After reading through the exchange of letters between Greece and the troika which are in the public domain and the impressions of various commentators it is now possible to get a tentative understanding of what has been agreed to. The document that all parties have signed is sufficiently ambiguous that different interpretations and spins can be placed on certain key passages thereby permitting both sides to claim victory or at least in the case of the Syriza government a partial victory.
For example the new government has agreed to tighten its campaign against tax evasion and corruption in order to ensure better revenue flows to state coffers thereby contributing to a potential larger operating surplus. In return the government has argued that the agreement permits it to run a smaller operating surplus as a percentage of the GDP thereby permitting it to run bigger programs aimed at helping the poor. The agreement also mentions the development of a food stamp assistance program. This may well permit the expansion of such a program into a major policy initiative which becomes a quasi parallel currency over time allowing for greater stimulus of the domestic economy. The increase in the minimum wage has been delayed until September but there will be no further pension cuts and reinstatement of public sector workers is maintained. The privatizations that have been completed will not be reversed and those underway including the Chinese purchase of part of the Piraeus port will be carried to its conclusion . However the minister of energy has reaffirmed his intention to halt the privatization of a state power company.
The agreement is not without its significant critics both on the left and on the right. Some politicians and journalists on the the left of Syriza have refused to support the agreement arguing it is a betrayal of the principles on which Syriza got elected. On the right the former governing party argues that the agreement is simply a repackaging of the old agreement and that the tax and anti-corruption measures were already being implemented by the former government.
Most of all however the agreement has given the new government four months of breathing space to develop an alternative economic strategy that finally permits Greece to escape from the destructive straight jacket of austerity and debt servitude.This may well be enough to ensure its support base in the difficult months to come.
The negotiators from the euro zone European union on behalf of the nineteen member countries reached a last minute deal with the Greek government to extend the existing arrangement due to expire on February 28 for a further 4 months to enable further negotiations on establishing a new framework to proceed. The new government’s margin to manoeuvre has been restricted somewhat but it can reduce the size of the primary surplus it is forced to run as a percentage of the GDP and some of its anti austerity measures can be implemented though not all of them. Once further details emerge we will be able to better assess whether the Greek Government has properly escaped from the straight jacket they were in.
Greek bond prices rose slightly so that the interest rate on them fell to 9.89 %. This is still a punitive rate for Greece to have too pay to finance its debt particularly since such a large percentage of the debt is owed to the IMF, the ECB and the special EU emergency financial fund. Clearly all these institutions could and should receive a lower rate of interest instead of one that borders on usury when the rate on German ten year government bonds is close to zero at 0.36 %. Usurious interest rates and overburdened debt loads are an ancient story in Greece. Both Aristotle and Engels commented upon it. Solon in the sixth century B.C. banned debt bondage and limited the size of land holdings.(See James Macdonald A Free Nation Deep in Debt, N.Y., Farrar, Straus and Giroux, 2003. p.26)
The latest news from Europe indicates that Germany continues to resist a compromise solution to the Greek crisis that is contained in the latest proposal by the Greek government for a post bailout 6 month arrangement which would permit Greece a reasonable breathing space to negotiate a different sort of arrangement to manage its debt,end dysfunctional damaging austerity and restore its economy on the road to recovery.Given this intransigence if there is no movement Greece should proceed to establish a second currency called the ‘new drachma or whatever name Greeks prefer and have the government directly spend it into circulation in a portion of public sector wages, pension payments, infrastructure programs and support for low income persons. The currency will initially trade at some market determined discount to the euro but over a short period of time will adjust and find a stable exchange rate to the euro which will continue to be used to pay off external debts. All existing bank deposits in euros will continue to be honoured in euros and the two currencies can run in tandem for quite some time. In this way Greece will get the breathing space that is necessary to allow them the time necessary to restructure their debt and guarantee the stability of the banking system. As the new currency finds its level of value adjustments can be made to the amounts paid in pensions and salaries to ensure that people receive payments close in value to the euro equivalent. In the run up to the euro there were de facto dual currencies in use in many European countries. There is no reason not to use this monetary and fiscal policy tool in Greece today.
