Business Standard

Claude Smadja: A Greek band-aid

At best, the deal between Athens and its creditors can buy time for a realistic solution to be found

Claude Smadja 

Claude Smadja

It looks like these movies we have all seen: After multiple twists in the plot the plane is about to crash - but then a last-minute manoeuvre or reversal of situation allows it to land brutally but more or less safely, to the relief of the passengers, the crew and the onlookers. I am, of course, referring to the debt drama which was seen by many just a few days ago as about to end in tragedy with "Grexit" - a forced exit of from the - but now seems on course at this writing to end up, at least for the moment, in a kind of face-saving deal.

The mix of spending cuts and tax increases and changes in the social security regulations, such as abolishing early retirement by next year and gradually increasing the retirement age to 67, proposed by Prime Minister were labelled by the President of the European Council, "as the first real proposals in many weeks". Earlier on, the President of the European Commission, Jean-Claude Juncker, had set the stage for an outcome by pointing out that he was convinced that "there would be a deal this week for the simple reasons that there has to be one".

Read more from our special coverage on "CRISIS"



This is a victory for wisdom and cold-headed realism over dogmatism on both sides: The Prime Minister had to take over the negotiating process against the members of his government and of his party ready to go for a default on the country's foreign debt and return to the drachma, thus freeing itself from the burden of a debt now at 18 per cent of and benefiting from the devaluation that would follow an exit from the to boost competitiveness. On the European side, Chancellor and Mr Juncker had to overcome the dogmatism of the German finance minister, Wolfgang Schauble, who was ready to go for Grexit, convinced that the crucial priority for the credibility of the is to enforce strictly the rules and that the improvement of the economic outlook and the improvements in the functioning of the would allow it to withstand the turmoil generated.

This argument, however, overlooked the enormous damage to the credibility of the euro by a precedent for adoption of the euro being reversible. In addition to that, many European leaders are well aware of the fact that although the conditions have improved inside the euro zone, nobody can predict for sure what could be the implications of Grexit, not only on the itself but on the world economy (remember the Lehman Brothers bankruptcy?). Last but not least, there is no underestimating the geopolitical risks involved in having a desperate let loose.

With a deal would get access to the last tranche of the existing bailout agreement - euro 8.2 billion - which would allow it to reimburse the euro 1.8 billion it owes to the just on the deadline date of 30 June. This, in turn, would open the door for a third bailout agreement that absolutely needs to be able to meet some basic obligations in the coming period - continuing to honour its debt and covering the basic financial needs of a barely functioning state, such as paying civil servants and pensions and keeping the minimum social services going.

Does that mean that the drama is now definitely moving towards a positive outcome, and that the leaders can thus devote all their attention to the still urgent priority of strengthening and broadening an economic recovery? After all, the recovery is still too timid to dent the 11.3 per cent average euro-zone unemployment rate? Don't bet the house on that.

In fact, what has happened this week with the high-wire drama taking place between and its "troika" of creditors - the European Commission, the and the - is best characterised as a band-aid solution to long-term problems. What is actually required are the kind of structural solutions that take not only time but radical changes in terms of social and political mindsets, as well as in the way national institutions function.

First of all, Prime Minister Tsipras will have serious difficulties getting the deal with Brussels accepted by large segments of - and especially the left of the constituency that brought him to power at the beginning of the year on the promise made to face up to the diktats of the troika. His further promise was to end the five years of brutal austerity that have reduced the country's by more than 20 per cent. The demonstrations in this week are a harbinger of the resistance he will face. Even more importantly, the government can commit to raise some categories of taxes and abolish tax exemptions for islands, but the key issue remains the ability of the authorities to enforce efficient tax collection in a country where tax evasion is a built-in mindset and a major structural issue, with the underground, unreported, economy evaluated at being about 25 per cent of the whole real economy. And then there are the institutional and political obstacles and resistances: It suffices to point out that out of the euro 50 billion that had been expected in the bailout plan to be raised from the privatisation of state assets, a mere euro 3 billion has been realised.

