As the negotiations drag on, is it time to reconsider Schaeubles offer?

Greece’s creditors have returned to Athens after their Easter break but no one except the most optimistic analysts and the Greek government expect that the first review of the programme will be concluded soon, despite announcements that the two (or three) sides are ‘close’. The delay has more to do with the disagreements between the European lenders and the IMF than the Greek government’s willingness to resist unreasonable demands for more tax hikes and cuts in pensions and benefits.

As has been the case many times before, the outcome of the review is linked to the subsequent advance of a loan tranche that Greece needs to repay its creditors in the next few months, with a large repayment due in  July.  And as it happened several times in the past, the review is already overdue – it should have been completed in November last year, and the funds should have already been released.

The country agreed to previously unimaginable tax and spending concessions last July, in exchange for the current 86-billion-euro bailout package, after the European Central Bank withheld emergency assistance to Greek banks pushing them to the brink of collapse before capital controls were imposed. That event also forced the Syriza government to accept the conditions of the lenders similar to those their predecessors had agreed but could not implement.

However, even if the review concludes successfully during April as the Greek government hopes it will, it wouldn’t  take an economics laureate to figure out that the programme is unworkable and that soon the Greek economy will run into trouble again at the next hurdle. Anyone with a rudimentary knowledge of economic theory and the Greek reality can tell you, that squeezing household disposable income depresses the economy further and overtaxing businesses and individuals does not increase state revenues – it just leads to more people being unable to pay taxes and more businesses closing down or  moving north of the border.

It is therefore hard to believe that a number of highly paid technocrats, a group of finance ministers and several politicians and their advisers are not aware of that the Greek programme has no chance of succeeding.

“The International Monetary Fund acknowledges that it made “notable failures” on the first rescue package for Greece, setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed. As such, the fund said in an unusually frank report released July 2013, it lowered its own standards on debt sustainability, setting lending levels too high for Greece while not pushing hard enough on Greek debt restructuring”.

So, what do the lenders want?

In the early days of the first Syriza government, it was said that the lenders’ apparent aim was regime change in Greece and a humiliation of the left government to set an example to the rest of Europe. And in that they were partially successful; they totally humiliated the first Syriza government forcing them to a complete capitulation on all their  pre election promises for a memorandum free future. In turn the defeat and surrender of Syriza just about rescued the governments of Spain, Portugal and Ireland from devastating defeats in their respective national elections in the hands of anti austerity left wing alternatives.

But it is hard to see what the lenders hope to achieve beyond that, though it is not a secret that there is a group in Europe that still prefers dealing with the new leader of the opposition New Democracy, who they see more as a reformist in their own image.

At the same time Herr Schaeuble and his band of followers would still prefer to see Greece out of the eurozone as they do not see Greece fitting into the German vision of Europe, even if circumstances have restricted their freedom to express their views openly.

Why doesn’t Greece say ‘yes’ to Mr Schauble?

Public sentiment about the euro in Greece is believed to be such, that any government that makes the decision to leave the euro will never darken the doors of political power again. If Greece is to leave the eurozone it would be preferable for the European establishment to make it happen during the watch of a radical left government, thus ensuring the complete removal of the risk that voters of a country will never vote for another left government again.

But at the same time the Greek government – any Greek government – would prefer it to happen when the opposition is in power.

Is there such a strong public support for remaining in the euro ‘at any cost’ as  suggested in opinion polls?

Opinion poll after opinion poll since the beginning of the crisis have shown that between 70 and 80% of the Greek voters want the country to stay in the eurozone ‘at any cost’. Even though is not clear what is meant by ‘at any cost’, that preference was formed on the back of a long and persistent one sided scare campaign orchestrated by almost all media and political parties  – save the communists who argue for Grexit, but do not come up with any cohesive arguments, other than regurgitating an academic and outdated critique of capitalism.

Greece it would seem had discovered ‘Project Fear’ a few years before the UK, with predictions ranging from ‘Grexit would be calamitous for the country’ to that a Grexit would ‘sent the tanks out in the streets to restore order’.

