Tag Archives: Greece

Is the Euro worth saving?

Anglo-Saxon economists were always sceptical. And so was much of the British establishment, though less so in the early days. But sponsors of the European dream were determined. And at first European Monetary Union defied the sceptics. But now the dreams are vanished and the only people defending the union seem to be those that have face to lose. Is it all over for the Euro?

It is Greece that seems to prove the scheme’s futility. The Greek government cannot repay its debts; its banking system depends on a bankrupt government for solvency and the European Central Bank (ECB) for liquidity. Greece cannot print its own money to inflate its way out of the hole. Instead European institutions and the IMF have to bail it out, and they are demanding conditions that add up to a loss of the Greek government’s sovereignty over its economic policy. Both sides blame the other, and the more the blame game goes on, the more trust and solidarity break down. The Euro is tearing the union apart, when it was supposed to bring Europe’s peoples together.

It doesn’t take hindsight to see what went wrong. Mostly the scheme’s weaknesses were pointed out at the start. Its supporters (who included me) just thought that this time it would be different.

Monetary policy is set at continental level, and yet there isn’t a great deal of economic integration. In order to adjust to local business cycles and local economic shocks, national governments have only a very limited set of tools. And the most important, fiscal policy, is constrained by the Stability & Growth Pact. This was instituted to try and prevent member governments becoming insolvent, a contingency that the zone had no process to deal with. This made it quite unlike a federal system, like the US, the only comparable monetary system that most knew. In the US there is a strong federal level of government, which draws substantial taxes from all parts of the union, and can make big fiscal transfers between the union’s members to compensate for the lack of monetary flexibility.

Funnily enough the problems with this set up did not play out in the way that most critics foresaw.  They thought that different business cycles or local shocks in different parts of the union would be the big problem. This happened – especially when the central economies of Germany and France endured recession, while peripheral economies, such as Spain and Ireland fizzed. But these were not the main cause of the crisis that emerged following the global financial meltdown in 2008.

The first problem was that investors assumed that member governments could not go bust, and that if they got into difficulties somebody would bail them out. As a result, it became much easier for the peripheral governments to borrow, and this allowed them to run their economies with a looser hand than they should. This was most egregious in the case of Greece, who produced misleading economic statistics, which put their government into a completely unsustainable position. And when it was clear Greece could not repay its debts, the system had no set of processes with which to manage the crisis.

Perhaps Portugal and Italy were guilty of something similar without the fraud, though Italy has not needed a bailout. But the other bailout cases (Spain, Ireland, and Cyprus, though I am less confident that Cyprus follows quite the same narrative) the main problem was not government finances, but a reckless private sector that fuelled property bubbles. What added fuel to these bubbles was cross-border flows from elsewhere in the Euro area, and especially German banks. The Euro system had greatly facilitated such flows. When the bubble burst, it brought down the countries’ respective banks, and this in turn draw their governments down with them. Governments couldn’t let the banks go bust, since they controlled local payments systems and economic chaos would have resulted. Like Greece these countries then needed external support and bail-out.

The important point to make about this series of crises was that they were to great extent “endogenous” as economists like to say – they have to do with the way the system itself operated – and not exogenous – the external shocks and uncontrollable factors which most economists thought was the system’s weakness. That suggests that bad systems design was a large part of the problem – and that, in theory, could be fixed. Most suggest that it implies a fully federalised system, with a federal government, supported by federal taxes and federal debt. An alternative route would have two main elements: a national insolvency regime (a bit like US states, but not Puerto Rico, which is on the path to creating a US version of the Greek crisis); and banking reform to produce a more federalised banking system firewalled from member governments.

But either route would leave member governments facing a grim reality. The Euro offers a straitjacket for government finances, and not a liberation. In the fully federalised case, the scope of government responsibilities would be curtailed and handed over to a federal government. In the alternative governments would be heavily restricted by their ability to borrow in financial markets (which would do away with the need for the Stability & Growth Pact). This latter is, in fact, what many supporters of the Euro (including me) envisaged all along (though in my case I completely failed to grasp the difficulties of managing the banking system). It was rather a Thatcherite project. But others thought EMU would be a step along the path towards a federalised Europe. It was the unresolved conflict between these two visions of the Euro that got the system into its current mess.

