The Greek Deal – A game changer or a mere name changer?

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Followers of Re-Define’s recent publicly available work on Greece will know that:

1) we thought Syriza’s election was good news both for Greece and for the EU,

2) there would be a lot of noise and bluster, but that a compromise would eventually result,

3) the risk was always negligible and that of an “accidental” exit was zero, despite numbers such as 75% risk of Grexit pulled out of what can only be thin air by various “experts”,

4) Syriza deserved to, and probably would get a chance to, prove its mettle.

Mercifully, it appears that we have been right, at least so far. The Troika, as we knew it, is dead.

Now that a “deal” has been reached, what do we make of its terms? Is it, as many are saying, “total capitulation” by Greece? A mere “name changing, not game changing” exercise? Or, is it something more substantial? Most important, does it leave Greece and the Eurozone better off?

There is something to the accusation, as articulated by Manolis Glezos, a respected Syriza MEP best known for having torn down the swastika from the Acropolis in 1941, that all that has happened is that the new euphemism for the Troika is “institutions”. Syriza tried, but has failed so far, to get the OECD more deeply involved, particularly at the cost of the ECB and the European Commission. But more has changed than meets the eye. Syriza can only claim some of the credit for the changes.

First, the IMF and the European Commission are not playing the same role they did before. In fact, in the negotiations, both, particularly the IMF, fought from Greece’s corner, particularly in terms of the need for more fiscal space and debt relief. The IMF has recognized it messed up on its concept of “expansionary austerity” and, while the European Commission has not had an explicit “mea culpa”, both President Junker and Pierre Moscovici are more sympathetic to Greece’s predicament and challenges than the previous commission was. Staffers too have recognized that they might have gone a bit overboard with the last programme.

This time, the ECB is taking a more hands-off role than previously. Do not expect a repeat of previous letters from the ECB to the Irish and Italian Prime Ministers that were little more than veiled threats. Thanks to the recognition by the ECB that it has had far too much political exposure of late with the publication of the said letters, as well as with German opposition to its program of quantitative easing, it will keep a low profile. Of the Troika, the IMF had the most benign stance on fiscal policy, and the team from the ECB most aggressively pushed for austerity. An equally important reason for the ECB’s newly found reticence is the opinion from the Advocate General at the European Court of Justice who pronounced that the ECB should not be a member of the Troika. The final judgement is not due for a few months, but the writing is clearly on the wall.

Take these secular developments and add in the aggressive anti-Troika stance taken by the Tsipras government for whom the continuation of the Troika in its current form was a red line, and the Troika is actually dead. Syriza deserve credit for dealing the fatal blow.  The “institutions”, whatever form they might finally settle into, will never quite be the Troika of yore. That is indeed good news. In all likelihood, despite initial rebuff, the OECD will likely play a more important, and one hopes sensible role in the future.

Greece has achieved some important concessions,

And what of the reform proposals themselves? Are they, as many are suggesting, particularly in the German press, “total capitulation”? Would this have been exactly the terms that ND and Mr. Samaras would have negotiated? Should Tsipras, as Schauble provocatively seemed to suggest, have a very hard time selling this deal to the Greek people?

In short, no the deal is not “total capitulation”. Of course it is not a “total victory” for Syriza, which no one was expecting in any case. If you take Syriza’s election manifesto as a starting point, then it does at first glance appear that Greece has made many concessions, perhaps far too many. Gone is any mention of debt renegotiation. Pledges on reversing privatisation, an immediate hiking of minimum wages, no changes to pension among others have all been rolled back to accommodate European partners. What, one would say, is left then? Why is this any better than what Greece under ND would have looked like?

Scratch the surface and more has changed than meets the eye. Perhaps as much as could have been expected from a government with no previous experience facing unprecedented financial and political pressure from day one from its European partners many of which, such as Germany, were unwilling to negotiate in good faith. What are these potentially important changes and concessions that Greece has won?  

First, Greece has won a very important victory on process. The Eurozone has accepted that it is legitimate for the Greek government to put forward its own proposals as an alternative to reforms prescribed by the creditors. This is more than it appears on the surface, given the very top-down regimented and legalistic approach followed by the Troika so far. Governments have fallen in vain attempts to try and water down or change the Troika’s prescriptions in the past. We had a system where the Troika was awarded walkover victories and programme countries such as Greece and Portugal were not even allowed on the field. Greece may have lost 7-1 to Germany in this first match-up, as Brazil did in the world cup final, but at least it has won the right to play the match.

