In February, Greece agreed to a
four month extension of its current bailout programme, subject to the approval
of reform measures proposed by the Greek government. As yet, however, the
country’s creditors have still not reached an agreement over the reforms which
have been put forward. Tough negotiations ahead, the piecemeal approach which
has so far been adopted by Eurozone governments during the crisis is becoming
increasingly unsustainable.
The recent negotiations and the agreement to
extend the Master Financial Assistance Facility Agreement between Greece and its institutional creditors (the IMF, ECB and
Eurozone) highlight a range of issues pertaining to European monetary, fiscal,
and political integration.
This two-level negotiation between a weak
debtor country on the verge of default and a heterogeneous coalition of
creditors may well prove to be of utmost political significance. The diversity
of national positions on the issue of Greece within the Eurogroup – with France
and Italy taking a softer position vis-à-vis Greece as opposed to Germany,
Spain, Portugal, and the Northern bloc – and the multiplicity of overlapping
transnational cleavages affected by its potential redistributional effects
demonstrate the issue’s political complexity.
Some observers have likened the recent
bailout negotiations to a game of ‘chicken’ with uncertain ‘collision’ payoffs.
The original two bailouts in 2010 and 2012 were mostly driven by fears of
financial contagion in the event of a ‘Grexit’, which were eventually allayed
through the establishment of the European Stability Mechanism, the activist
monetary policies of the ECB (especially through the OMT and QE programmes),
and the launch of the banking union.
What was markedly different this time round
was the fact that, following the sovereign bond restructuring in February 2012
(with private sector involvement), the bulk of Greek external debt now rests in
the hands of the official sector (see Figure 1), which is answerable to foreign
electorates, taxpayers, sovereign bondholders, and non-European IMF member
states.
Distribution of Greek debt (Source: Open Europe)
As a result, the political contours of the
relationship between Greece and its creditors have been significantly altered.
Political contagion has become the new name of the game, both in terms of,
first, signaling commitment to the irreversibility of EMU to global investors;
second, inducing fiscally prudent behavior by EMU incumbents (especially those not
under an official bailout programme) in accordance with the Fiscal Compact
(moral hazard); and third, helping the electoral prospects of mainstream
pro-European parties (adverse selection) by signaling resolve to enforce the
existing policy framework.
The nature of the agreement would set a
precedent on the renegotiability of Eurozone rules in the aftermath of national
elections and partisan shifts in the make-up of national governments. Whichever
way the pendulum swung, strong signals would be sent to multiple recipients
(governments, parties, voters, taxpayers, and investors). The hard-powered
incentives of monetary bailout and the leverage enjoyed by creditors over a
heavily indebted nation have rendered Greece the guinea pig of austerity
policies. Continued adherence to such a policy prescription in the face of
limited signs of economic recovery is a warning to others who may wish to
tamper with the fiscal rules of EMU (e.g. France and Italy).
In the end, a delicate balance was struck
between respect for national democracy and adherence to common rules,
considerations of moral hazard and the humanitarian effects of austerity,
containment of political contagion and apprehension of the domino effects of a
potential ‘Grexit’. Although in principle the extension agreement was seen as a
reaffirmation of the loan-for-reforms conditionality arrangement reflecting the
interests of creditor nations and institutions as well as pro-austerity
governments such as Spain and Portugal, the intentionally vague phraseology of
the joint statement constituted a significant concession to the new Syriza
government, not least because of its omission of the politically toxic terms of
‘Troika’ and ‘Memorandum’.
Greek Finance Minister Yanis Varoufakis used
the phrase ‘creative ambiguity’ to characterise the spirit of the renegotiated
contractual arrangement. On the one hand, the wording provides a strong enough recapitulation
of the terms of the relationship between Greece and its creditors so as to be
acceptable to both national parliaments and public opinion. Moreover, with Greece's
commitment to abstain from any unilateral actions with significant budgetary costs,
creditor institutions (formerly known as the 'Troika') have reasserted
themselves as effective veto players or 'censors' in the domestic policy
formation process. On the other hand, the
Greek government won some time, discretion, and flexibility in its design
and implementation of a socially fair and fiscally balanced adjustment to
economic growth and sustainability (outlined in the recent gradually unveiled ‘Varoufakis’
list of reforms).
Greece is thus becoming the ‘co-author’ of
its own reform strategy. The key question remains how well it can 'sell' it to
both domestic and international audiences. In its pursuit of this new package
of reforms, the new Greek government – while still enjoying a high level of
political capital and a strong anti-austerity mandate – will have to walk the
tight rope of gaining international credibility in the eyes of foreign
creditors and investors without losing popular and partisan support.
And yet, the loan extension agreement in
February constituted only one salvo in the battle against the Greek debt
crisis. It effectively set the stage for an upcoming round of negotiations
between Greece and its creditors with respect to debt restructuring and
potentially a new bailout. Continued economic and political uncertainty, anaemic
growth, and deflationary pressures in Greece may render its euro membership
increasingly untenable in the near future. Despite efforts to ‘quarantine’ the
Greek ‘patient’ and to present it as an exceptional case, the ongoing strategy
of 'muddling through' the rough waters of a debt crisis may soon have to give
way to a watershed decision tipping the scales towards less austerity and more
fiscal centralisation.
In the face of deteriorating economic
prospects for Greece and urgent liquidity needs, any decision aiming at keeping
the Eurozone intact will have to be more radical than what has been seen so far.
It has been a recurring theme of international monetary regimes that, when
there is conflict between internal adjustment and external adjustment objectives
and no recourse to fiscal or monetary stabilisers, such a regime comes under
intense pressure to either disintegrate or transform itself into a fiscal
union. Thus, the political spillover effects of a new deal with Greece will be
unavoidable, either in terms of paving the way for more fiscal coordination and
centralisation under a more flexible regime, or marking the beginning of the
end of EMU. In other
words, these current squabbles may either amount to the 'growing pains' or the
‘dying throes’ of an 'ever closer union'. What is for
sure is that the incrementalist approach adopted so far is becoming
increasingly unsustainable.
Nikitas Konstantinidis is a University Lecturer in International Political Economy at the
University of Cambridge.
The paper was first published here.
No comments:
Post a Comment