Alberto Mingardi  

The Greek turmoil

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As you probably know, Greece is marching towards new elections on January 25. The Parliament was dissolved because Prime Minister Antonis Samaras couldn't secure a large enough parliamentary majority to support his candidate for the Greek Presidency. The Greek constitution provides that the country should go back to the ballot box if the lawmakers fail to agree on a head of state with a supermajority after three votes. Under normal circumstances, this may lead one to think that MPs would be eager to agree on a candidate, to preserve their own seat--which for some of them, won't be safe in the new election. The fact that they did not may suggest that elections do appear seductive to many, and that the opposition parties are confident that their level of support won't be shaken.

Lots of words have been spent on Alex Tsipras, the leader of the extreme left party Syriza. Contrary to what some have argued, Tsipras is not advocating Eurexit: but he is arguing for overcoming "Austerity" (whatever it means), raising the minimum wage, stopping any attempt to curb government spending (initially, Tsipras argued for re-hiring government employees who left the public sector, but apparently he jettisoned this particular promise) and generally renegotiate terms with the so-called "Troika" and European institutions. Tsipras's nostalgia for a big spending bonanza could be problematic (and expensive) for all the other euro-countries.

Observers fear a new debt write off. Paul Mason has a very interesting post on the possible scenarios, which he so summarizes:

So a worst-case scenario under a Syriza victory is: short-term repayment crisis, botched negotiations with the EU, social upheaval, capital flight and default.
A best-case scenario - for Syriza - would see its EU allies force a long-term debt deal, but it would have to ride out and tactically manoeuvre on the 2015 debt repayments, as suggested above, and there would still be massive social upheaval.
When you consider these risks, and ask why the party is still - with the mainstream media warning of armageddon - 3-4 per cent ahead in the polls, the answer is clear.

There might be however other factors to be taken into consideration.

The first one is that the parties that dream to go back to looser public finances are split between left and right, and so it is difficult to imagine they will be able to build a parliamentary majority. New parties are being founded and the electoral battlefield looks rather messy. No party appears likely to achieve a decisive victory at the polls at this point. Deputy prime minister Venizelos forecasts that "pro-European democratic forces" would have to come together after the snap polls to form Greece's next government". Perhaps Syriza may arrive first at the elections, but be unable to form a government - or form a government that will last only a few months, because of tensions with other coalition partners, and thus won't be particularly effective.

The second one is that, though the country is still in dire straits, Greece is forecast to grow at 2.8 % in 2015, and it had a (feeble) positive growth in 2014. Is that going to have any impact on the elections?

Third, what if Tsipras is actually more "mainstream" than we think? Enemies of fiscal consolidation are not that far from Europe's commanding heights. In Germany the Social Democrats are part of the majority coalition, with Mrs Merkel. The French are certainly not particularly keen on lower spending themselves. In Spain the rise of the populist left wingers of "Podemos" (which is doing better than both 'traditional' parties in the opinion polls) may soon bring another bigger spending-friendly party at the helm of a major country. And the Italian prime minister, Mr Renzi, says he is committed to "overcoming austerity" himself. So, we may consider Syriza an outlier, but what if it is actually just the most extreme manifestation of a new trend in European politics? A solidarity of "spending nostalgics" is not such a remote scenario. German Christian Democrat MP Michael Fuchs has recently declared that "There is no potential for political blackmail anymore. Greece is no longer of systemic importance for the euro", which led many to speculate that Mrs Merkel may actually now be in favour of Greece leaving the euro (see this article on Der Spiegel). But forces on the left may see Mr Tsipras's blackmail as an opportunity to reap hegemony.


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CATEGORIES: Eurozone crisis




COMMENTS (7 to date)
ThomasH writes:

Europe as a whole needs a central bank that will consistently hold to its announced target. Even if the 2% inflation target were too low (or especially if it is too low) the ECB should at least be committed to it. Since actual inflation has been far below the target for so long, this implies a good bit of catch up inflation. [I agree with Scott that it would have been even better had the ECB had an NGDP level trend target, but better a price level trend target than nothing]

This, in turn, will require a lot of QE which ECB has delayed initiating. But unless governments actually use the lower borrowing costs to finance projects that will increase future income -- by more than the amount of debt incurred-- the effect of the QE will be limited (and therefore much more QE will be required)

Tracy W writes:

Being committed to "overcoming austerity" does raise the question of who is going to pay for the living it big.

ThomasH writes:

@ Tract W

No one if "overcoming austerity" is investment in projects that increase the present value of the income generated more than the present value of the investment costs. Recessions do not change the criterion for public expenditures, just the parameters.

Ray Lopez writes:

I am a Greek citizen and live in Greece from time to time, though now I'm in the Philippines. This was a fine piece by the author, who does not appear to be a Greek. Also I found of interest the Ekathimerini editorial link, also a good English language source, and was surprised to find that, as the author says, Syriza is essentially trying to become more mainstream: Last but not least, can leftists really identify with SYRIZA? ... A party that has taken every possible position on the economic crisis, from an extension of the memorandum to a unilateral exit from the eurozone? (Ekathi*)

BTW, bonus for you non-Greek readers: what's Greece's biggest export? Tourism. Yes, export. Think about it.

Tracy W writes:

ThomasH:

Call me a cynic, but I somehow doubt that's the definition of "overcoming austerity" that Syriza has in mind.

You also don't mention that even for projects where the cost-benefit ratio is positive, generally there's a timing gap between paying the money and getting the revenue which requires financing, and that, from the government financing point of view, what matters is taxes. If a project costs $40,000, benefits society by $100,000, but only 20% of that extra $100,000 can be feasibly taxed, then there's a financing problem.

Recessions do not change the criterion for public expenditures, just the parameters.

Fiscal crises on the scale of Greece's however do change the criterion.

ThomasH writes:

@ Tracy W

Good nuance. Projects with net present values might not finance themselves budgetarily as with US road and bridge infrastructure because gasoline taxes do not collect "enough" revenue. This would be a sort of collective action problem in the public sector and could limit the number of projects undertaken. But the larger point is that agressive monetary stimulation say QE, ought to increase the public sector's demand for investment goods becasue the cost of financing has come down, i.e. this is, ceteris paribus, anti "austerity.

Tracy W writes:
But the larger point is that agressive monetary stimulation say QE, ought to increase the public sector's demand for investment goods becasue the cost of financing has come down, i.e. this is, ceteris paribus, anti "austerity.

You appear to have wandered majorly from Greece at this point. I don't think that Greece's fiscal crisis was caused by the public sector spending too much money on investment goods. Or, if it was, it indicates that the Greek government was terrible at identifying investment goods, and thus should be dialling back its enthusiasm for such investments.

It's like how if you've just blown through $100,000 of your life savings to try out your theory about how to win at roulette, and lost it all, this is probably not the time to borrow another $100,000 to keep testing said theory, no matter how low the interest rate.

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