Second, what Greece wanted when the new government came in was time to put forward its own policies, but without having to sign up to the existing program – a bridge – in the words of the new government. It has got a bridge up to April, but not on the terms it wanted. There are sufficient concessions in the reforms put forward by the Greek government and these are likely to be accepted by all other Eurozone governments and their parliaments, which allow it to credibly claim that things have changed. It will be able to rethink future privatisations to maximise revenue over the long term, which is sensible. It has some scope for increasing humanitarian spending that it rightly prioritises. It has the green light to put far more focus on tackling tax evasion, fighting corruption and taking on entrenched interests than before and has been able to win concessions on some other issues with this promise. Being a party that has thus far not been part of the clientelist state, Syriza is more likely to actually deliver on these. It will also focus more on creating an e-government, transparency and on investments essential to help build up productive sectors. Many of the reforms in the programme that has been put forward are sensible and reasonable. It has a few more weeks to put more flesh on the bone and put forward an alternative program to negotiate with the creditors when the “bridge” runs out. There will be a rematch, and the score, one hopes will be better than 7-1.

Third, the government has won some important time to take care of basic organisational issues and teething problems at home that come with any change in government, particularly if you have never held the reigns of power before. Most of all, it has won a precious few weeks to demonstrate to its creditors and Eurozone partners that it is a serious government and that Syriza has actually moved beyond the rhetoric of the election into the slow business of taking Greece out of its great depression. What Syriza does in the next few months will be closely watched and scrutinised for intent, as well as competence. In a situation when minister Schäuble was once again, as in 2012, ready to push Greece out of the Eurozone and many Greece’s partners had lost trust in the country, this is perhaps the most important victory.

To be clear, Syriza is not really getting the “fair chance” we called for and that we think it deserves after the destruction wrought upon Greece by previous governments and the Troika. It will have to govern with one hand tied behind its back, given the shortage of funds and the tight leash from its creditors, but at least it is being given half a chance. This means that rather than being dismissed as the “loony left”, as many have called it, and bullied by some of its more aggressive Eurozone partners, Syriza may actually have a chance to be judged on its record.

Take these together, and Greece has the best chance it has had in years to make a clean break with the past. It may not be on the terms its people wished for, but on a number of matters the moderating influence of the “institutions” will actually make for better policy than what Syriza had in its manifesto.

The reforms Syriza puts forward, particularly for the longer term will be judged on merit, not on their conformity with German diktat. The triple criteria of “fiscal sustainability”, “financial stability” and “economic growth” make sense and one hopes that the technocrats at the IMF, the European Commission and the OECD do a better job of applying these. If Syriza governs competently it will no doubt also win significant concessions on debt relief and the size of the primary surplus it will be required to maintain. Together, this could easily amount to more than 10% of GDP of fiscal space over its term to be used for much needed investment and humanitarian relief. It will also have a significant positive impact on growth. Whether the reforms look good for Syriza or not, they should be good for Greece and that is all that really matters.

In our opinion, the deal is also good for Europe.

It has been remarkable that defying history and developments elsewhere in Europe, the Greek people have, after enduring a great depression, elected a party that is pro-European, pro-Euro and pro-migration. This contrasts sharply with the rise of the anti-European anti-migrant far right in France, the Netherlands and elsewhere. We fear that if such an outcome led to no changes whatsoever in the terms of Greece’s bailout, despite the economic evidence also clearly being in favour of a different approach, that it would lead citizens elsewhere to conclude that the Euro is not compatible with democratic expression. The bullying and humiliation of the Greek government enjoying the support of 75% of Greeks would be hugely counterproductive. While it appeared to be touch and go for a while, the moment has passed and the European behemoth has moved, though not much, to accommodate the some of the legitimate demands of Greek citizens and voters. This is good for democracy and good for the pro-European constituencies across the whole of the EU.

The other good thing that the election of Syriza has done for Europe is to force a discussion of important issues that have been brushed under the carpet for far too long. For example, debt sustainability, the pace of austerity, and the manner in which the Eurozone is governed, are only some of the critical matters that have received a lot of airtime in recent weeks thanks to Greece and Syriza’s confrontational strategy. No matter how much conservative political and bureaucratic types may dislike the style of Greece’s Finance Minister, few would disagree that it has brought a breath of fresh air to an otherwise stultifying political space that citizens feel disconnected from. This impact goes far and beyond, showing that EU citizens’ interest in the EU political processes can be reignited.

Whether Syriza fails or succeeds, it has brought a new and different approach to the EU that for many of us, exposed to the soul-destroying mechanics of decision-making in the Eurozone, is a breath of fresh air. One can only wish Syriza, Greece and the Eurozone the best of luck.

Sony Kapoor is Managing Director of Re-Define and Strategy Adviser to the Systemic Risk Centre at the London School of Economics