Fights About the Past and the Future

Decades ago I read an unnerving book by Uwe Nettelbeck, part documentation, part fiction, about the Dolomiti war in WWI. This was a static warfare where troops from both sides shot on each other and killed each other, without getting anywhere. World War I was rich on absurdities but fighting at up to 3000 m altitude for getting a few rocks here and there was quite a devastating feast. Greece and the Institutions don’t shoot at each other but then there is no lack of mutual attempts to verbally attack each other. The fight is not about rocks but about the future of Greece as well as about the future of the Eurozone.

At this point frustration is overboarding, not only on the side of the various negotiation teams. Francesco Giavazzi from Bocconi in Italy, one of the more prominent Italian economists who steadily contribute to the Euro debate by pushing for a strong austerity approach, expressed his anger in a FT piece today, by saying that Greece voluntarily opts to stay a poor and underdeveloped country by not adhereing to the austerity receipe: ‘Five years of negotiations that have achieved virtually nothing (the few reforms that had been adopted, like a small reduction in the inflated number of public sector emp[loyees, have since been reversed by the Syriza-led coalition). It is pretty clear that the Greeks have no appetite for modernising their society. They worry too little about an economy ruined by patronage”. One could shelve such statements and forget about it, not only because the whole op-ed is written with a radical anger that induces only the worst associations; it should be forgotten because it comes witha such a depth of untrue statements that Bocconi students should quewstion the academic integrity of their professors. Gravazzi is wrong in regards to reforms, and he knows about that: The Greek government made substantial (but not sufficient) reforms of the pension system. Main pensions have been reduced by 44-48% since 2010, and the average pension is now close to Euro 700 per month; those who contributed to a supplementary scheme receive an extra Euro on average per month. To note: about 45% of all GBreek pensioners receive less than Euro 665 per month. Also, the criteria for early retirement have been made stronger, i.e. unlike in the past, it is much more difficult on average to get into early retirement, not to talk about getting a full pension. In regards to labor market reforms Greece moved along too, according to the OECD even swifter then for example Germany and Italy. Given the calamities of the Greek economy one can debate whether reforms went into the right direction and went far enough, given that liberalization of the labor market is not automatically delivering economically and socially encouraging outcomes.

No doubt, though, the pension scheme is in a mess. This has to do with the expenditure side where for a long time period this welfare state institutionshas been used by both large parties to buy votes. Syriza has a hard time to deal with those structural excesses, and so did the previous governments. Progress has been made, though, and more reforms need to be made, not least in regards to managing the scheme. The various pension programs are . It has also to do with the financing side of the system. Due to pressures of the Institutions the various pension programs are now unified and run under one umbrella but without allowing the incerease in efficiency to get translated into employee numbers. It needs political courage to deal with this overhang. The pension scheme is in a mess, also due to events on the financing side. The pension scheme lost an estimated Euro 25 bn of reserves in the course of the debt hair-cut of 2012 – quite a staggering amount. Any defined pension scheme runs into problems if unemployment occurs and stays at a high level. The official unemployment rate hovers around 25%, and this means that the contributions to the scheme went down rapidly. This race between quickly shrinking inflows and slowly shrtinking outflows creates problems, and it is standard practice across the OECD that the state steps in in order to close the gap. Critics like Giavazzi make the point that such a standard practice is not acceptable for a country with a debt-overhang, and rather then sending good money after the bad the Institutions should move on and accept that the previous credits will never be repaid, and thus no new credits should be handed out.

In the last months politicians as well as academic and other observers of the drama were eager to state that unlike in 2010 the Eurozone today is well prepared to deal with an GREXIT and its potential fall out costs. Indeed, the Eurozone of today comes with a permanent emergency-support institution; the ECB of today has a wide arsenal and mandate to make use of those weapons in order to safeguard the Euro; the banking union is omnly at the start but at least there are contiours that would get mobilized in a worst-case situation; financial markets alreday priced in costs of an GREXIT. All those elements strengthen the hands of the Institutions, and hence the strict line in the talks to make Greece surrender. Why then still continuing those painful and time-consuming talks? According to critics like Giavazzi It would be easier to end the farce and to move back to business. There are at least three reasons why this will not happen. First, despite all rethoric about increased resilience of the Eurozone, an GREXIT still means entering unknown waters. Resilience of the new institutional setting has not been tested yet. Most of the relative stability over the last few months stems from ECB actions. Second, we don’t know exactly what GREXIT would mean for Greece but it seems safe to assume that the consequences would be dire for a import-dependent country that would be totally cut off from financial flows. A economically, politically and socially devastated Greece would come with severe security costs for the EU. Third, the EU and the Eurozone have a strong political interest to make any non-austeritarian policy unattractive, and this holds even more so for right of centre governments in many parts of the EU who fear for their political lifes in case a Syriza-led government would succedd in re-writing Eurozone rules. At the same time, though, the EU has an interest to demonstrate to the rest of the world that the common currency will not degenerate into a fixed exchange rate regime, and this implies to keep Greece in the zone.

It does not need a lot of economic and political understanding to realize that all those various parts do not square. Something and somebody has to give.