Tuesday, February 17, 2015

Deal or no deal

Both sides need a deal, but is there going to be one? We will know by Friday, because that is the deadline to stop the process that will lead to a Greek default. Negotiators seem to be going about it in rather an odd way. Mind you, the Greek finance ministry is led by a tie-less economist who quotes Kant.
One may think that this retreat from game theory is motivated by some radical-left agenda. Not so. The major influence here is Immanuel Kant, the German philosopher who taught us that the rational and the free escape the empire of expediency by doing what is right.
How do we know that our modest policy agenda, which constitutes our red line, is right in Kant’s terms? We know by looking into the eyes of the hungry in the streets of our cities or contemplating our stressed middle class, or considering the interests of hard-working people in every European village and city within our monetary union. After all, Europe will only regain its soul when it regains the people’s trust by putting their interests center-stage.
Meanwhile, the apparently German-led insistence that the Syriza government has to abide by the agreement made by the previous government would, in effect, nullify the result of the Greek election, which was fought on precisely this issue. It is a basic principle of Parliamentary democracy that a Parliament cannot bind its successors, otherwise there can be no change and democracy becomes meaningless. Negotiators have to face that reality.

Austerity has produced a primary budget surplus in Greece. It has also produced an increase in sovereign and private debt, social crisis, capital flight, a brain drain, mass unemployment, the rise of fascism and a 30% contraction in GDP. Every economic forecast coming from the 'Troika' of lenders has been completely wrong, every target missed. And now the Eurozone as a whole is slipping into recession and deflation. Is this a success? 

Syriza's negotiating position on economics is modest. They wish to run a smaller primary budget surplus (not a deficit), restructure debt and tie repayments to growth, mitigate the social crisis, whilst dealing with serious problems of elite corruption and tax evasion. The principle is simple - they aim to restore growth by boosting demand at the bottom though poverty alleviation and at the same time attack corruption at the top. It's not a bad basis for a democratic left reform agenda. But modest proposals sometimes have immodest aims. This policy undermines the elite economic consensus and the basis of decades of economic policy making. It won't be easily conceded.

There is something else as well. If it works and the debt crisis is eased, the fundamental issue will still remain - the flawed construction of monetary union. Here, Greece isn't the problem. It is Germany, with its excessive savings and trade surplus. This is beautifully explained in this neat animation from the Financial Times. All currency unions allow for transfers from wealthy to poorer areas and the collective sharing of risk, except EMU. In other words, the next crisis is built into the Euro. Even with a deal, it will not be time to relax.

1 comment:

lostmysocks said...

An excellent summary of the issues! Always a pleasure to read :)