Greece and the Eurozone: the prodigal son

by George Hatjoullis

The institutions have accepted the Greek proposals as starting point for a full review of the Greek Master Financial Assistance Facility. A four-month extension has been granted to allow a full review and allow discussions on a possible follow-up arrangement. The Greek government proposes to change the shape of the reform commitments to allow more ‘social justice’ in the adjustment programme. In return it has fully committed to the substance of structural reforms and to neutralising the fiscal impact. However, in this respect the institutions have committed to use available flexibility in the existing programme to ease the fiscal restriction in 2015 and to ensure they are ‘appropriate’ in future agreements.

This does not sound very much but it is a huge step forward for Greece and the eurozone. There is a small but perceptible admission from the institutions that Greece may have been forced to do too much, too quickly. The process cannot simply be reversed but whatever flexibility it allows can be used. There is also recognition that a change in government does change the facts on the ground and the new Greek government have a right to ask for the form of reforms to be reconsidered provided amendments can be accommodated within existing arrangements. It is a narrow path, if it exists, but the institutions have allowed four months to see if it can be found.

The Greek government has had to take a very aggressive position even to achieve this and the result has been a loss of trust. This is not the fault of the Greek government but of the inflexible, and rather patronising, nature of the support arrangements available to member states. The Greek government, having made the breakthrough, needs to modify the rhetoric and work to rebuild trust. Cries of ‘freedom or death’ are not appropriate. Greece is not fighting the Ottomans or the German Nazis. It is co-operating as a permanent member of the EU and eurozone family. This is something domestics critics of the Syriza government must also bear in mind. Mock heroism is easy. The reality is far more challenging and dangerous. Exit from the eurozone is not something to be sought and should be avoided if possible. The other eurozone member states would like Greece to remain and will do everything they can to achieve this. However, they too are answerable to parliaments. They too have democratic considerations. Democracy is not the sole gift of the Greeks.

The immediate problem for Greece is cash-flow. It must fund itself for four months and meet its commitments whilst the review takes place. It will seek an increase in the T-Bill limit, which presumably it will sell to its own banks. However, the ECB may not accommodate this request immediately. Much will depend upon its faith in the review process. The Greek government must thus be quick to show good faith. Looking at the Greek proposals there is a very narrow path that will satisfy all the conditions for a successful review and an end to this crisis. Greece will be on a path to reform and the reform programme will incorporate a more socially just structure. However, the Greek debt to GDP ratio will remain elevated for an extended period. There is no realistic path that reduces the ratio in a meaningful time horizon. One can only hope that, once Greece fully restores trust and demonstrates that it has implemented necessary reforms, and that the social cynicism that pervades and undermines the Greek economy has been transformed, that the partners will cut them some slack. Remember the parable of the prodigal son.