Will Greece win Europe's economic war?

By John Quiggin Friday 27 February 2015

Photo: Views of the Greece compromise differ, mostly depending on pre-existing views on the topic. (Reuters: Yannis Behrakis)

The compromise deal reached between Greece and European finance officials last week hasn't resolved the euro debate, but it has paved the way for at least moderate fiscal expansion and a shift away from austerity, writes John Quiggin.

At the end of last week, it seemed that the great European economic crisis might finally come to a head, with the enforced exit of Greece from the Eurozone, the repudiation of Greek debt and the emergence of open economic warfare within Europe, including the threat of deliberate attempts to destroy the Greek economy.

In reality, as nearly always happens in modern European politics, a temporary compromise was reached, allowing the problems to be kicked down the road for another four months.

But how did things come to this? On the official view of the European bureaucracy, dominated for all practical purposes by the German government, the problem is one of profligate spending by successive Greek governments, who evaded the Maastricht rules meant to constrain government debt. Their folly having caught up with them, the Greeks are now seeking to shift the burden to the long-suffering taxpayers of Northern Europe, and, in particular, Germany. The only solution is to get debt and deficits under control through deep cuts in public spending.

There is a grain of truth in this, as in the parallel view that the the mortgage crisis in the United States, which kicked off the global financial crisis (GFC), was due to the irresponsibility of borrowers who took on loans they could not realistically hope to service. But in reality the financial tsunami that engulfed the world in 2008 did not discriminate between the prodigal and the prudent.

Countries like Spain, which were running budget surpluses before the crisis were hit just as hard as Greece. The only consistent outcome was that the banks and bankers responsible for the crisis were not only protected, but given even more wealth and power than before.

The GFC, and the subsequent recession and banking crisis made it impossible for Greece and other national governments to service their debts, given reduced revenue and the need to rescue domestic banks. They were therefore forced to accept bailouts on conditions imposed by a "Troika" comprising the European Central Bank (ECB), the European Commission (EC) and the International Monetary Fund (IMF).

The core condition was the acceptance of a program of "austerity", that is, deep cuts in public spending. The underlying theory, based on some sketchy research and a lot of wishful thinking was that such cuts would allow room for the private sector to grow, thereby generating tax revenue and assisting in the "financial consolidation" needed to reduce debt and deficits.

Austerity proved a disastrous failure in practice, to the point where the IMF concluded that it did not work as intended and was in fact highly contractionary. Even the ECB, by adopting a massive quantitative easing program in January, has effectively admitted the failure of the policies it has pursued since the GFC.

But that didn't affect the position of the Troika that, in effect, followed the line dictated by the German government.

Despite its disastrous effects, national governments in the peripheral European countries saw no alternative but to accept austerity. In Greece, the program was pushed through by the centre-right New Democracy (ND) party, which had been responsible for the most egregious pieces of irresponsible borrowing. ND was supported by its historic rival, the social-democratic PASOK party, which entered coalition with ND after 2012.

After five years of disastrous austerity, Greek voters had had enough, and threw the coalition out. ND lost ground to more radical right-wing parties, notably the Independent Greeks (ANEL) and the neo-fascist Golden Dawn. But the real disaster befell PASOK, seen as having betrayed its working-class constituency. PASOK received 4.7 per cent of the vote, less even than the Greek Communist Party.

The winner, displacing PASOK as the representative of the Greek left, was Syriza. The name is an acronym for "Coalition of the Radical Left", the operative word being "coalition" rather than "radical". Syriza's program called for Greece to remain within the Eurozone, but demanded an end to the austerity program imposed by the Troika. The German government, represented by finance minister Wolfgang Schauble was unimpressed, saying that the elections didn't change anything and that no change in the austerity program could be considered.

As negotiations reached a critical point last Friday, it seemed that the only alternatives were a humiliating climb-down by Syriza or the expulsion of Greece from the Eurozone. Instead, there was a compromise in which the current bailout was extended for four months, but under conditions that enabled Syriza to propose an alternative reform program to the austerity regime previously imposed by the Troika.

It remains to be seen how the compromise deal will play out. Opinions differ, largely in line with pre-existing views. Supporters of continued austerity see the deal as a climb-down by Syriza, sugar-coated with some softer language. This view is shared by those on the left who favour an immediate exit from the euro and repudiation of "odious" debt.

Syriza supporters (of whom I am one) see it as a back down by the Troika, paving the way for at least moderate fiscal expansion and a shift away from austerity. Only time will tell.

Professor John Quiggin is an ARC Laureate Fellow in economics at the University of Queensland.

Will Greece win Europe's economic war? - The Drum (Australian Broadcasting Corporation)