So in the face of such perceived strength of support for the euro the radical anti-austerity SYRIZA government has no option but to take a deep breath and accept all the conditions the lenders impose, claiming that they have  no choice but to  follow the wishes of the people to stay in the euro.

But there may be another way of interpreting the will of the people. In the space of a few months in 2015, Greek people voted twice on the issue of the cost of retaining the euro.  First they elected in government a marginal anti austerity party that European institutions and establishment politicians in both Europe and  Greece had labelled as ‘crypto anti euro’.  A few months later in June  2015 the Greek public were called to vote again, this time in a referendum on whether the people accepted the conditions accompanying  new bailout funds for the ailing economy of Greece.

A referendum to decide whether Greece was to accept the bailout conditions in the country’s government-debt crisis proposed jointly by the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) on 25 June 2015, took place on 5 July 2015

As the Greek economy suffered on its first day of stringent capital controls, politicians from Germany, France and Italy joined the European commission in insisting that the poll was not about whether Athens could secure more favourable bailout terms but was about continued euro membership.

Matteo Renzi, Italy’s prime minister and hitherto seen as one of the European leaders closest to Tsipras. The referendum, Renzi said, was not a question of the commission versus Tsipras but of “the euro versus the drachma. This is the choice”.

Jean-Claude Juncker, the commission president, said: “It’s the moment of truth … I’d like to ask the Greek people to vote yes … No would mean that Greece is saying no to Europe.”

As a result of the referendum, the bailout conditions were rejected by a majority of over 61%  voting No to 39% Yes, with the “No” vote winning in all of Greece’s regions

The referendum results also forced the immediate resignation of New Democracy leader Antonis Samaras as party president because of the perceived negative result of the “Yes” choice, to which the conservative party and Samaras had committed themselves and had argued that a “No” vote would be a vote against the euro.

So it could be said that the Greek public had in the space of a year in 2015 twice rejected the notion of paying the very high costs of chronic unemployment, poverty, higher taxes, reduced living standards and a lifetime of debt servitude just to stay in the euro, first by voting for a government  that wanted to ‘tear up’ the memorandum and then by a  resounding ‘No’ vote in the July 2015 referendum.

The danger, of course, is that a moment will come in the next few months when we all realize that the numbers don’t actually add up. When the penny drops, even the most pro-European part of society will question whether it’s all worthwhile. Schaeuble will have given Tsipras all the rope he needs to hang himself and the economy. And in such cases, it is likely that we will see more voices calling for what Schaeuble has wanted since last summer: a time-out from a program that was never meant to be implemented and, of course, a time-out from the eurozone – wrote a recent Kathimerini  editorial

What does the IMF want?

It is no secret that the IMF is not happy with its involvement in the Greek rescue package ant that it is seeking ways of persuading the European institutions to accept significant debt reduction.

To that aim they are prepared to stall the negotiations as long as possible, risking a Greek default, to force Germany to accept a Greek debt haircut.

Having been criticised for bending its own rules to loan money to Greece in the first place, the IMF has on 20 January 2016 abolished a rule created in 2010 that allowed it to participate in the international bailout of Greece despite doubts about the country’s debt sustainability.

So to participate in the third programme the IMF will have to ensure either that the European lenders write off a substantial part of Greek debt – something they are not prepared to do – or change its definition of sustainable debt once again. The latter is Europe’s preferred option, but it may not be as simple for the IMF to change its rules this time.

The  IMF does not believe the numbers being used by both Greece and Europe to do the next stage of the deal. It does not want to take part in the bailout. Meanwhile the EU cannot do the deal without the IMF because the German parliament won’t allow it.

The  IMF’s one and only strategy when dealing with high levels of national debt is to make economies competitive through a significant currency devaluation, which drives down wages and  standards of living, makes exports more attractive and imports very expensive,  impoverishing a large proportion of the population of the countries it rescues. The devaluation in previous IMF rescues however has also been  also accompanied by a significant debt reduction by the creditors of the indebted country.

