From GREXIT to GREECIDENT?

Recently Martin Wolf from Financial Times elaborated about the probability of an unintended event: Greece leaving the Eurozone as a non-planned result of actions of the Greek government and the Eurogroup. Indeed, time is running out: Greece seems close to run into a liquidity crisis where it can’t any longer pay its internal obligations nor its external debt service. Only yesterday the government singled to the IMF that the upcoming debt service tranche of $ 450 million on April 9 can’t be paid in time. Even if this announcement is a further element of the game of chicken it is widely accepted that the coffers are running on empty. Greek citizens – at least those ones who still have savings – are seemingly aware of the situation and started take out record amounts of funds from their banks. The political uncertainty tempers any willingness for domestic investments, and export competitiveness is not improving quick enough, despite a drastic reduction of unit wage costs. In short, Greece stands on the edge of an abyss. At this moment, it doesn’t look as the EU and its Eurogroup is willing to halt the fall. Again, it may be part of the game of chicken but it seems that the EU only will act if Greece surrenders completely. If both sides stick to their positions, Greece soon will no longer be able to meet its domestic and external obligations. Sooner then later Greece then will exit the Eurozone. This would be an ugly and messy process, with asymmetrical damages but with damages for both sides.

This must not happen.Today, the Financial Times published the document the Greek government sent to Brussels that presents on 26 pages a complete list of planned reforms and their potential fiscal impact. Its estimated fiscal impact is calculated with about Euro 6 billion for 2015. So far, the document received conditional reception from representatives of the Eurozone, in combination with the warning that the document only will be discussed at the next meeting of eurozone finance ministers on April 24 in Riga. This lukewarm response has probably to do with the things that are missing in the document, in particular any mentioning of a further liberalization of the labor market or a further overhaul of the pension system. Rather, ton those areas the document deals with actions to fight ‘undeclared work’, i.e. the informal sector, and an announcement to gradually increase the minimum wage. Also, rather then further reducing state pensions the document indicated that low-income pensioners will again get a thirteenth payment. All this does not complement the taste of the vast majority of the eurogroup.

The document can be read as a serious reform plan with an emphasis to radically change the fiscal apparatus and its underlying approaches. In technical terms you find all the right stuff, and yet it can also be read as a futile attempt as already the list of instruments indicates that it needs a complete rupture with deeply entrenched practices. More so, if all those reforms would be put in place Greece would be a far less attractive place for doing business. On the other side, if Greece wants to find a sustainable fiscal base there is no way to avoid going this route. The kind of proposed reforms need time to get chalked through the system, and it would be ludicrous to expect quick turnarounds. In this respect I think that the estimated fiscal impact of the various reforms are not realistic, at least not in the short run. And yet, it is the short run that counts. Moreover, even though the deputy foreign minister Euclid Tsakalotos is rightly pointing that that the previous Troika programs one-sided the big tax avoiders and that the eurogroup never cared that the previous government was not a bit willing to seriously follow through with the ‘Lagarde’-list, nobody in Brussels is willing to look back. This rigidity may have some serious reasoning behind it but it also poses the question to which degree the EU and the eurogroup are sticking to a narrow ideological frame that does not allow to openly review the situation and its history. The danger may be that such a open review would open a box of worms the EU wants to shut forever. There is no doubt that the Greek government works hard to move the burden of responsibility to the creditors and political savours, and this is to a serious degree a misleading narrative. The document of reforms, though, indicates that at the same time the government accepts the need for a fundamental renovation of the Greek mode of regulation and growth model. The problem is that the EU and the eurogroup are not at all happy about the political direction of the reforms. It will be interesting to see whether a compromise can be achieved, and this will critically depend from the size of political space the eurogroup will allow the Greek government.