Haggling over economic policies to appease creditors and Greeks is next hurdle
By MARCUS WALKER, Wall Street Journal
Greece and the rest of the eurozone spent February fighting about the procedure for keeping the country afloat. They will spend the spring haggling over a tougher issue: Which economic policies can appease both Greece’s creditors and its population?
This week’s agreement to carry on talking was hard enough to achieve. The next deal will be far harder because the airy communiqués that preserved a consensus so far must be turned into meaty policy decisions.
Part of the mistrust between Greece and its German-led creditors stems from an ideological rift over what has gone wrong in the small, distressed country over the past five years.
ENLARGEBerlin blames the economic collapse that followed Greece’s 2010 bailout on the fiscal and other sins that predated it. Greece’s new government blames the bailout for turning a financial crisis into a full-blown depression. Opposite policy prescriptions follow from these clashing interpretations.
Finding common ground will be the key to keeping Greece in the euro. The search must survive three stages, if Greece’s new drama isn’t to end in the drachma.
Act One was about whether Athens would accept the rules of the eurozone’s sovereign-bailout game, designed by Germany to ensure that its taxpayers would finance other euro nations only in return for tough economic overhauls.
The left-wing Syriza party won the election on Jan. 25 on a promise to end the humiliation of Greece’s five-year tutelage under foreign technocrats. In February, Syriza discovered that the only way to avoid an imminent banking crisis and capital controls was to accept the rigmarole of reviews, reforms and loan releases.
Greece’s interim deal with its eurozone partners has already helped calm nervous depositors. A senior banking official in Athens said Thursday that more than €800 million ($905 million) in deposits has been put back into the Greek banking system since Monday—though that pales in comparison to the more than €20 billion that Greeks withdrew in recent months.
Act Two will be to agree on and enact economic measures by the summer that will unlock badly needed financing, resuming and completing Greece’s current bailout program.
Greek Finance Minister Yanis Varoufakis will have to turn the policy program he sent to Brussels on Monday—centered on aspirations to fight corruption and tax evasion and alleviate some ofthe social pain of Greece’s depression—into more-concrete measures that satisfy the creditors’ priority: to leave Greece with a flexible and competitive economy that can service its huge public debt.
Athens’s need for financing to service its debt, and Greeks’ desire to stay in the euro, mean the creditors continue to hold most of the cards. Prime Minister Alexis Tsipras will have to sell painful concessions to Syriza lawmakers and supporters, some of whom are making mutinous sounds before the major struggles over economic policy even start.
The main reason for optimism remains that nearly no one wants Greece to default and tumble out of the euro.
“We will probably witness another late-night agreement in four months’ time,” says Christian Odendahl, chief economist at the Centre for European Reform, a London think tank.
Act Three, assuming a deal that completes the current bailout is struck, will be to agree upon a follow-on program that allows Greece to meet its debt repayments over the summer and beyond, until it can return to bond markets.
The past month was tumultuous enough, thanks to open animosity between Athens and Berlin, but achieving a deal was relatively simple. Syriza had to accept that the existing bailout process is the only show in town. Germany had to accept that ambiguous policy promises from Greece were good enough to at least carry on talking.
To get money, however, Greece will have to resolve the ambiguity by agreeing on specific measures with the institutions formerly known as the “troika”—the International Monetary Fund, European Commission and European Central Bank.
The IMF has long been the toughest of Greece’s inspectors, which is why German Chancellor Angela Merkel brought it into the eurozone’s debt crisis: She doesn’t trust European institutions to crack the whip in European countries that need politically painful overhauls.
A thumbs-up from the IMF for Greece’s reform measures is required not just for the IMF to disburse loans, but for Germany to consent to the release of European money, giving the fund an effective veto over all of Greece’s loans.
That is why, in February’s flurry of letters between participants to the Greek talks, the most important may turn out to be the one that IMF head Christine Lagarde sent to eurozone finance ministers on Monday.
In it, Ms. Lagarde warned that Greece’s policy program is ambivalent about the overhauls that the IMF considers most essential, including on pensions, labor laws, sales taxes, privatization and business regulation.
The IMF’s strict demands for weaker workers’ rights against layoffs, deeper pension cuts and other market-oriented changes proved too much for Greece’s previous, conservative-led government to swallow. Syriza, especially its radical-left wing, is likely to have an even harder time digesting them.
“The two main areas of friction will be labor and pensions,” says George Pagoulatos, professor of European politics and economy at the Athens University of Economics and Business. “It’s not going to be smooth,” he says.
Greece’s main victory in the talks so far was to gain the chance to replace the IMF’s preferred measures with policies of its own. But to actually follow its own path, Greece must convince the IMF that Syriza’s policies are just as effective a way to achieve the bailout program’s broader goal of making Greece’s economy competitive inside the euro. The fund and Berlin are audibly skeptical.
