Friday 27 April 2018

Greek euro exit would still leave Trojan horse behind

The Greeks have asked the right question about what has happened to European solidarity
The Greeks have asked the right question about what has happened to European solidarity

GREECE is the big story, no doubt about that, but it presents great problems for a weekly column. With Greece, it's always complicated.

At the time of writing, it is not clear whether Greece will default on its debts, with all the unknown consequences that would entail, or reach a last-minute deal - with all the unknown consequences that would entail.

By the time you read this it may still not be clear but it is not too soon to begin considering some of the known unknowns in this whole sorry mess, both for Greece and the Euro project.

Naturally enough, most of the attention has been on Greece itself, given what it has already gone through and what it faces in any plausible future, but the crisis has laid bare the theoretical and practical weaknesses of the Euro system. Irrespective of the outcome, that system cannot continue as before.

For Greece itself, oddly enough, the issues are somewhat clearer. There has been lots of the expected talk about austerity versus - well, it's never quite clear what the opposite to austerity looks like - but we do know how much austerity was being demanded.

The creditors were looking for a primary budget surplus (before interest rate payments on the national debt) of 1pc of GDP this year, 2pc next year, rising to 3.5pc by 2018.

That does represent austerity. A primary surplus of the size being requested by the creditors has rarely, if ever, been sustained by any country, and few of them were in Greece's parlous state.

Athens' alternative of a surplus peaking at 2.5pc in 2017 was more than reasonable and would still have left no room for public spending stimulus. The real problem was agreeing on how even this could be achieved. Had Greece offered a plausible plan, it could probably have secured some relief.

This is a more central question than size of surplus. Syriza claimed it had an electoral mandate to oppose austerity. But one cannot have an electoral mandate to force other countries to lend one money. One can, however, have a mandate as to how the borrowed money is used.

We have been through this ourselves in the bailout. Nevertheless, one lesson must be that lenders concentrate on whether national policies will meet the targets, rather than deciding on the policies themselves.

This is not an exact science: would the tax rises proposed by Syriza really bring in the desired revenues, after allowing for the economic effects, as compared with the cuts in pensions demanded by the creditors?

My feeling is that they would not, but that is the question which should be asked: not, as sometimes seemed to be the case, whether cutting pensions is intrinsically preferable to raising taxes.

The Irish government exaggerates the degree to which it changed the bailout programme. The Taoiseach, probably with the best of intentions, muddied the waters further with his highly contentious claim that Ireland did not rely on tax increases.

In truth, when public finances have all but collapsed, there is very little room left for manoeuvre but within those constraints a right-wing government might well make different choices than a left-wing one.

The problem for the left, and not just in Greece, is that it often seems not to accept that there are constraints, which inevitably means a dialogue of the deaf.

Beyond Greece, we must recognise that the crisis is an extreme manifestation of what is now the Eurozone system supposed to apply to all. National politics are subject to scrutiny from the centre in terms of budget balances, current account deficits with the rest of the world (it must be hoped, one day, surpluses too) and estimates of the economy's economic abilities.

To be effective such scrutiny would have to take in, not just taxes and public spending but wage and credit developments as well. The job of fitting that into electoral mandates has not even begun.

The Greeks have asked the right question about what has happened to European solidarity, equality and mutual respect, even if they have not been exactly the best people to ask it. Whichever direction the crisis takes, everyone else must ask it too.

In a recent blog, the eminent US economist Paul Krugman highlighted an intriguing explanation for the limited welfare system in his country. The explanation put forward is race, and more particularly the history of slavery, which means there is not sufficient solidarity to persuade people to transfer significant sums to others, because those others are very often of a different race.

Even without the scars of slavery, the same phenomenon has been observed in the most cohesive countries - those of northern Europe. They have found it politically difficult to maintain their generous social systems in the face of significant immigration from other cultures.

It is no good pretending that something as disparate as the European Union can have the kind of solidarity associated with the Nordic nations (and, in my opinion, Ireland).

It was hard-nosed politics for governments such as the Irish or Spanish to oppose debt relief for Greece because of the boost it would give to anti-austerity parties. But the real problem is that people in the richer countries do not want to give some of their money to the Greeks. To that must be added the not unreasonable view among poorer countries that they should not have to.

The inevitable conclusion is that, even without crises, there will be no meaningful transfers from richer to poorer regions within the Euro area. The inevitable consequence is that the less productive countries will have to accept that their incomes will be lower. This will be difficult, because it will not be camouflaged by the varying purchasing powers of different national currencies.

It gets worse. Transfers are not a good way of increasing growth in poorer regions. Such regions needs to be able to compete and catch up. That does mean structural reform, wage restraint and sound budgets. It may also mean working harder and longer than those in more productive societies and offering incentives to investment to make up for lower returns in the past.

But all of that is largely forbidden. The Eurozone faces an existential choice. It may be possible to have a successful monetary union without substantial internal transfers, or one with harmonised labour, tax and social conditions. It is hard to see how it can have both.

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