A New Deal for Greece
ATHENS – Three months
of negotiations between the Greek government and our European and
international partners have brought about much convergence on the steps
needed to overcome years of economic crisis and to bring about sustained
recovery in Greece. But they have not yet produced a deal. Why? What
steps are needed to produce a viable, mutually agreed reform agenda?
We and our partners
already agree on much. Greece’s tax system needs to be revamped, and the
revenue authorities must be freed from political and corporate
influence. The pension system is ailing. The economy’s credit circuits
are broken. The labor market has been devastated by the crisis and is
deeply segmented, with productivity growth stalled. Public
administration is in urgent need of modernization, and public resources
must be used more efficiently. Overwhelming obstacles block the formation of new companies.
Competition in product markets is far too circumscribed. And inequality
has reached outrageous levels, preventing society from uniting behind
essential reforms.
This
consensus aside, agreement on a new development model for Greece
requires overcoming two hurdles. First, we must concur on how to
approach Greece’s fiscal consolidation. Second, we need a comprehensive,
commonly agreed reform agenda that will underpin that consolidation
path and inspire the confidence of Greek society.
Beginning with fiscal
consolidation, the issue at hand concerns the method. The “troika”
institutions (the European Commission, the European Central Bank, and
the International Monetary Fund) have, over the years, relied on a
process of backward induction: They set a date (say, the year 2020) and a
target for the ratio of nominal debt to national income (say, 120%)
that must be achieved before money markets are deemed ready to lend to
Greece at reasonable rates. Then, under arbitrary assumptions regarding
growth rates, inflation, privatization receipts, and so forth, they
compute what primary surpluses are necessary in every year, working
backward to the present.
The result of this method, in our government’s opinion, is an “austerity trap.”
When fiscal consolidation turns on a predetermined debt ratio to be
achieved at a predetermined point in the future, the primary surpluses
needed to hit those targets are such that the effect on the private
sector undermines the assumed growth rates and thus derails the planned
fiscal path. Indeed, this is precisely why previous fiscal-consolidation
plans for Greece missed their targets so spectacularly.
Our government’s
position is that backward induction should be ditched. Instead, we
should map out a forward-looking plan based on reasonable assumptions
about the primary surpluses consistent with the rates of output growth,
net investment, and export expansion that can stabilize Greece’s economy
and debt ratio. If this means that the debt-to-GDP ratio will be higher
than 120% in 2020, we devise smart ways to rationalize, re-profile, or
restructure the debt – keeping in mind the aim of maximizing the
effective present value that will be returned to Greece’s creditors.
Besides convincing
the troika that our debt sustainability analysis should avoid the
austerity trap, we must overcome the second hurdle: the “reform trap.”
The previous reform program,
which our partners are so adamant should not be “rolled back” by our
government, was founded on internal devaluation, wage and pension cuts,
loss of labor protections, and price-maximizing privatization of public
assets.
Our
partners believe that, given time, this agenda will work. If wages fall
further, employment will rise. The way to cure an ailing pension system
is to cut pensions. And privatizations should aim at higher sale prices
to pay off debt that many (privately) agree is unsustainable.
By contrast, our
government believes that this program has failed, leaving the population
weary of reform. The best evidence of this failure is that, despite a
huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).
Additional wage cuts
will not help export-oriented companies, which are mired in a credit
crunch. And further cuts in pensions will not address the true causes of
the pension system’s troubles (low employment and vast undeclared
labor). Such measures will merely cause further damage to Greece’s
already-stressed social fabric, rendering it incapable of providing the
support that our reform agenda desperately needs.
The current
disagreements with our partners are not unbridgeable. Our government is
eager to rationalize the pension system (for example, by limiting early
retirement), proceed with partial privatization of public assets,
address the non-performing loans that are clogging the economy’s credit
circuits, create a fully independent tax commission, and boost
entrepreneurship. The differences that remain concern how we understand
the relationships between the various reforms and the macro environment.
None
of this means that common ground cannot be achieved immediately. The
Greek government wants a fiscal-consolidation path that makes sense, and
we want reforms that all sides believe are important. Our task is to
convince our partners that our undertakings are strategic, rather than
tactical, and that our logic is sound. Their task is to let go of an
approach that has failed.
Yanis Varoufakis is Greece's finance minister.
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