Rather than worry about Gresham’s law and the bad money driving out the good as some critics of dual currency suggest,(See for example Mario Nuti’s comments on dual currencies on blogspot and his most recent post on the Greek situation on Feb 12 ) used judiciously in combination with a balanced budget on operating account and a very large stimulus on capital account directed at infrastructure public works employment substantially financed by the new currency Greece can begin to emerge from the terrible destructive austerity imposed on it by the EU, the IMF and the ECB.
Most of the leadership of the Eurozone led by Chancellor Merkel and German Finance minister Wolfgang Schauble have so far refused to agree to any of the very sensible debt restructuring proposals made by the Greek government and brought to them in person for consideration by the new Greek finance minister and former Professor of Economics Yanis Valoufakis. Instead they have stubbornly insisted that once the current program expires on February 28 it must be renewed on similar terms after an inspection visit by the hated Troika of Eurocrats with whom Greece has insisted it will no longer negotiate. This sets up a who will blink first scenario that Valoufakis as a student of game theory will find very familiar. In these circumstances a Greek exit from the euro begins to look more likely even if the damage done to the eurozone currency might be substantial. Perhaps the IMF representatives will have better advice and suggestions about how to engineer an acceptable compromise since they surely now must understand that austerity in an economy rocked by financial collapse and a banking crisis is the worst possible policy response in both economic and political terms. The easiest solution would involve using the ECB’S quantitative easing capacities to ease the Greek situation in the short run followed by some variation of the debt restructuring proposals. History however teaches us that politicians often allow personal pride to interfere with more rational outcomes. Much is at stake in Europe . May reason rather than pride prevail.
The new Government in Greece has wasted no time in reversing austerity measures and proposing legislation and administrative measures to help the poor and the destitute. They have announced ten bills which restore the minimum wage, restore food aid programs, rehire workers laid off by the previous Government and a number of other comparable measures designed to promote aggregate demand, a restoration of dignity and hope among all of those people so badly hurt by the previous austerity obsessed government. They have also announced that the old corrupt ways of rewarding the wealthiest people with tax concessions, exemptions and contracts has come to an end.
In specific measures they have raised the minimum wage back to its pre austerity level of 751 euros from the 580 euros per month the previous government had imposed (490 euros for workers under 25). They have abolished the one euro prescription drug fee and the five euro public hospital fee; they have announced they will rehire 1000s of laid off teachers, school guards and cleaners who were fired by the previous government to reduce the size of the public sector; they have restored the 13th month payment for low income pensioners; they have announced they will grant Greek citizenship to the children of migrants who have been raised in Greece and in an important symbolic act they have removed the barricades from the front of the Greek Parliament.
On the foreign policy front the new Government has also refused to go along with strengthened EU sanctions against Russia over the Ukraine without a new debate. It remains to be seen whether this foreign policy shift will be permanent or is simply a gambit in the negotiations that Greece wants over its debt structure including their demand for a haircut on the outstanding debt. A large chunk of the debt was used to bail out the banks and hedge funds who were exposed as opposed to actual transfers to the Greek government to finance any sort of new public spending. Some commentators in the FT notably Martin Wolf have called for sensible compromise and statesmanship on the part of the EU negotiators pointing out that the EU cannot expect Greece and the new government to accept to service an impossibly heavy debt load for decades.
The correct solution lies in further lengthening the term of the debt from its current average of 16 years to twice or thrice as long, refinancing it at lower interest rates and some sort of relief through a haircut on part of it.Given the very low interest rates that now prevail, the potential possibility of using more of the QE mandate to help with Greek finances it is possible to see more fiscal room on the Greek expenditure side . As well a separate infrastructure fund financed by special funds would be a very useful option.
