her when trying to negotiate a resolution.

Not only has Merkel faced criticism from her own members of government, there has been fierce debate surrounding Germany’s hard line. “For the third time in history, the obstinacy of a German government is in the process of destroying Europe.” Said Jean-Luc Melenchon who leads the left front party in France. However, the German public appear to resent a new deal and support the hard line.  They believe they will have to pay for Greece's mistakes. Within Germany it is reported that roughly 75% of Germans doubt that the Greek government will implement the announced austerity measures and reforms, according to a new survey by Polit Barometer. Whilst an INSA poll showed that only 21% of Germans back the current extension for Greece. These figures suggest the unwillingness of the German public, which I would argue, contributed to the votes against the third bailout deal in parliament due to the general public’s opinion. “I had to work until I was 65 before I got my pension. In Greece you can retire in your fifties.  But it’s we Germans who are paying for that and it’s not right, we’ve had enough,” said a retired civil servant Karl Obermeyer. Merkel has faced backlash from all aspects of German society not just from her cabinet. The German public has been reluctant to support Merkel as they fear they will have to pay for it if Greece fails to get its act together.

It is possible to argue that there is some level of hypocrisy in Germany’s hard line approach due to the fact that in some respects it is benefiting from Greece's turmoil. According to the German IWH institute, the debt crisis in Greece has saved the German government €100 billion in lower borrowing costs as investors sought safety in German bonds. Furthermore, the study by Halle Institute for Economic Research said Germany had made interest savings of more than 3% of GDP between 2010 and 2015 and much of this can be connected to the debt crisis. In addition, Greece's over spend in defence also puts the spotlight on Germany as Greece continued to make weapon purchases from Germany when obviously it could not afford such deals. Merkel’s response to this situation conveyed Germany’s harshness further: “But we never asked you to spend so much of your GDP on defence.” Thus, with Germany’s knowledge of this how can they uphold their hostility towards Greece when Germany could have simply rejected these transactions and forced Greece to direct this money towards helping to fix their economic situation instead. Perhaps Germany might not have had to lend Greece so much money if they had intervened and done the morally correct thing. Therefore, Germany’s enforcement of a tough deal seems partially unnecessary as it has benefited from the crisis.

On the other hand, who is to say that Germany is in fact being overly harsh to Greece? Realistically, it is sensible to ensure that Greece is in a position to be able to repay its loans, rather than Germany and others providing them with additional money with no assurance that they will be repaid. Therefore, I would argue that Germany has every right to be cautious and stringent when considering offering more money to Greece as they have a record of being a liability. Equally, Germany should not oppose lending to Greece as it is in a strong position to help and the resulting effects would be detrimental to Germany if it decided to take no action.

The politics in this case are hampering the outcome of the bailout as Merkel is conflicted between achieving a suitable deal that benefits Germany and appeasing her cabinet and the German public. The conflicts within Germany alone have made reaching an agreement all the more difficult.

Currently, the hegemony of the IMF, ECB, and EU holding Greece afloat is undergoing somewhat of a stalemate. The IMF is demanding that the ECB accept large debt relief otherwise they are unwilling to cooperate whilst Germany is dependent on the IMF’s involvement to consider lending further. Therefore, it will be some time before conclusive long-term results can be seen.

The initial fear of a Greek exit from the euro sparked Eurozone members to put a number of contingency plans together and subsequently united the leaders. Despite their heated debating, they moved closer to a bailout agreement in order to avoid a Greek exit dubbed ‘Grexit’. Arguably, the negotiating of a possible third bailout suggests that the likelihood of Grexit is greatly diminished. However, it is still the case that if Greece is unable to resolve its current issues once more then its position in the Eurozone cannot be guaranteed if it defaults on future payments. The immediate impact of Greece leaving the euro would be complex; there is certainly a risk to the value of the euro but the longevity of this effect would most likely be a short-term issue as other countries have strong enough economies to withstand the disturbance. The weakening of the euro would result in cheapened exports and more expensive import costs for Eurozone members.