And this conflict is still unresolved. But the federal vision is losing ground; there simply isn’t the political support for it. That doesn’t stop people in the European Commission from quietly pushing for it though. But those who aren’t convinced by the federal idea, aren’t convinced by the multi-state currency area alternative either. Why opt for a straitjacket? Wouldn’t it be more democratic and easier to say goodbye to monetary union altogether and let each country go its own way with its own currency?

And I don’t have the answer to that. One thing I will say is that the quality of economic commentary in the media is pretty dire. From this you would think that the advantages of having a floating currency make doing anything else foolish. But all Economics students are asked to do an essay on the pros and cons of floating currencies, and frankly it is not that obvious that either route is a winner. As a rule, the smaller and more open the economy, the more there is to be said for a fixed currency regime – which is why the Euro is popular with so many smaller EU members. Floating currencies reduce the effectiveness of fiscal policy, especially in such small and open economies. The rather loose fiscal policy of the Britain’s government in the 2000s caused the exchange rate to be too high, leading to a trade deficit and a hollowing out of British industry the country still have not recovered from. By contrast Germany has been able to maintain its industrial base within the Euro, albeit with some painful restructuring.

And a floating rate does not prevent banking bubbles. Iceland had one in parallel with Ireland, with its own currency. Recovering from the bust best no less painful for Iceland than for Ireland, though arguably not really any worse either.

But setting up a more secure banking system across the Euro area is no small thing, and its feasibility is an unknown. Against this, taking the Euro apart would be a huge undertaking, so there is there is much to say for trying to make it work on a rather less ambitious scope. Inertia is on the side of the Euro. But the starry-eyed enthusiam is gone

 

 

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Greek crisis: the problem is loss of trust

The leaders of Greece’s Syriza government are clever people. They include university academics, well versed in modern economics, including game theory and the theory of negotiations. After yesterday’s decisive No vote in the referendum on settlement terms, these negotiators now feel they have a strong hand. I don’t share their optimism.

Unless you believe the conspiracy theories that Syriza’s real aim is to create a Venezuela in the Mediterranean, they appear to think that their EU counterparts and the IMF will be forced to negotiate because the consequences of not doing so are dire. What they seek are two things. First is that the level of government debt be reduced through forgiveness. The second is that the Greek government has a free, or freer, hand to follow an economic policy of its choosing, supported by fresh funding, primarily in the form of support for the Greek banking system by the European central Bank (ECB).

On the face of it neither of these requests is all that unreasonable. The moral case for debt forgiveness is a sound one. In the modern age more responsibility needs to be pinned on creditors to lend responsibly, and to suffer losses otherwise. The lending made to Greece before the crisis was not responsible, although misinformation from the Greek government contributed. This moral case is softened but still stands after two things. The Greek debt has already been substantially restructured so that the country’s interest rate burden is proportionately less than even Germany’s; the net present value of Greece’s debt is not nearly as high as you might assume for its nominal size. And now the debt has been taken over mostly by government agencies; the private sector banks that originally lent the money have mostly been paid off, after significant losses were forced on them.

And as for economic policy, the nominal Greek aim is to set up a virtuous circle of increasing demand that will help the economy to recover, so that its banks can repay the ECB, and that other lending becomes more sustainable. There is a familiar, Keynesian demand management logic to this. I think this is why so many respectable economists (especially based far away in the US)  support the Greek government’s standpoint. There is also a powerful argument about democracy – surely a democratic Greek government should choose its own path to a sustainable economy? The sight of so many unelected functionaries dictating terms to the Greek government has angered not just Greek citizens. I have seen many comments this morning about how the Greek referendum vote was a blow for democracy. The People have spoken!

So what’s the problem? International leaders are masters of fudge and pragmatism. Surely some kind of face-saving formula can be found that will be better than the consequences of a collapse of the Greek banking system? This is now a clear and present danger. Greeks having been withdrawing deposits from their banks, making the system insolvent. Since this looks like a temporary problem, the ECB has been prepared to prop the system up with emergency funding, awaiting the return of those deposits once a new deal has been struck. But last week this support was cut off, as the confidence of European governments was shaken about the ability to do any deal, when the Greek government called the referendum. With the referendum done the outgoing Greek Finance Minister, Yanis Varoufakis, suggested that this funding would return while a new and more reasonable deal was in prospect. Mr Varoufakis, who had taken to lecturing his European colleagues on basic economics, even resigned to make such a deal easier to negotiate.

