How to fix Greece: A seven-point plan for economic salvation

As Vicky Pryce's native land lurches from one crisis to the next, the threat of an exit from the Eurozone is still very much in the air. However, there is some hope remaining – if only her compatriots would follow her plan

Vicky Pryce
Tuesday 31 March 2015 01:06
Protest rally in June 2011 in front of the parliament in Athens expresses opposition to a new austerity package
Protest rally in June 2011 in front of the parliament in Athens expresses opposition to a new austerity package

All eyes are on Greece, again. After six years of austerity that drove some four million Greeks on to the breadline as economic activity declined by 25 per cent, citizens are holding their breath, watching as the newly elected leaders present their case to the powerbrokers of the eurozone. Ordinary Greeks have endured huge economic hardship as previous governments implemented the austerity economic programme demanded as a condition of the bailout by the "troika" of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) in 2010 – and then again in 2012 – to address the country's debt crisis.

Now, Greece finds itself yet again in the eye of a financial storm that is once more threatening to bankrupt the country. Leaders of Syriza, the radical left-wing party that leads the coalition – clever academics; idealistic, appealingly tieless but often clueless in terms of political and economic strategy, due to their inexperience – must negotiate an economic strategy that satisfies their eurozone neighbours and offers up a vision of a better future to a people who elected them on the slogan "Hope is on the way".

At stake is continuing support from the rest of the eurozone to a country that seems not to want to play by the rules of the game, particularly since electing a government that pledged to end austerity, renationalise utilities, rehire sacked public servants, reverse cuts in the minimum wage and ensure that healthcare provision is restored to those who lost it due to becoming unemployed.

And, of course, write off at least part of its unsustainable debt of some €310bn (£225bn), the servicing of which costs the economy some 4 per cent of its GDP annually and is crippling any chances of proper recovery.

But things have proved very difficult since Syriza took control, propelled to power by what was mostly a protest vote. At the time, I thought the relatively small lead for Syriza since it came top in the May 2014 European elections would probably disappear as the normally conservative Greeks would be taking a risk on national election night by voting for anything other than the status quo. But to my surprise, I had underestimated the wish to see change, however small. As elsewhere in Europe, there was a populist desire to punish ruling elites and to shift the balance of power away from the technocrats of the hated "troika", and back to elected politicians accountable to Greek citizens and no one else.

The Greeks dislike and mistrust authority anyway – a leftover from the 400 years of Ottoman rule that ended in the early 19th century. But even so, they didn't vote overwhelmingly for Syriza. The populist leftists got just 36 per cent of the vote. The bizarre Greek electoral system favours the largest party by allocating 50 extra seats to it, so that it has the chance of securing a majority in parliament. All the same, Syriza still fell two seats short of a majority in the parliament. So it formed a coalition with the Independent Greeks, a small right-wing populist party whose leader once said: "Muslims, Jews and Buddhists do not pay taxes."

Alexis Tsipras and Angela Merkel in Berlin

The trouble is that Greek spending was for the most part not covered by sufficient revenues and had to rely on international borrowing to fund it. So, without defaulting – having a panic run on banks that would be like endless Northern Rock queues, and leaving the euro and probably the EU – there is nowhere else for the Greeks to turn to. There is talk of help from Russia, but so far this seems to be more a half-hearted attempt to force the Europeans' hand.

So what should Syriza do? The situation is desperate. The economy has gone into a nosedive. No one is hiring, tax revenues are collapsing as people have cut down on spending, banks are finding it harder to get people to service their debts and there have been mini bank runs as people have withdrawn funds – an estimated €20bn since December.

Everyone I speak to there is just praying for some return to normality. So, as an expatriate Greek, but also as an economist, here is my list of suggestions:

Get the publicity right

In a crisis, dialogue is key. The inexperience of Greek negotiators shows. Instead of picking fights, Syriza should be reminding the world of the progress Greece had made, albeit at great cost. The improvement in its deficit position and the beginnings of a recovery that were seen in 2014 as the country benefited from record tourist receipts had begun changing perceptions. Greece was growing again in 2014, and the government forecasts were for further expansion of nearly 3 per cent in 2015. Even though that was slightly on the optimistic side, the improved sentiment allowed Greece to tap the markets again last year, for the first time in years paying less than 5 per cent interest.

Unfortunately, all this was lost when the EU ministers last autumn rejected the 2015 budget presented to them by the previous coalition government, led by the centre-right New Democracy prime minister, Antonis Samaras, for not imposing even more savage austerity cuts. Unlike, say, the UK, where debt and deficit have run free and the Bank of England has been printing money in best Keynesian style, the eurozone was trapped in a pre-1914 ideology that demanded debtless growth. Mr Samaras may have expected some understanding from his fellow conservative leaders, especially Germany's Angela Merkel. He got none and the eurozone ideologues forced Greece to an early election in January 2015, which resulted in Syriza leading a coalition, having promised to throw the troika out of Greece and to reverse austerity. Greece was once again shut out of the markets and dependent on the ECB and the Europeans for liquidity.

Get on with reform

By voting out New Democracy and their coalition partners, Pasok, the Greeks finally turned their backs on the clientelist, elitist structure that favoured the rich, privileged and well connected. Revelations of massive tax avoidance and evasion through, among other methods, the use of Swiss bank accounts, shook the Greeks.

Syriza must capitalise on this and make clear, shouting as it were from the top of Mount Olympus, that there will be no more delays on reforms needed to make it a more competitive economy and ensure sustained growth in the longer term. Indeed, the Swiss authorities are now talking with Athens about returning some of the money that was lodged in Swiss bank accounts to avoid tax.

