Wednesday, June 24, 2015

Greece: negotiating without trust

The Eurozone and Greece are going through the last hours of a negotiation to ensure release of additional funds from the previous agreement and possibly setting the basis for the next one.

The leaked details of the latest Greek proposal and the Eurozone counterproposal is full of details and discussions around technical issues (for example, whether the pension reform is effective from October 31 or July 1st). But what the technical discussions reveal is a negotiation that can only lead to an outcome that will not satisfy any of the parties.

Reading between the lines of the technical details we see the Eurozone asking Greece for a strong package of front loaded fiscal measures many of which are exactly the ones the Greek government wanted to avoid as they go against the electoral platform under which they were elected.

It would be very easy to criticize Germany, Brussels (and the IMF) for failing to see that we are possibly doing again the same mistakes as in previous agreements and that this one is also bound to fail. But the reality is that it is very difficult to imagine any other type of agreement give the lack of trust between the two parties.

Many argue that this government should not be asked to pay for the mistakes of previous governments. After all Syriza was not in power when the Greek government and the Greek economy were running very large deficits. This is correct but it is also true that Syriza was not elected on a platform of economic reform, even if some of the economic reforms being discussed are not contrary to their ideas.

I am very sympathetic to the logic that the Greek finance minister Varoufakis has very well expressed that Greece needs growth first and that insisting on fiscal austerity will not deliver the necessary growth. But I also understand the view of the Eurozone when negotiating with a Greek government that was elected on a platform that is not clear that will deliver sustainable growth. Because of the lack of trust, what the Eurozone is looking for in this negotiation is a strong early commitment that the Greek government is willing to take steps that might go against its own electoral platform. In an ideal world those steps would all be about making growth happen: reforms in an environment where demand is not a constraint for growth. But many reforms cannot be implemented in the short run so the only way to get a signal of commitment is to put on a table a set of fiscal measures to improve primary balances, what the Greek government wanted to avoid.

So we are back to a proposal that looks too much like the previous ones and it is very likely that, even if there is an agreement over the coming hours or days, we will witness again in the near future yet another negotiation between Greece and the Eurozone once it is clear that the current plan will not work.

This is the unfortunate outcome of a negotiation that started without trust between the two parties and where the only possible outcomes where both suboptimal: either another unrealistic agreement or a break up of the negotiations that leads to a Greek default and possibly exit from the Euro area. In the next days we will see which of the two (bad) scenarios turns into reality.

Antonio Fatás
on June 24, 2015 |   Edit