But all negotiations are built on trust. You have to believe that your counterpart will stick to their side of the deal. And this has always been the problem with Greece and its creditors. What these creditors fear is that the Greek government do not put their economy on the path to true sustainability, and that it and the country’s banks will continue to need injections of foreign money without any real prospect of these being repaid. And this further support will have to supplied or underwritten by fellow European governments. There is little feeling of solidarity with the Greeks from other European electorates. Better off countries, like Germany, Finland and the Netherlands are outraged about the prospect of more taxpayers’ money being sent to countries that they see as feckless. Many east European governments, like Slovakia or Lithuania, are poorer than the Greeks overall, and see no reason to let the Greeks off; in some cases they have been forced to endure harsher austerity regimes than the Greeks were. Governments in other countries that have been subject to bailouts, Spain and Portugal in particular, do not want to give an easy victory to Syriza, lest it encourage similar movements in their own countries.

And why isn’t the Greek economy sustainable? This is a familiar combination of corruption, clientalism and ineffective government. Tax collection is inefficient; many benefits are too generous; there are too many meaningless publicly funded jobs. Many Greeks are entrepreneurial and hard working, but overall the economy does not pay its way – consumption is sustained by net imports. To create something more sustainable would require a programme of reforms, most of which would be politically unpopular. They would also suck demand out of the economy in the short term, i.e. they involve what has become known as “austerity”. Some theoretical economists, like Joe Stiglitz and Paul Krugman, seem to think that economic reform programmes can be designed without austerity. But this requires a favourable context and an efficient government – which does not apply here. The commonest way for such reforms to be imposed is through the government following a programme designed by outsiders, such as the IMF. Or else it is the threat of such an intervention that forces governments to act. These outsiders become convenient scapegoats, but in the longer term the reforms may be popular, as they deliver a healthier economy.

But the hidden background to the current crisis is that the Syriza government has not offered any convincing programme of reforms, while reversing reforms enacted by its predecessor. You wouldn’t guess this from listening to their smooth-talking spokespeople on the international media. But the Syriza movement contains many with more extreme, anti-foreigner views, limiting the government’s ability to act. The IMF in particular have found their plans utterly unconvincing. Politically they seem happy to go after rich people to tax them more. But rich people’s money is a notoriously elusive quarry; and the government is unwilling to take on any other reform with a political cost.

So what are the European governments to do? They are the critical parties on whom a deal depends. They have been humiliated by the referendum. Their electorates are telling them to not throw good money after bad. Their expert advisers suggest the Greek offers of reform are unconvincing, which means that the crisis will simply repeat itself. Over the years they have increasingly embraced an idea that had been unthinkable: that countries may be able to drop out of the Eurozone. The political costs of a negotiating failure have never been lower.

So what might happen? This depends in some measure on how well-prepared the Greek government is for this moment. If they have in their back pocket a credible compromise deal that saves some face for the European governments, we might pull back from the brink. Mr Varoufakis’s resignation is a good start, it has to be said.

What are the ingredients of such a deal? The Greek banking system must be at its heart. The banks must be recapitalised using external capital. They need to be insulated from the Greek government – in other words the money supplied by outsiders shouldn’t be simply channelled into government debt. Something needs to be offered to reduce the principal of older debts – though perhaps the interest bill can be kept intact. The Greek government can then be left to work its own way out of its short-term economic problems.

Such a deal would point towards the sort of reforms that might make the Euro more sustainable. Separating the banking system from government, with a more centralised regulatory and ultimately deposit insurance scheme. A resolution system for insolvent governments that means debts can get written down quickly. More nominal freedom for government fiscal policy – with discipline forced by bond markets, not EU agencies.

Such a deal would be a way forward. But it still needs trust. Alternatively the Greeks will have to create a quasi-currency of their own to keep their banks afloat – a first step towards the Euro exit. I am not optimistic.

