Wed, Apr 22, 2015 page9

• Greece stands on brink of ruin when reasonable deal is possible

  Demands unacceptable to a recently elected leftist party are getting in the way of a solution that would set the stage for economic recovery and stability

  • By Paul Krugman / NY Times News Service
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  “Don’t you think they want us to fail?”

  That is the question I kept hearing during a brief, intense visit to Athens. My answer was that there is no “they” — that Greece does not, in fact, face a solid bloc of implacable creditors who would rather see default and exit from the euro than let a leftist government succeed, that there is more goodwill on the other side of the table than many Greeks suppose.

  However, you can understand why Greeks see things that way. And I came away from the visit fearing that Greece and Europe might suffer a terrible accident, an unnecessary rupture that will cast long shadows over the future.

  The story so far: At the end of 2009, Greece faced a crisis driven by two factors: High debt, alongside inflated costs and prices that left the country uncompetitive.

  THE BAILOUT

  Europe responded with loans that kept the cash flowing, but only on the condition that Greece pursues extremely painful policies. These included spending cuts and tax hikes that, if imposed on the US, would amount to US$3 trillion per year. There were also wage cuts on a scale that is hard to fathom, with average wages down 25 percent from their peak.

  These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the country’s slump, creating Great Depression-level suffering and a huge humanitarian crisis.

  On Saturday last week, I visited a shelter for the homeless and was told heartbreaking tales of a healthcare system in collapse: patients turned away from hospitals because they could not pay the 5 euro (US$5.34) entrance fee, sent away without needed medicine because cash-starved clinics had run out, and more.

  NIGHTMARE

  It has been an endless nightmare, yet Greece’s political establishment, determined to stay within Europe and fearing the consequences of default and exit from the euro, stayed with the program year after year.

  Finally, the Greek public could take no more. As creditors demanded yet more austerity — on a scale that might well have pushed the economy down by another 8 percent and driven unemployment to 30 percent — the nation voted in SYRIZA, a genuinely left-wing (as opposed to center-left) coalition, which has vowed to change the nation’s course.

  Can a Greek exit from the eurozone be avoided?

  Yes, it can. The irony of SYRIZA’s victory is that it came just at the point when a workable compromise should be possible.

  ALTERNATIVES

  The key point is that exiting the eurozone would be extremely costly and disruptive in Greece, and would pose huge political and financial risks for the rest of Europe. It is therefore something to be avoided if there is a halfway decent alternative.

  And there is, or should be.

  By late last year, Greece had managed to eke out a small “primary” budget surplus, with tax receipts exceeding spending, excluding interest payments. That is all that creditors can reasonably demand, since you cannot keep squeezing blood from a stone. Meanwhile, all those wage cuts have made Greece competitive on world markets — or would make it competitive if some stability can be restored.

  The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant, but not ever-growing, payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.

  However, that deal does not seem to be coming together. Maybe it is true, as the creditors say, that the new Greek government is hard to deal with. However, what do you expect when parties that have no previous experience in governing take over from a discredited establishment?

  CATASTROPHE

  More important, the creditors are demanding things — big cuts in pensions and public employment — that a newly elected government of the left simply cannot agree to do, as opposed to reforms like an improvement in tax enforcement that it can.

  And the Greeks are all too ready to see these demands as part of an effort either to bring down their government or to make their country into an example of what will happen to other debtor countries if they balk at harsh austerity.

  To make things even worse, political uncertainty is hurting tax receipts, probably causing that hard-earned primary surplus to evaporate. The sensible thing, surely, is to show some patience on that front: If and when a deal is reached, uncertainty will subside and the budget should improve again. However, in the pervasive atmosphere of distrust, patience is in short supply.

  It does not have to be this way. True, avoiding a full-blown crisis would require that creditors advance a significant amount of cash, albeit cash that would immediately be recycled into debt payments. However, consider the alternative. The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous.
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