THE TWO WORDS DIVIDING GREECE AND THE EUROGROUP

Posted by Frances Coppola on Feb 17th 2015,

http://www.pieria.co.uk/articles/greece_the_two_words_that_ended_the_eurogroup_meeting

The meeting of Eurogroup financial ministers broke up suddenly yesterday amid Greek accusations that the Eurogroup had moved the goalposts. The Greek delegation leaked to the press a draft communique that the Eurogroup had apparently presented to the meeting, saying that it contained things that they could not possibly agree to. Reuters published the full text here.

In a later press conference, Yanis Varoufakis said that the communique presented to the meeting was not the one that he had discussed earlier with Pierre Moscovici, which he had been “happy to sign there and then”. There was some press speculation as to what Mr. Moscovici's communique actually contained – was it really a draft agreement, or just a few points for discussion? Paul Mason of Channel 4 then came to the rescue, releasing the text of Mr. Moscovici's draft first on Twitter and then on Facebook. The full text is here.

This left people scratching their heads. There seems to be little difference between the two communiques. Why was Mr. Varoufakis happy to agree to Mr. Moscovici's version, but not to the version presented to the Eurogroup meeting?

It’s all about two words. Paragraph 3 of Mr. Moscovici's draft says this:

“We discussed the policy priorities of the new government on the basis of work undertaken by the institutions and the Greek authorities. We welcomed that in a number of areas the Greek policy priorities can contribute to a strengthening and better implementation of the financial assistance programme and can serve as the basis for a new arrangement. The Greek authorities intend to make the best use of existing built-in flexibility in the current programme as work commences on the new arrangement. They will work closely with their European and international partners to secure agreed parameters for structural reforms”.

But the same paragraph in the version presented to the Eurogroup meeting says this:

“We discussed the policy priorities of the new government on the basis of work undertaken by the institutions and the Greek authorities. We welcome that in a number of areas the Greek policy priorities can contribute to a strengthening and better implementationhttpimagesintellitxtcomastadTypesicon1png of the current financial assistance programme. The Greek authorities have indicated that they intend to successfully conclude the programme, taking into account the new government's plans. In this context we intend to make the best use of the existing built-in flexibility in the current programme [as work commences on the new arrangement]. The Greek authorities gave their firm commitment to refrain from unilateral action and will work in close agreement with its European and international partners, especially in the field of tax policy, privatisation, labour market reforms, financial sector, and pensions.”

I’ve highlighted the differences. Yes, it’s a lot more than two words. So why do I say it is two?

The key difference is the inclusion of the words “current programme”. Or, if you prefer, the exclusion of the words "new arrangement". Pierre Moscovici's draft only mentions the current programme in the context of transition to a new arrangement. But the Eurogroup version omits any mention of a new arrangement and commits the Greeks to full implementation of the current programme. The following paragraph nails it (my emphasis):

“The Greek authorities committed to ensure appropriate primary fiscal surpluses and financing in order to guarantee debt sustainability in line with the targets agreed in the November 2012 Eurogroup statement.”

The “overarching objective” of the original Memorandum of Understanding of March 2012 was to reduce Greece’s debt/gdp to 120% by 2020. The November 2012 agreement extended the timeframe by two years in the light of the severe contraction of the Greek economy, and included additional concessions on interest rates and repayment of debt. Underpinning all of this is a detailed IMF plan outlining fiscal consolidation measures and structural reforms aimed at achieving debt/GDP targets by means of primary surpluses of 4.5% or more “in the medium term”. In its 2012 letter to the Eurogroup, the Greek government committed to achieving primary surpluses of 4.5% from 2016 onwards.

This was never a credible commitment. Attempting to achieve primary surpluses of such size for an extended period of time would ensure the Greek depression – already longer and deeper than the US Great Depression - continued not for years but for decades, and would probably be unattainable anyway because of that depression. And the collapsing GDP consequent on such austerity would actually increase, not decrease, the debt burden. It’s a vicious spiral which Yanis Varoufakis has described as “debt deflation”.

Irving Fisher, writing about the US Great Depression, defined “debt deflation” as a condition where “The more the debtors pay, the more they owe”. This is undoubtedly true of Greece: attempting to comply with the terms of the November 2012 agreement has resulted in debt rising from 110% to 175% of GDP in three years. Since, during that time, Greece has managed to achieve a small primary surplus, this astonishing debt/GDP increase is almost entirely due to falling GDP. Clearly the last thing the current programme does is “guarantee debt sustainability”.

In fact it never did. We knew three years ago that the PSI debt restructuring was inadequate, the targets set in the agreement were unattainable and the growth forecasts were unbelievable. There would inevitably be another restructuring further down the road in which the official sector would have to take losses. That moment has now arrived. Of course, had the Eurogroup chosen to do the restructuring properly in the first place, the Greek people might have been spared three years of pointless economic destruction. But the Eurogroup had too much face to lose. PSI was bad enough, but OSI was anathema. So they concocted an inadequate restructuring in return for conditions they knew to be impossible.

And the Eurogroup still has too much face to lose. Rather than admit that the current programme is not – and never has been - fit for purpose, it tried to force the new Greek government to commit to it. In effect, the Eurogroup’s draft communique says “Give up your silly ideas of recovery so we can continue to pretend everything is fine”. Had the Greek delegation agreed to this, the "Greek Spring" would have been abruptly curtailed. By pens, rather than tanks. I suppose this is progress. But it would still have been a tragedy.

The sticking point is the Eurogroup’s insistence that the current programme must be “completed”. Face-saving aside, it is not reasonable to insist that the new Greek government continue with a programme to which it did not agree and which has been shown to be counterproductive in its focus on debt reduction rather than growth. To be sure, the IMF’s underlying plan contains many sensible recommendations which could be brought forward into a new arrangement, and the Greek government’s “four demands” only envisage ending 30% of the programme anyway.  But the priority must change from repayment of debt to restoring growth, relieving suffering and supporting the new Greek government as it embarks on the difficult task of radically reforming and strengthening institutions.

It will take time to agree a new arrangement, and during that time Greece will need transitional financial support, which as both communiques point out is available under the current programme. For that, it is useful. But as a long-term economic plan, the November 2012 agreement is dead.