Berne is showing more sympathy and understanding for Greece than Brussels is.

Syriza has already promised to tackle tax evasion. In its pre-election demagogy, it also wanted to deal with the undue influence and privileges enjoyed by the Greek oligarchs and extend the tax base to sectors so far largely excluded, such as the shipping industry. But in particular, the government needs to show how it will tackle an antiquated administrative system that hinders competition and breeds a culture of corruption and nepotism, as well as demonstrate what steps it will take seriously to slim down a bloated public sector that crowds out real entrepreneurship, competition and innovation. Sad to think that "technocracy" is a Greek word, after all, combining skill with governance. The measures being worked up over the weekend still lack sufficient detail in these areas.

The immediate priority is to have sufficient liquidity so the government can carry out basic functions such as paying wages and pensions. Greek banks are now entirely dependent on the ECB for survival, having seen a huge outflow of deposits – at least €20bn over last couple of months – as the message from the eurozone is unremitting in hostility.

Restructure the debt (but not yet...)

It will have to happen, but as an early negotiating tactic, it has failed. The Greek prime minister, Alexis Tsipras, has moderated his demands, at least for the moment, to get the European countries, the IMF and the ECB (the old "troika" of lenders, which now, between them, hold most of the debt that Greece owes, of which €240bn is the sum of the two bailouts) to write off part of the debt, now standing at a huge 175 per cent of GDP. Everyone knows it is unsustainable. And it won't be solved by selling assets cheaply – the original troika plans to collect €50bn from privatisations by 2020 had already been reduced to half by the second bailout of 2012 and is now unlikely to be anything like that much. Tsipras has already dropped his promise to renationalise the small number of entities privatised.

But Syriza is right to object to "fire sales" to oligarchs or foreign entities of public-sector enterprises valued at rock-bottom prices due to the economic recession that Greece has lived through. So, for the moment, promise as much privatisation as possible, but wait to see what the lie of the land is later.

More importantly, promise anything to shorten as much as possible the "review" period during which the "group" of creditors (as the troika is now called) scrutinise Greece's economic plans before disbursing much-needed money. Greek bonds are not rated high enough to be eligible to be bought under the quantitative easing (QE) programme just started by the ECB to pump liquidity into the banking system and prevent deflation in the eurozone.

Countries that are in a bailout arrangement can still, in theory, get round this rule and be eligible, too. But not if they are under "review", which Greece is at present! The emphasis now has to be on getting that review period out of the way quickly so that Greece can also have its bonds bought under the scheme. Hence the sense of urgency in Athens these past few days, hammering out the details of the proposed reforms. While it remains outside the scheme, Greece is in the surreal position of finding its own lender of last resort, the ECB, discouraging Greek banks from buying Greek debt of any form and accentuating the government's liquidity crisis.

Make the European Commission your best friend

It is clearly much more favourably disposed towards Greece than the politicians, who always have one eye on their own voters' reactions. But at the same time...

Work on Merkel

Don't worry too much about Germany saying no, initially. It originally said no to the bailouts, and we have since had four – five if you count the two bailouts to Greece separately. It said no to the ECB embarking on QE. We now finally have it, despite various attempts by the German constitutional court to stop it. It tried to stop the ECB becoming a lender of last resort and objected to the sharing of risk between the member countries, as it believed that would create moral hazard – countries would misbehave if they thought that others would help to foot the bill. Yet the ECB is now effectively the lender of last resort and QE itself will have an element of mutualisation of the risk in it after all. So, work on Chancellor Merkel as much as possible. There is nothing much that can be done about the opposition from other "periphery" countries' governments, which are themselves fearful of rising anti-austerity opposition at home. For the moment, focus on what matters most.

Avoid a referendum on the Euro

Syriza has already dropped or moderated its pre-election promises. No matter. The party has increased its popularity since the elections to some 42 per cent of the popular vote, up from 36 per cent at the time of the election, although Tsipras's own ratings have come down somewhat from the 80 per cent he enjoyed for a brief period after his win. Don't squander that advantage. Some 80 per cent of the Greek population want to stay in both the euro and the EU.

A "Grexit" plebiscite would be destabilising. But be mindful of any attempts to force Greece into imposing capital controls to prevent capital flight and bank runs.

Learn that Image matters

Finally, tackle the charge of amateurism that risks undermining a government still in its honeymoon period at home and abroad. Though the strained dialogue so far has made a "star" of the finance minister, Yanis Varoufakis, it has also left observers worried that there is too much emphasis on style rather than content. The Greek problem needs to be taken seriously elsewhere in Europe. "Grexit" – or "Grexident", as exit by accident is now termed – would be a calamity for Greece and Europe as a whole. It would encourage the idea that exiting Europe was possible, even desirable, as Nigel Farage and Marine Le Pen argue in Britain and France.

The European leaders surely know that a Greece expelled by design or by accident from Europe would be prey to Russian designs and destabilise still further the unhappy geopolitical disequilibrium in the Mediterranean region. That is probably Syriza's strongest card yet in the current negotiations – and I suspect it will be used to greater effect in the weeks to come.

Vicky Pryce is the chief economic adviser at the Centre for Economics and Business Research and author of 'Greekonomics' (Biteback Publishing, £9.99), published in 2013. Her latest book on the forthcoming UK elections, 'It's the Economy, Stupid: Economics for Voters', with Andy Ross and Peter Urwin (Biteback, £15.99), is out now

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