However, there are even more reasons to consider that the crisis is definitely not over. For the moment, the official European line is that there should be no write-off of any amount of international debt. But it is common sense that there is no way the country will be able to repay its financial burden in total. So far it has been "extend and pretend" - continuing to lend more money to so that it can repay its creditors with the money just lent to it, while pretending that the debt is repayable.

There will have to be a coming to terms with reality. In addition to that, the Europeans and the will have to stop insisting that reforms that require one or two good economic cycles to be implemented and absorbed by the economic and social fabric of the country can be implemented in a matter of months or even one or two years. They should remember that it took almost all of German Chancellor Gerhard Schroder's two terms in office to implement a labour reform in his country - a reform on which Mrs Merkel is now backtracking, abrogating some of its important elements for political convenience.

The deal struck this week will only be significant if it is used to gain the time necessary to create the conditions for a realistic framework for a long-lasting solution - one that would be a win-win for as well as for the and the global economy. This will require a lot of painful soul-searching and reversal of the absurdly dogmatic notion that austerity can be the solution to recreate growth for an economy on its knees.

The writer is president of Smadja & Smadja, a strategic advisory firm
Twitter: @ClaudeSmadja

RECOMMENDED FOR YOU

Claude Smadja: A Greek band-aid

At best, the deal between Athens and its creditors can buy time for a realistic solution to be found

At best, the deal between Athens and its creditors can buy time for a realistic solution to be found It looks like these movies we have all seen: After multiple twists in the plot the plane is about to crash - but then a last-minute manoeuvre or reversal of situation allows it to land brutally but more or less safely, to the relief of the passengers, the crew and the onlookers. I am, of course, referring to the debt drama which was seen by many just a few days ago as about to end in tragedy with "Grexit" - a forced exit of from the - but now seems on course at this writing to end up, at least for the moment, in a kind of face-saving deal.

The mix of spending cuts and tax increases and changes in the social security regulations, such as abolishing early retirement by next year and gradually increasing the retirement age to 67, proposed by Prime Minister were labelled by the President of the European Council, "as the first real proposals in many weeks". Earlier on, the President of the European Commission, Jean-Claude Juncker, had set the stage for an outcome by pointing out that he was convinced that "there would be a deal this week for the simple reasons that there has to be one".

Read more from our special coverage on "CRISIS"



This is a victory for wisdom and cold-headed realism over dogmatism on both sides: The Prime Minister had to take over the negotiating process against the members of his government and of his party ready to go for a default on the country's foreign debt and return to the drachma, thus freeing itself from the burden of a debt now at 18 per cent of and benefiting from the devaluation that would follow an exit from the to boost competitiveness. On the European side, Chancellor and Mr Juncker had to overcome the dogmatism of the German finance minister, Wolfgang Schauble, who was ready to go for Grexit, convinced that the crucial priority for the credibility of the is to enforce strictly the rules and that the improvement of the economic outlook and the improvements in the functioning of the would allow it to withstand the turmoil generated.

This argument, however, overlooked the enormous damage to the credibility of the euro by a precedent for adoption of the euro being reversible. In addition to that, many European leaders are well aware of the fact that although the conditions have improved inside the euro zone, nobody can predict for sure what could be the implications of Grexit, not only on the itself but on the world economy (remember the Lehman Brothers bankruptcy?). Last but not least, there is no underestimating the geopolitical risks involved in having a desperate let loose.

With a deal would get access to the last tranche of the existing bailout agreement - euro 8.2 billion - which would allow it to reimburse the euro 1.8 billion it owes to the just on the deadline date of 30 June. This, in turn, would open the door for a third bailout agreement that absolutely needs to be able to meet some basic obligations in the coming period - continuing to honour its debt and covering the basic financial needs of a barely functioning state, such as paying civil servants and pensions and keeping the minimum social services going.