For Greece, it would be probable that it would return to its former currency the drachma, but the value of this would be very weak and many people would face bankruptcy with the collapse of banks. However, the complexities arise with the involvement of the other European members as Greece's departure would have adverse effects for investors and it would make the banks in Greece more volatile. Staying in the euro offers Greece some level of security. The underlying problem here is not necessarily that the debt is the main hindrance to Greece, it is how much they can be trusted. Staying in the euro offers a secure view to investors that Greece’s economy is being stabilised. Even if miraculously a Greek exit resulted in an improving economy, no one would be willing to invest whilst there is still uncertainty about Greece's future. Particularly the dramatic reshaping of its currency and banks in attempts to increase competiveness (whilst having no real trade to support Greece throughout the transition) would not be popular. It appears that Grexit has been avoided for the meantime and the reasons for keeping Greece in the euro outweigh those for it leaving. Realistically, staying in the euro is the only viable option Greece has, or a better option out of a bad deal. Either way, if Greece stays or goes there will be implications and its problems will not be solved instantly.

Greece’s dependency on the troika for a third bailout has made agreements more taxing as each party is trying to end the crisis whilst simultaneously trying to get the best deal for themselves in the process and so to some degree has slowed the progress. With differing views of what constituents a ‘good deal’ it may appear that there is large disagreement and thus negotiations are remaining stagnant. Actually, it could be seen as an example of the troika trying to unite the European powers and therefore prove the efficacy of the Eurozone.

The Eurozone has been a help and a strain to Greece, Greece is too important to the euro to fail and a potential exit could have a resonating impact throughout Europe. It would also be a failure of the Eurozone as it would be the first member country to leave. However, being a part of the euro should mean that Greece abides by the rules of the EU as was expected when it joined. The troika’s involvement is crucial to the stability of Europe as the current situation is already having knock-on effects. An example of this can be seen in Italian real estate where ‘Sorgente group’ postponed a $649.6 initial public offering of subsidiary Sorgente real estate systems, while two weeks earlier ‘Domus Italia’ also postponed a €250 million IPO planned for July. The cause of the delay was blamed on market volatility in Italy which has been exacerbated by the current crisis in Greece – “There was a general and generic concern about what was going on in Europe” said Giovanni Maria Benucci chief executive of Domus Italia. Therefore, Greece simply cannot be left to try and settle its crisis singlehandedly, as it is far too unpredictable and the wider implications for Europe leave too much in the balance and the credibility of the Eurozone as no member joins in the expectation of ever leaving.

Having considerable debt is not exclusive to Greece and is in fact inclusive of all major countries. This raises questions about the value of debt and its worth. It could be seen that security in the future of the Greek economy is key to resolving the crisis. The biggest obstacle for Greece and the greatest concern for the creditors is that Greece continually fails to deliver on its promises. This scepticism about Greece's ability to lift itself from the chaos made harsh terms unavoidable.

A primary example of the necessity for reliability can be seen in the case of Japan where its debts are far superior to Greece's; Greece's debt to GDP ratio is a staggering 173% whilst Japan surpasses this at 246%. However, Japan is not on the brink of economic destruction. This suggests that levels of debt are not always the most important issue but that how they are handled and credibility are. The world justice project ranked Japan 12th in the world on rule of law whilst Greece, 32nd. Similarly Japan was ranked the 11th best country for absence of corruption whereas Greece placed 34th. The fact that by the end of 2014 Greece had failed to collect $86 billion in unpaid taxes highlights the discrepancies between the two countries and the fear creditors have in trying to support Greece.

Whilst strict economic, monetary market forces may have prevailed so far in retaining Greece within the Eurozone, the path has not been smooth. Political pressures have influenced the manner and timing of the outcome, perhaps to Greece's detriment. The unorthodox evolution towards a resolution of the Greek crisis and the ability for lenders to impose austerity controls over a population may impact future political international relationships. In addition, the volatility that has been produced may influence future international relationships and trust.

Moreover, it has raised questions to be considered such as how democracy and perceived living standards can influence an economic crisis. Despite all the interrelated conflicts surrounding the Greek debt crisis, all of the lenders are working towards the same solution in order to help Greece. Although the conflicts obscure the fact that the solution is most important for all, how the European leaders resolve the culmination of issues will set the precedent for the future.

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