 

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The European dream slowly unravels

I am one of nature’s political optimists. But 2015 is one of those years where it is all going wrong. The Lib Dem near wipe out in this year’s UK General Election, for one thing. The rise of Islamic State is another – along with the spread of vicious Islamophobia promoted by such outfits as Britain First. Meanwhile state after state in the Middle East and Africa is failing, with vicious dictatorships taking hold in other countries. This gives Israeli hardliners the cover they need advance their own brand of apartheid, and the ghettoisation of Gaza. Any attempt at finding a humane middle way is undermined by extremists of one sort or another, in country after country.

And now, as Gideon Rachman points out in yesterday’s FT, the European dream is dying before our eyes. The idea of ever closer European union was one of the formative ones in my own politics. In 1975 I was a 17-year old that was definitely ready to vote in that year’s British referendum on Europe. I’m not sure why it should have caught my imagination so – I grew up in postwar prosperity, where the World War was just an interesting piece of history. I suppose I found British society so staid and constricting that I wished for its institutions to be subsumed into something much more modern and exciting. I meet many people of my age that feel the same way though.

But apart from opening out British society and commerce, the EU represented a path towards civilised governance and prosperity for the undemocratic countries on its fringes. Greece was the first country to take the path of throwing off dictatorship and coming in to the mothership of Europe. 35 years on and the achievements look hollow. Greece took on the trappings of a well-managed European democracy but did not take it to heart. It remained run by a rich elite which did as it pleased, while bribing the rest of society with generous pensions and meaningless public sector jobs. They became artful in keeping that show on the road by extracting grants and loans from the rest of the union at the same time as disregarding rules they did not like. They even managed to join the Euro, reducing borrowing costs, and allowing the fiction of a properly functioning European state to continue. But sooner or later the music had to stop. And when it did the foundations of the European project looked shallow. There is an absence of trust and solidarity.

The Greeks themselves, or at least those that govern them, seem in denial about the sort of reforms that will be needed to get them on the path to prosperity. They claim to be victims, condemned as to doom-spiral of “austerity”, with many Anglo-Saxon economic commentators (Noble Laureates Paul Krugman and Joseph Stiglitz among them) cheering them on. But dig a bit deeper and we find that words such as “austerity” and “reform” have been abused so that a lot of the dialogue is at cross purposes. The Syriza government wants to reform some aspects of the Greek state, but sees no problem with those aspects that I have referred to as “bribery”: maintaining ineffective public sector jobs and unaffordable state benefits, such as pensions.This leads to the suspicion, especially amongst Germans, that all the Greek government want to do is to keep the old, failed way of running the state on the road, lurching from bailout to bailout, using moral blackmail each time.

The Germans, of course, are hardly blameless. Their banks kept the Greek show on the road, in the apparent anticipation that their government would bail them out if things went wrong. That expectation proved sound enough – most of the bailout money went to them, and practically nothing towards providing the investment the Greeks so badly need. The Greek government’s moral case is not entirely hollow – but their combative approach to negotiation is destroying trust. No wonder that British Eurosceptics urge the UK government to emulate such tactics in their dealings with the EU! Even now the Greek Prime Minister, Alexis Tsipras, suggests that a No vote in the forthcoming referendum is just a step in the negotiation, not a real moment of decision. Those European leaders who have been trying to fudge things to get a deal, like Claude Juncker, the President of the EU Commission, feel betrayed.

The prospect of Greece dropping out of the Euro and then the EU is steadily growing. This would be a calamity for Greeks, and raises the prospect of yet another failed state. As more than one commentator has suggested, if the Greek ruling elites had what ti takes to run an independent monetary policy, they would not have got into this mess in the first place. It would mark a big moment for the EU too. Its first major defeat. But it has limited powers; it cannot make an unwilling partner reform itself.

And old Europhiles like me must wake up and acknowledge the truth behind that. Our dream cannot be fulfilled. The EU is a confederation, not a federal state. It cannot bind its members by force of arms, as the United Stares did when some of its members tried to secede over 150 years ago.