There is much joy in Athens today. The anti austerity left of centre coalition Syriza led by Alex Tsipras has brought hope to millions of Greeks that new policies which will promote lower unemployment, fight poverty and reduce hardship will be at the forefront of government policy in Greece after six long years of horrible hardship and depression levels of unemployment in Greece. The political mandate for this change is crystal clear. The final vote count will not be available for some hours but a 70 % official count and extensive exit polls confirm that Syriza has captured about 36.1% of the vote and as many as 149-151 seats in the 300 seat Parliament. The old pro austerity government of New Democracy led by the outgoing prime minister Antonis Samparas lost half of its seats, received 28% of the vote and will have about 77 seats in parliament. In third place with 17 seats and 6.4 % is the fascist party Golden Dawn. Narrowly behind it is the centre left formation To Potami with 16 seats and 5.9% of the vote. To Potami is a potential ally of Syriza in the Parliament. The communist party KKE has 5.4 % of the votes and will have about 13 seats, as will the former governing party Pasok with now just 4.75% and 13 seats. One other small party has 4.7% and 13 seats.
The new party formed by the former leader of Pasok and Prime Minister George Papandreou from a family that has produced three Greek prime ministers
has failed to get above 3% and hence will have no seats in Parliament.
The first major hurdle which Syriza will face will be its commitment to renegotiate the terms of the austerity imposed on it by the IMF and its EU creditors led of course by the austerian in chief German leader Angela Merkel.She and her finance minister have insisted that there will be no renegotiation of the terms, no haircut on Greek debt and no continuation of bailout money without continued austerity. But this is easy for her to say but in practice may well turn out more difficult to achieve in practice. Already in a victory speech the new to be named Prime Minister Alex Tsipras has declared an end to “the vicious austerity” imposed on Greece.
Since the terms of the current deal expire in any case at the end of February there is a neeed to negotiate new terms. The emergence of quantitative easing in Europe at the ECB also gives new possible options to the EU. Why not for example allow Greece easier and somewhat greater access to the QE that will be available than what was originally announced. Other options include prolonging the term of the debt, taking full advantage of the low interest rates available in Europe with QE in place, developing a separate infrastructure investment and employment program in Greece and other needy member states that can be financed over the long term by pledged funds or if need be by a second currency in Greece restricted to infrastructure and backed by Greece’s very substantial gold and silver reserves. One way or the other the rules of the game are changing. Syriza’s victory has and will reinforce the determination of other anti- austerity parties in Spain,France,Portugal even in Germany to promote policies which can restore prosperity and humanist values to their countries and Europe as a whole.
The ECB QE plan is a very interesting variant of the model I first proposed when I first started writing about greater monetization of the debt as a policy tool in the late 1980s and early 1990s. In a paper which I presented to a conference sponsored by the Canadian plains research centre and later published in 1992 in a collection of papers from the conference edited by Jim McCrorie and M.MacDonald , The Constitutional Future of the Prairie and Atlantic Regions of Canada, Canadian Plains Reserarch Centre, University of Regina, I explored how to implement the reform in a regionally balanced way in the Canadian federation.I suggested allowing each province access to the debt monetization capacities of the central bank up to a limit that in total would equal monetized debt in relation to the broadly defined money stock which would not exceed 20 %.The formula for each province’s allocation within that limit would be calculated in relation to each province’s GDP as a percentage of the total national GDP.(A Regional approach to Monetary and Fiscal Policy,in McCrorie &MacDonald p.114) The ECB has essentially adopted a similar approach with each member state (excepting for the time being Greece) being allocated a share of monetized debt which is proportionate to the share of the given country’s contribution to the capital of the European central bank. My model did not exclude any province that was more indebted than others nor did it restrict mutualization in the way which the ECB plan proposes. Nevertheless I am glad to see the regional principle at work in Europe. Its a long way from Regina to Brussels and Frankfurt but the Canadian plains once again illuminated a progressive reform with global consequences over twenty years ago.