It is precisely that process that the Greek politicians say they are  struggling to avoid by staying in the euro, with the encouragement of the European institutions who do not want to see a break up of the eurozone during their watch either.  They have therefore created a climate of fear, by repeating in as many possible ways that Greece will not be able to survive outside the eurozone and that leaving the protection of the euro it will have disastrous effects on the economy and the lives of the people of Greece.

But in all the thousands of pages of analysis on the effects of Grexit to both Europe and Greece published in the last five years, there has been no argument  to adequately explain why the internal devaluation which the IMF is implementing in Greece  will be softer option than an external one, if they both aim to bring about the  level of competitiveness  that will satisfy the IMF.

An internal devaluation will in other words, need to squeeze the economy, reduce wages and curtail the purchasing power of the Greek consumer through tax increases and other ‘reforms’  just as much as an independent currency devaluation. If euro incomes are suppressed enough to satisfy the IMF, the majority of the people of this country will not have enough euros  be able to buy imported goods and fuel and expensive gadgets, just in the same way that they wouldn’t if their  national currency was devalued. What matters most in this instance is the kind of economic policy applied and not the currency under which the process of increasing a country’s competitiveness takes place.

So it would appear that the Greece will not have much more to lose by accepting the terms Wolfgang Schaeuble’s offer for an assisted time out of the eurozone. Most of the damage to the Greek economy has already been made and there may be significant advantages.

Today Greece’s biggest export earner and job creator, tourism, would hugely benefit from substantial devaluation of a national currency.  True, a devaluation would equally raise the cost of imports, but not in a dissimilar way to  reducing  the affordability of imported goods by reducing disposable incomes as it happens now.

Several credible  pro grexit analysts have argued that if Greece slid out of the euro after the crash of 2009, it would now be on the road to recovery. Its debts would have devalued. It citizens would be in work. Tourists would be flowing in. Uncertainty about Grexit would have been removed and investors would be investing.

Nobel Prize-winner Joe Stiglitz has said that while leaving the euro would be painful for Greece, remaining would be worse .

Costas Lapavitsas, an acclaimed economics professor at the University of London who was elected in the first SYRIZA government, continues to support  Grexit.

Analysts at Oxford Economics take an optimistic line on Greece’s potential outside the eurozone, too: One reason to be optimistic for Greece is that so many of the bad things that could happen to an economy have already happened, so it just cannot get much worse without busting the lessons from history.


The second Syriza government is sticking to the plan the lenders forced on the country and is trying to sell it to the public  as the best possible bad deal, in the belief that in return the lenders will discuss debt relief –debt relief is the carrot the lenders have  dangled in front of Greek governments since 2013, when the IMF first admitted that the Greek debt is unsustainable, but which they then kept putting off until Greece satisfied yet another set of unattainable targets.

Again, the Greek government seems to hope that rescuing  chancellor Merkel from the refuge crisis she has herself created by declaring  Germany’s borders open, Berlin might show some gratitude.  But given the political atmosphere in Europe, the opposite seems more likely.

It was revealed recently, that at one point during last summer’s  negotiations for the third bailout program, Merkel and Tsipras agreed that the only rational way forward was for Greece to leave the eurozone.

And if they came to that conclusion once, it’s possible they’ll come to it again.

The money advanced to pay loans is conditional on Greece completing each stage the programme successfully something which is by no means guaranteed to happen because of the disagreements among the lenders and because the demands on the Greek government to generate and sustain big surpluses from a collapsing economy might be too much for even the most compliant of governments to be able to deliver.

Tired of the same old act being replayed over and over again, it is perhaps time that the Greek people were given the chance to engage in a rational and balanced  debate about the euro, without threats and disaster scenarios that may or may not happen – neither economists nor politicians have yet developed powers to predict the future.

People are tired of hearing that Greece needs to stay the euro only because life outside it may be worse and lonely and there is the fear of facing the world alone. The people of Greece deserve the option to make a decision on whether they want to stay in the euro at any cost or take the Schaeuble offer for an orderly exit  – assuming that the offer has not been withdrawn.

And let’s hope that  that someone in the government has kept a copy of Varoufakis’s Plan B in a drawer somewhere