Ending what has been a tumultuous six-month long negotiation process, last week the Greek Parliament approved the first package of austerity measures required by Greece’s creditors as part of the “Greekment” reached in the early morning hours of 13 July 2015 in order to initiate talks on a Third Fiscal Adjustment Programme (or “Memorandum”) and avoid Greece’s expulsion from the Eurozone. According to early reports, this Memorandum cover the Greece’s financing needs for the next three years, but will require the harshest set of austerity measures of the three fiscal adjustment programmes to date. In this first package alone, the Greek government is obliged to implement tax increases and pension cuts totalling approximately 2% of GDP, while future austerity measures are expected to include, among others:
- Privatization of €50 billion of public funds;
- Increase in VAT on most goods and services to 23%;
- Elimination of lower VAT rate for Aegean islands;
- Defense cuts of €300 million;
- Increase of retirement age to 67 years old.
As US economist Paul Krugman notes, Greece’s creditors (IMF, EU Commission, ECB) continue to insist on the effectiveness of such austerity measures in spite of the fact the implementation of the First and Second Fiscal Adjustment Programmes, equivilant to the US cutting $3 trillion from its balance sheet, has only led Greece’s Debt-to-GDP ratio rising from 148.3% (2010) to 180.2% (2015). More specifically, austerity in Greece has entailed, among other things:
- 25% decrease in real GDP;
- 28% reduction in public sector employment;
- 5% decrease in food consumption;
- 61% decrease in the average pension (to €833);
- 44% of population now living below the poverty line;
- 27% overall unemployment; 53% youth unemployment.
Clearly, the imposition of fiscal austerity in Greece by the IMF, EU Commission, and ECB has failed. What’s even more tragic, however, is the blatant disregard of Greece’s creditors for the will of the Greek people, particularly given the outcome of Greece’s recent referendum. Earlier this year, speaking at St. Antony’s College here in Oxford, Nikos Kotzias, the Foreign Minister, labeled the actions of Greece’s creditors as “imperial.” One well-known definition of the term is the ability of an international actor to manipulate the domestic and foreign policy of a state. Adopting this definition, it is hard to argue that the actions of Greece’s creditors are not imperial.
Syriza’s folly
Yet I would argue the most tragic act to date of the tragedy that is the Greek Debt Crisis (2010- ) is the elections of 25 January 2015, through which Syriza won a majority in the Greek Parliament and Alexis Tsipras became PM. Why? Because it completely undid the progress being realized by then-PM Antonis Samaras and his coalition New Democracy-PASOK government. It is easy to forget, but until that point Greece had begun an unthinkable economic recovery. The country was on track to record a primary budgetary surplus of €3.3 billion (3% of GDP), had raised €3 billion in the country’s first bond issuance since the crisis began at an annual coupon rate of 4.75% (16.69% today), and was in the midst of negotiating an emergency credit line with the IMF (not austerity measures) that would have allowed the country to be lent money from the private sector at even lower interest rates. All this resulted in Greece realizing economic growth in the third quarter of 2014 (1.7%) for the first time in six years. Even overall unemployment had recorded its first decrease since the onset of the crisis. I am not claiming that the Greek economy under the coalition New Democracy-PASOK government was perfect, but it was certainly improving.
How was former PM Samaras able to achieve the aforementioned progress in spite of the austerity measures imposed by the IMF, EU Commission, and ECB? His government intelligently negotiated with its creditors. Acknowledging that negotiations with his country’s creditors were not a one-off event and that Greece needed a positive relationship with these partner institutions in the long-term, PM Samaras and his negotiators did not resist impactful, sensible reforms that would actually facilitate economic growth (privatizations). On the other hand, however, PM Samaras and his negotiators did present creditors substantiated counterarguments in response to nonsensical austerity measures that would only deepen the recession (cross-cutting public sector job and pension cuts). Indeed, it is no coincidence that the coalition New Democracy-PASOK government has been the only Greek government of the crisis era that has undergone evaluation by the troika and not been asked to implement further measures. It is likewise not coincidental that it was under the Samaras government that the IMF publicly admitted to errors in calculations based on which the degree of austerity to be implemented was decided.
The relative effectiveness of former Samaras’ approach to Greece’s creditors has never been clearer than it is today. Upon assuming office, Tsipras and his Syriza-Independent Greeks coalition government looked to act on campaign promises and initiated an uncoordinated, uninformed, and misguided attempt at not only renegotiating the Second Fiscal Adjustment Programme, but also “ending austerity throughout Europe.” The results have been impressive. Greeks have witnessed discussions shift from €1 billion in additional measures (last proposal put forth by the New Democracy-PASOK government following demands from creditors), to over €10 billion in additional measures last month, to today’s “Greekment” according to which Greece will undergo harsher austerity (for next three years) than at any other point since the crisis began. What’s more, since the Syriza-Independent Greeks coalition government assumed power, every day Greece’s GDP has decreased €22 million, an average of 59 small businesses have closed, and approximately 613 jobs have been lost, not to mention the first-ever default by a developed nation on an IMF payment and three weeks of chaotic capital controls.
What preceded this most tragic act in Greece’s ongoing tragedy? Let’s return to the aforementioned final proposal put forth by the New Democracy-PASOK government. In late 2014, the Greek government yet again engaged the IMF, EU Commission, and ECB in negotiations following the most recent evaluation of Greece’s bailout program conducted by the creditors according to which it was concluded that the country was off track to reach agreed-upon targets and therefore required additional austerity measures. Despite all the progress realized by Samaras’ government, Greece’s creditors demanded close to €3 billion in new austerity measures including, among other things, increases in VAT on hotel services up to 13% (from 6.5%). Third parties in fact predicted this would decrease Greek GDP by up to 2%. What’s more, Greece’s creditors insisted on such illogical measures while fully aware of the potential for national elections within a three-month period; elections in which polls indicated Syriza would be able to form a government.
A problem of Europe’s making
All of this underscores the arrogance of Greece’s creditors. The past eight months have demonstrated that the IMF, EU Commission, and ECB believe they are able to impose whatever is in their economic interest and coincides with their economic philosophy on sovereign nation-states regardless of their government, the will of their people or the facts on the ground. In this regard, Greece’s creditors have reaped what they sowed; by demanding yet more austerity two months before national elections, the IMF, EU Commission, and ECB facilitated the fall of Samaras’ coalition government, rise of Syriza, and the chaos that has ensued, almost leading to the dissolution of the Eurozone. Again, what’s most tragic is that the Greek people have paid and will continue to pay the cost of the arrogance of their creditors. Instead of living in a country with a (albeit slowly) growing economy, Greeks now face at least three more years of the harshest austerity yet. Without that arrogance, Greece might not have needed a third bailout program today.
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