The question now is whether the EU can survive a Greek exit, or will it be the start of a general process of disintegration. Greece is not the only country to be a cause for concern. The other bailout cases -Spain, Portugal and Ireland – were always more serious about reform and integration, and I do not see these as being of immediate concern. Cyprus, with its cultural ties to Greece, may be different. But the future integration of Hungary, Romania and Bulgaria are far from secure.  At least they are not members of the Euro.

Greece seems to be the lesson that the EU learns by. After its entry to the Euro, the EU became much stricter about allowing further new members. After its flawed bailout, which let many private sector investors off the hook, it was much stricter with Cyprus.

But what is emerging is a different Europe. One where much less solidarity is expected. And one with an Exit door. It is a system of rules and standards that facilitate free trade, environmental cooperation and good governance – but one where it if you fail you are out. Integration is not necessarily in one direction. The union will no longer be ever closer.

Into this sad situation the British Prime Minister David Cameron enters with his attempt at British renegotiation, leading to a referendum. This may seem to be the last thing that Europe needs. But Mr Cameron’s negotiating skills are far more advanced than Mr Tsipras’s, and he is showing much more application than hitherto. This cloud offers a silver lining. It may define a looser union, but if the British public votes to stay in it will offer a counter-narrative to the slow disintegration that is happening elsewhere. Such is what is left of my European dream.

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Greece: can you have reform without austerity?

The standoff between the Greek government and most other EU governments continues. The other governments are happy to extend loan facilities, but only if Greece stands by the conditions it had previously agreed. For the Greeks that is anathema, because it means holding to austerity. Many observers here in Britain seem to sympathise with the Greek side. And they offer a middle way: reform without austerity.

Three columns in the FT make the case. I have provided links, but beware – the FT operates a paywall with a very limited number of free goes. First was the weighty (intellectually) Martin Wolf. He condemns the EU programme for focusing too much on austerity and not enough on reform. Austerity sucks demand out of the economy, causing mass hardship; reform would make Greece’s economy more efficient. Next came the intellectually much lighter Tony Blair: Two false paths for Europe – and a new third way. This puts the idea into more overt political terms, though conjuring up memories of his own British “third way” that was politically successful for a while, but whose reputation is now somewhat tarnished. As an aside this is interesting because it shows that Mr Blair accepts uncritically the basic left wing economic narrative – looser fiscal and monetary policy will lead to growth. On Monday was regular FT columnist Wolfgang Munchau: Athens must stand firm on failed policies. This is positively vitriolic about the EU conventional wisdom on austerity, which he regards as economically illiterate and a complete failure. This article contributes to the picture by exploring Greece’s options in the event of breakdown, including the intriguing one of the country printing its own money.

So what to think? Austerity refers to the reduction of public spending and the increase of taxation. It is considered economically counterproductive because it sucks demand out of the economy, which in turn knocks tax receipts – which makes things worse by creating a downward spiral. In Greece’s case the object of vitriol is the target that the government should run a primary budget surplus of 3% , to pay for debt interest, which comes to about 3%, after the recent restructurings (and a remarkably low figure for debt of 175% of GDP). Surely even prudent governments should be allowed a deficit in a recession? So what about reform? It is here that each of these commentators is awkwardly silent. Just what on earth do they mean?

Economic reforms to promote efficiency usually mean changes to product and labour market regulation to make them more open to free market forces. These are undoubtedly required in Greece.  But they promote short-term insecurity to jobs and businesses. They are not politically popular, and I doubt very much that there that the Greek public distinguishes between these reforms and austerity. They all part of the same hateful phenomenon.

And the problem goes deeper. Regulation tends to create public service jobs., which deregulation threatens. Besides it is the scale of the public sector, both in terms of jobs and transfer payments, that is a large part of the problem. In several ways this undermines a dynamic private sector. They tie up resources; they undermine labour markets, and so on. For too many people the way to wealth involves politicking rather than delivering things that people actually need and want. And so reform often means cuts – which is back to austerity.

In fact to find ways of stimulating demand without blocking reform is quite hard. There is the economists’ old favourite: investment. But efficient public investment requires an efficient state to direct it. Otherwise the money simply lines the pockets of well-connected people. Surely Greece is vulnerable to this? More bank lending? Another can of worms. Frankly I will not be convinced that reform without austerity is a possibility until somebody can spell out a programme which delivers it. The Greek government is proposing a reversal of both austerity and reform. Once again British (and American) economists are guilty of using macroeconomic analysis to skate over practical problems that turn out to be the very heart of the issue.