Does that mean that the drama is now definitely moving towards a positive outcome, and that the leaders can thus devote all their attention to the still urgent priority of strengthening and broadening an economic recovery? After all, the recovery is still too timid to dent the 11.3 per cent average euro-zone unemployment rate? Don't bet the house on that.

In fact, what has happened this week with the high-wire drama taking place between and its "troika" of creditors - the European Commission, the and the - is best characterised as a band-aid solution to long-term problems. What is actually required are the kind of structural solutions that take not only time but radical changes in terms of social and political mindsets, as well as in the way national institutions function.

First of all, Prime Minister Tsipras will have serious difficulties getting the deal with Brussels accepted by large segments of - and especially the left of the constituency that brought him to power at the beginning of the year on the promise made to face up to the diktats of the troika. His further promise was to end the five years of brutal austerity that have reduced the country's by more than 20 per cent. The demonstrations in this week are a harbinger of the resistance he will face. Even more importantly, the government can commit to raise some categories of taxes and abolish tax exemptions for islands, but the key issue remains the ability of the authorities to enforce efficient tax collection in a country where tax evasion is a built-in mindset and a major structural issue, with the underground, unreported, economy evaluated at being about 25 per cent of the whole real economy. And then there are the institutional and political obstacles and resistances: It suffices to point out that out of the euro 50 billion that had been expected in the bailout plan to be raised from the privatisation of state assets, a mere euro 3 billion has been realised.

However, there are even more reasons to consider that the crisis is definitely not over. For the moment, the official European line is that there should be no write-off of any amount of international debt. But it is common sense that there is no way the country will be able to repay its financial burden in total. So far it has been "extend and pretend" - continuing to lend more money to so that it can repay its creditors with the money just lent to it, while pretending that the debt is repayable.

There will have to be a coming to terms with reality. In addition to that, the Europeans and the will have to stop insisting that reforms that require one or two good economic cycles to be implemented and absorbed by the economic and social fabric of the country can be implemented in a matter of months or even one or two years. They should remember that it took almost all of German Chancellor Gerhard Schroder's two terms in office to implement a labour reform in his country - a reform on which Mrs Merkel is now backtracking, abrogating some of its important elements for political convenience.

The deal struck this week will only be significant if it is used to gain the time necessary to create the conditions for a realistic framework for a long-lasting solution - one that would be a win-win for as well as for the and the global economy. This will require a lot of painful soul-searching and reversal of the absurdly dogmatic notion that austerity can be the solution to recreate growth for an economy on its knees.

The writer is president of Smadja & Smadja, a strategic advisory firm
Twitter: @ClaudeSmadja
image
Business Standard
177 22

Claude Smadja: A Greek band-aid

At best, the deal between Athens and its creditors can buy time for a realistic solution to be found

It looks like these movies we have all seen: After multiple twists in the plot the plane is about to crash - but then a last-minute manoeuvre or reversal of situation allows it to land brutally but more or less safely, to the relief of the passengers, the crew and the onlookers. I am, of course, referring to the debt drama which was seen by many just a few days ago as about to end in tragedy with "Grexit" - a forced exit of from the - but now seems on course at this writing to end up, at least for the moment, in a kind of face-saving deal.

The mix of spending cuts and tax increases and changes in the social security regulations, such as abolishing early retirement by next year and gradually increasing the retirement age to 67, proposed by Prime Minister were labelled by the President of the European Council, "as the first real proposals in many weeks". Earlier on, the President of the European Commission, Jean-Claude Juncker, had set the stage for an outcome by pointing out that he was convinced that "there would be a deal this week for the simple reasons that there has to be one".

