Waiting On A Greek Disaster

Since the beginning of the fiscal crisis in 2009, Greek politics has alternated periods of collapse with periods of decay.  We are in one of the latter periods now.  The bad news comes so often that it gets boring.  Here is the latest batch:

1.  Greece wants to renegotiate its loan agreement with its creditors (the IMF, the European Commission and the European Central Bank - collectively called the “troika.”)  Greece’s argument is that Greece’s recession has been deeper than was anticipated in the earlier loan agreements.  Greece’s smaller-than-anticipated economy and higher-than-anticipated unemployment means lower tax revenues and higher unemployment insurance costs.  That means that even if Greece follows through on the promised spending cuts and structural reforms, Greece will still have a larger budget deficit than the agreement allows.

2.  Greece has a three party coalition led by the conservative New Democracy party that is also backed by the nominally socialist PASOK party and the small Democratic Left party.  Keep in mind that these three parties are the most responsible, sober, and solution-oriented parties in the Greek Parliament.  The three party coalition published its joint policy platform.   The coalition wants more time for Greece to balance its books.  In practice this would mean larger loans to Greece from the troika to finance the larger-than-anticipated budget deficits.  The coalition also wants to stop promised layoffs to 150,000 civil servants, reduce the value added tax on restaurants, extend unemployment benefits from one year to two, and raise the minimum wage.  Basically the coalition is asking for more money, more time, and for Greece to back out of its policy commitments.  The coalition is arguing that they could pay for the new spending and lower taxes by cracking down on waste and tax avoidance.  This is the Greek equivalent of when American politicians promise to balance the budget by cutting down on waste fraud and abuse.  The coalition wasn’t able to put together a plan that even sounded plausible.

3.  There is probably space for a reasonable compromise in there somewhere.  One can imagine a “cash for reform” plan where Greece gets more time to balance its budget as long as the agreed upon spending cuts and labor market reforms happen in a timely manner.  Given good will on both sides, it could work out.  The problem is that the good will isn’t there.

Let’s be clear what is going on. The Greek coalition plan is a wish list and not an ultimatum.  If the rest of the EU kicks them hard enough, the coalition will do two things.  First, they will promise the creditors that they will follow through on their agreements.  Second, the coalition leaders will go home and promise the Greek public more renegotiation somewhere down the line.  It is anybody’s guess when any particular reform actually happens or if a policy passed by Parliament is actually implemented.   Interest groups will mobilize against a fragile government that lacks the courage of its (or anybody’s) convictions and appears to be bullied by foreigners.  There is never going to be a deal that the Greek government just sticks to.  The reforms will always be slow walked or half implemented.  There will always be more demands for more foreign money and fewer domestic spending cuts.  And there is always the possibility that this government will collapse.  The two smaller left-of-center parties would gladly kill off this government if they though it was in their interest.  And if the New Democracy-led government becomes unpopular, bailing out on the coalition will be tempting.  A collapse of this government likely means an election victory for the radical-left SYRIZA party and the ejection of Greece from the Euro - and maybe a European and possibly global financial crisis. But even if this coalition holds together, the most likely outcome is that it is just a matter of time before Greece exhausts the patience of the troika, is denied a loan installment, is unable to pay wages and salaries, and has to go on the drachma.  Maybe it happens next month.  Maybe it happens next year.

4.  By the way, Greece’s new Prime Minister just had major eye surgery so he won’t be able to attend a major European Union summit.  Fine.  The new Finance Minister-designate (and Finance Minister is the most important job in dealing with Greece’s fiscal crisis after the Prime Minister) just quit before he even took up the job.  The official story is that he was overtaken by ill health.  The rumors are that he didn’t like some of his fellow cabinet members and disapproved of the fantastical coalition policy platform.  And keep in mind that this is almost the best that we can hope for from Greece.

5.  Why all of this could matter over here.   I sure hope Simon Johnson overstates the risks.