There may be some hope a middle way though. Perhaps some fudge around economic cycles can be used to cut the target for primary surplus. And there must be some opportunity to reshape the austerity/reform programme to put more weight on collecting tax from wealthiest – which the new Greek government seems much better placed to do that the last.  Alas I am too far away from it all to have any feel for how likely such a deal might be. All I will say is that British commentators are generous with the taxpayers’ money of other nations, but their credibility would rise if they suggested that British taxpayers should join in. All the talk of respecting Greek democracy would then be put into a clearer perspective.

Meanwhile it seems quite likely that there will be some kind of Greek default. Following Mr Munchau it looks quite likely that the Greek government would issue some form of electronic currency of its own, in the from of IOUs, to keep things going. This may well be against the letter of the rules for the Euro area, but it could buy enough time for a compromise to be reached. And perhaps the development of a safety mechanism for the Euro currency area. The Eurozone needs to find some sort of middle way between the inflexibility of a gold standard, and the creation of a federal state without democratic consent. Might what amounts to local currencies be part of this?

Meanwhile, as the saying goes, if something looks too good to be true, it probably is. That is surely the case for reform without austerity. Sorry Mr Blair.

 

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Syriza’s victory. This is going to end badly for somebody

Last weekend the anti-establishment, far-left party Syriza won the general election in Greece, and did better than most people forecast. Under Greece’s unique electoral system, which gives the largest party a bonus of 50 seats, they almost won an overall majority. Guardian journalists jumped for joy. For them it showed that their hated austerity policies can be challenged and beaten. Elsewhere there are quite a few calming voices; things can be worked out, seemed to be attitude. Both views are naïve.

First, in fairness, a couple of positive things need to be said about Syriza. The Greeks have been badly let down by their political establishment, represented in two political parties: New Democracy and Pasok. And yet it is these establishment parties that have been entrusted with sorting the mess out so far. Syriza are coming to government with fresh eyes and should be in a better position to clean things up and distribute the burden more fairly. They should certainly be given the benefit of the doubt for now.

And one of their central positions, that Greece should be forgiven much of its debt, is perfectly coherent. We need more caveat emptor from buyers of sovereign debt. Repayment of debts is not a sacred duty that comes before basic human needs. A more liberal attitude to debt is one of the ways in which progress can be made in unfamiliar economic environment we find ourselves in. There are, of course, trying consequences to such liberality: it will become more difficult to borrow.

That I think is were the more moderate commentators start. But difficulties with Syriza’s position start come thick and fast after that. This is what Syriza’s leader Alexis Tsipras said immediately after his victory:

Greece is leaving behind catastrophic austerity, it is leaving behind the fear and the autocracy, it is leaving behind five years of humiliation and pain. Your mandate is undoubtedly cancelling the bailouts of austerity and destruction. The troika for Greece is the thing of the past.

This is rage against austerity: the need to cut back government expenditure and raise taxes in response to the economic crisis. And this is what those Guardian writers like. The left wing narrative, applied to countries as diverse as Britain, France and Greece, runs something like this. In the 1980s a malign conventional wisdom infected the governments of the western world: neoliberalism. This sought to reduce the scope of government and regulation, and in its place rely on free markets.  All this did was to enrich an elite at everybody else’s expense. And it ended in banking madness that led to economic collapse in 2008. And yet these neoliberals remain in charge! They have used the crisis as a reason to pursue austerity policies. But these policies are an evident failure: everywhere they have been applied growth has been stagnant. When will the world come to its senses, reverse austerity and let growth return?

Syriza’s victory will test this narrative to destruction. The first problem is the debt renegotiation. Sovereign debt is about 175% of Greek national income. This sounds unsustainable. Surely all Syriza is doing is asking for common sense to be applied so that everybody can move on? But all is not what it seems. The size of that debt is a bit of an accounting fiction. Debtors have already conceded a lot on both interest rates and repayment schedules; the debt is not anything like as burdensome as the headline figure suggests.