Read more from our special coverage on "CRISIS"



This is a victory for wisdom and cold-headed realism over dogmatism on both sides: The Prime Minister had to take over the negotiating process against the members of his government and of his party ready to go for a default on the country's foreign debt and return to the drachma, thus freeing itself from the burden of a debt now at 18 per cent of and benefiting from the devaluation that would follow an exit from the to boost competitiveness. On the European side, Chancellor and Mr Juncker had to overcome the dogmatism of the German finance minister, Wolfgang Schauble, who was ready to go for Grexit, convinced that the crucial priority for the credibility of the is to enforce strictly the rules and that the improvement of the economic outlook and the improvements in the functioning of the would allow it to withstand the turmoil generated.

This argument, however, overlooked the enormous damage to the credibility of the euro by a precedent for adoption of the euro being reversible. In addition to that, many European leaders are well aware of the fact that although the conditions have improved inside the euro zone, nobody can predict for sure what could be the implications of Grexit, not only on the itself but on the world economy (remember the Lehman Brothers bankruptcy?). Last but not least, there is no underestimating the geopolitical risks involved in having a desperate let loose.

With a deal would get access to the last tranche of the existing bailout agreement - euro 8.2 billion - which would allow it to reimburse the euro 1.8 billion it owes to the just on the deadline date of 30 June. This, in turn, would open the door for a third bailout agreement that absolutely needs to be able to meet some basic obligations in the coming period - continuing to honour its debt and covering the basic financial needs of a barely functioning state, such as paying civil servants and pensions and keeping the minimum social services going.

Does that mean that the drama is now definitely moving towards a positive outcome, and that the leaders can thus devote all their attention to the still urgent priority of strengthening and broadening an economic recovery? After all, the recovery is still too timid to dent the 11.3 per cent average euro-zone unemployment rate? Don't bet the house on that.

In fact, what has happened this week with the high-wire drama taking place between and its "troika" of creditors - the European Commission, the and the - is best characterised as a band-aid solution to long-term problems. What is actually required are the kind of structural solutions that take not only time but radical changes in terms of social and political mindsets, as well as in the way national institutions function.

First of all, Prime Minister Tsipras will have serious difficulties getting the deal with Brussels accepted by large segments of - and especially the left of the constituency that brought him to power at the beginning of the year on the promise made to face up to the diktats of the troika. His further promise was to end the five years of brutal austerity that have reduced the country's by more than 20 per cent. The demonstrations in this week are a harbinger of the resistance he will face. Even more importantly, the government can commit to raise some categories of taxes and abolish tax exemptions for islands, but the key issue remains the ability of the authorities to enforce efficient tax collection in a country where tax evasion is a built-in mindset and a major structural issue, with the underground, unreported, economy evaluated at being about 25 per cent of the whole real economy. And then there are the institutional and political obstacles and resistances: It suffices to point out that out of the euro 50 billion that had been expected in the bailout plan to be raised from the privatisation of state assets, a mere euro 3 billion has been realised.

However, there are even more reasons to consider that the crisis is definitely not over. For the moment, the official European line is that there should be no write-off of any amount of international debt. But it is common sense that there is no way the country will be able to repay its financial burden in total. So far it has been "extend and pretend" - continuing to lend more money to so that it can repay its creditors with the money just lent to it, while pretending that the debt is repayable.

There will have to be a coming to terms with reality. In addition to that, the Europeans and the will have to stop insisting that reforms that require one or two good economic cycles to be implemented and absorbed by the economic and social fabric of the country can be implemented in a matter of months or even one or two years. They should remember that it took almost all of German Chancellor Gerhard Schroder's two terms in office to implement a labour reform in his country - a reform on which Mrs Merkel is now backtracking, abrogating some of its important elements for political convenience.

The deal struck this week will only be significant if it is used to gain the time necessary to create the conditions for a realistic framework for a long-lasting solution - one that would be a win-win for as well as for the and the global economy. This will require a lot of painful soul-searching and reversal of the absurdly dogmatic notion that austerity can be the solution to recreate growth for an economy on its knees.

The writer is president of Smadja & Smadja, a strategic advisory firm
Twitter: @ClaudeSmadja

image
Business Standard
177 22