Hitting the ground running—backwards

Greece and the euro

http://www.economist.com/news/leaders/21643139-unless-syriza-changes-course-greece-inexorably-heading-out-euro-hitting-ground

The Economist

Unless Syriza changes course, Greece is inexorably heading out of the euro

WHEN the far-left Syriza party won the Greek election last month, the hope was that the new prime minister, Alexis Tsipras, would moderate his demands so as to compromise with his country’s creditors. After all, he (like the vast majority of Greeks) wants to stay in the single currency. But even as he prepared to meet fellow European Union leaders for the first time this week, he was making a Greek exit from the euro ever more likely.

Mr Tsipras has put forward some good arguments against the austerity that has been imposed on Greece as the price of its bail-outs. He has sound ideas on attacking corruption, fighting tax evasion and shaking up Greece’s cosy business elite. His ministers now talk of keeping 70% of the old government’s reforms (see article). But his first moves in office included promises to raise the minimum wage to pre-crisis levels, reverse labour-market reforms, restore pension increases, rehire thousands of public servants and scrap privatisation projects. These would not just breach Greece’s bail-out terms, but also wreck the country’s economic prospects.

To reverse course in this way when Greece’s economy is at last growing and unemployment is falling is perverse. Greece needs more, not fewer reforms: despite progress in regaining lost competitiveness, its exports remain weak. In its business climate it lags behind neighbouring Bulgaria, the poorest EU country, in areas such as enforcing contracts, registering property and providing credit.

Keeping Greece in the euro will require compromises. Greece’s creditors need to decide what to trade, and when. Mr Tsipras foolishly refuses to prolong Greece’s bail-out programme when it expires at the end of the month, talking instead of a bridging loan that would create time for negotiations to take place without monitoring by the hated “troika” of the European Commission, the European Central Bank and the IMF. There is a case for removing the ECB, which is politicised by its involvement in the troika. But Mr Tsipras cannot expect more loans without conditions, as the bad-tempered break-up of this week’s Eurogroup meeting demonstrated. Instead, he needs to extend the bail-out fast, and then enter talks.

A doable debt deal

In those talks there is scope for a deal. Greece’s total debt stock stands at an unpayable 175% of GDP (up from 109% before the euro crisis). Mr Tsipras has dropped his demands for an immediate debt write-down. The maturity and interest cost of the debt, two-thirds of which is owed to official European creditors, are so generous that Greece pays a smaller share of GDP in debt service than Portugal and Italy. These terms could be made more generous still. And the creditors should be prepared to adopt a version of the IMF’s old highly indebted poor countries (HIPC) initiative for Africa: a promise to write down debt in stages at indeterminate future dates, but only in return for defined progress on reforms.

It should also be possible to give Greece more fiscal breathing-space. The government is now required to run a primary (ie, pre-interest) budget surplus of 3% of GDP this year, rising to 4.5% from 2016 onwards. Mr Tsipras wants to cut that to no more than 1.5%. A compromise of around 2.5% would allow him to spend more on social programmes.

Here, then, is a simple message for European leaders to give Mr Tsipras. They will negotiate, but only once the bail-out is extended. They will help him on debt and the budget, but only if he is prepared to make his economy more competitive. If an athlete insists on running backwards, even the most patient trainer cannot help him.