And there are powerful reasons for preserving that accounting fiction. First, outright debt forgiveness is unpopular right across northern Europe – and not just Germany. Conceding ground on it will nourish the far right from France to Finland. And of course, it will undermine mainstream governments in Europe’s periphery: Portugal, Ireland, Spain and even Italy. The original Greek deal, put together with the hated Troika (the European Commission, the European Central Bank and the IMF) was an elegant compromise designed to balance these destructive forces. The best the Greek government can hope for is a bit more of the same fudge. Allowing Greece to drop out of the Euro and the EU would be very destabilising for the rest of Europe; but it is hardly clear that conceding a lot of ground to “renegotiation” (a euphemism I have always hated) is any better.

And then there are those austerity policies on which the Troika have insisted. These are often portrayed as economic nonsense by the left, because of their effect on aggregate demand, which leads to a sort of doom loop. That is indeed a problem, but their fundamental aim is to put the Greek economy on a sustainable footing. Government expenditure and taxation were way out of line with each other; Greek industry was internationally uncompetitive. Unless these problems are tackled no solution is credible, which means that nobody will lend the Greek government money. Read the more thoughtful “Keynesian” critics and you will suggest that stimulus is focused on initiatives that do not undermine sustainability – infrastructure investment is a favourite. And that, as I have pointed out before, is not as easy as it appears.

Now the Syriza leaders are not stupid, even if some of those Guardian commentators are. Elements of their programme address the issue of sustainability: improving tax collection and targeting the wealthy elite more effectively. But many of their promises seem to go in the absolute opposite direction – reinstating government jobs and raising salaries; reversing changes to employment protection.

Now it is possible to sketch out a fudged way forward; changing the balance of Greece’s reforms, allowing a little more short-term slack, and a little more debt rescheduling.  But how is this “leaving behind catastrophic austerity”? It is impossible for Syriza to meet the expectations it has raised. The Vox Pops broadcast by the BBC over the last week or so suggest that the Greek voters themselves largely understand this – which is one reason to think that maybe such an outcome is what is in store. Mr Tsipras will simply follow the trail blazed by France’s Francois Hollande. In that event it will be the far left in other countries that will be left empty handed.

But a Greek exit from the Eurozone, and the EU, is the other likely outcome. If that happens Greece will indeed have banished the Troika and liberated itself from its debt burden. But the austerity that the Greek populace have suffered to date will look tame.

There is very little middle ground. This is not going to be an easy year. Behind that we can see a flaw in the leftist narrative. The economic policies of the 1990s and 2000s did not just benefit a wealthy elite in developed countries; benefits were spread right across society, including an expansion of government programmes. But these advances were built on sand. Lacklustre growth since 2008 is shaped by fundamental economic forces. It is the new normal. We had better get used to it.

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The Greek elections – what actually happened?

The media coverage of yesterday’s critical Greek election has been truly appalling.  The BBC and newspaper websites simply tell us that New Democracy has “won” and that Greece is now on course to form a government that is more accommodating to the EU.  But New Democracy won last time, and this time Syriza did well.  So why have things changed?  Some of the websites give you the projected numbers of seats that each party has won.  But they don’t well you how they compared with last time – i.e. how many seats each party gained or lost.  The Economist, usually much better at telling you the relevant facts, is as yet saying very little.  To find out what actually happened you have to go to Wikipedia.

So what did happen?  New Democracy won an extra 21 seats.  PASOK, the other establishment party, lost 8 – so there was a net gain of 13 for the establishment.  Syriza gained 19 seats – but at the expense of a whole range of other anti-establishment parties.  Last time the two establishment parties fell just two seats short of a majority in parliament – and as no other party would give them any leeway, no government could be formed.  Now, between them, they have 162 seats in the 300 seat parliament – a majority.  What’s more the one “centrist” party – the Democratic Left, which lost 2 seats – was too frightened of Syriza to join a coalition last time, but seems happy to talk this time.  It has 17 seats, which would make up a comfortable majority, but even more importantly it would help give the government legitimacy – since the establishment majority only comes courtesy of the 50 seat bonus the Greek system gives to the leading party.  The three parties together would have a majority without this bonus, though not if the bonus had gone to Syriza.

Hope that helps.

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