Greek Leaders Bow to Tough Reforms; Defusing a Nightmarish EU Crisis

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Buguéles, France, July 15, 2015

By Axel Krause

 

Barely a week or so ago, deadlocked, acrimonious  negotiations between Greek leaders and the nation’s creditors over easing record, multi-billion-euro debt and overhauling its stalled economy, conjured up nightmarish scenarios.

The scariest envisioned the first-ever collapse of an EU member, bankrupt, with no euro, and virtually isolated, facing hyper-inflation, a chaotic humanitarian disaster amid protest riots in the streets of Athens, Salonika and other cities; dangerous instability in the Balkans that threatened other, weakened European Union and NATO members and indeed the EU’s goal of ever-closer unity.

European Council President Donald Tusk of Poland warned it was “the most critical moment” in EU history as some world leaders, notably President Barack Obama in private phone talks last week encouraged the key players to try hard for agreement in the interests of EU, regional and global security.

After some seventeen hours of what participants – leaders of the EU, the European Central Bank and Commission plus the International Monetary Fund – described as a  last-chance “tough battle” in Brussels, Mr. Tusk this morning announced unanimous agreement on a “growth package.”

Hard-driving, popular 40-year-old Greek Prime Minister Alexi Tsipras said it averts “financial strangulation” and collapse of the Greek banking system, thus ending the feared Greek withdrawal from the euro currency system; amid guarded praise from hardline conservative German Chancellor Angela Merkel, who quickly warned that a long, difficult and “arduous road loomed ahead for fully implementing the detailed reform measures in the proposed agreement.

And though France’s Socialist President Francois Hollande, who proved the key, staunchest ally of Greece, claimed Europe had proven “capable of solving a crisis that has menaced the euro zone for several years,” and Mr. Tusk’s praised the “serious” reforms called for, many questions remained.

For example, will national parliaments not only in Greece, but other, previously hostile or skeptical EU members, now ratify the agreement? Can the proposals once implemented somehow restore solvent, economic growth to the depressed Greek economy Greece, while significantly reducing the nation’s 25% jobless rate and total national debt of some 320 billion euros, currently equal to some 177% of its GDP, one of the highest rates among the world’s developed economies?

And more broadly, will German-led austerity remain the EU’s dominant economic dogma? That has been repeatedly, harshly criticized by leading American and some EU economists, notably Nobel Prize winner Paul Krugman, for as he wrote last week, it painfully disregards “everything we know about macroeonomics” arguing that “ever-harsher austerity is a dead end.”

Maybe so. Yet that is precisely what the latest Greek bailout plan is about, the third since 2010 that to date has involved payments of some 240 billion euros. Crucially, the new bailout package would provide new loans over three years that could total as much as 86 billion euros from the European Central Bank, the International Monetary Fund and other creditors, notably Germany, France, Italy and Spain.

These fresh funds will, among other things, enable Greece meet a July 20 deadline for repayment of some 3.5 billion euros owed to the Frankfurt-based ESB, one of several looming debt repayment deadlines. Notably for its absence was any hint of a commitment to providing Greece yet another “haircut,” the buzzword for debt reduction.

And reflecting classical supply-side economics, provides for a 10%-hiked turnover tax consolidated at 23%; phasing out substantial tax breaks for millions of retired men and women, increasing the retirement age to 67 and phasing out tax discounts for dynamic,  scattered islands whose hotels and restaurants are a major source of Greek’s national income from tourism; while cutting several hundreds of millions of euros for defense spending (currently at some 4% of Greek’s national budget, roughly double that of nuclear-power France); and privatization of key state-owned entitities, such as key ports, the telecom, electrical transmission and the national railroad companies, plus a vast, development-ripe area outside Athens, once the city’s main airport.

Managing the latter, previously started under the previous, conservative government, and that could be worth some 50 billion euros, will be under the supervision of a new, non-governmental trust fund representing the creditors; dovetailing with another new, governmental body charged with supervising tax compliance for the legendary legions of Greeks who traditionally avoid or hide their taxable personal corporate and property incomes, including the powerful Greek Orthodox Church. Some 12.5 billion euros will be earmarked for direct investments in the depressed economy, the rest for reducing debt.

Government reformers will also undertake tackling widespread corruption, kickbacks on contracts, what France’s daily Le Monde recently described as reflection of the “incestuous relations” between large corporations, media, banks and the Greek political establishments that for many years has dominated the Greek economy, that Mr. Tsipras and his radical, ruling left-wing Syriza party pledged to tackle upon taking office earlier this year.

Responding in positive reaction to the news, according to government estimates, the revenue-generating portion of the bailout package should generate at least some 13 billion euros, as European stocks today rose and the bond marked calmed. Clearly not nearly enough to meet the nation’s looming financial obligations, but a major step forward from where things stood on Monday June 22, the date the current crisis began.

Then Greek negotiators submitted reform proposals, some in the current package, which the International New York Times last week revealed, also involved the Tsipras government’s refusal to cut pensions and tax breaks for the islands. To their dismay, the IMF, the other 18 eurozone nations and the European Central Bank, took a decidedly hardened position arguing for tougher reforms, spending cuts, with no discussion of debt relief until wider reforms were agreed to.

And that, to the dismay of Mrs. Merkel and other EU members, triggered the surprise call by Mr. Tsipras for the national referendum held last Sunday terming the tough conditions as a “humiliation” and “unbearable,” he urged Greeks to vote against the bailout plan, which they did on July 5 by a 61% margin.

To some degree, his reaction reflected the nation’s long tradition of defiance of outside, often occupying rule dating from the 19th century rule of Ottoman Turkey and the following century under Fascist Italy and Nazi Germany. “Even in recent times, Greece has nurtured a culture of protests,” added the New York Times reporting team in Athens. On my most recent vacation visit to Salonika two years ago, I too was struck by both the strong, anti-German slogans heard and seen in the nation’s second-largest city, and also gratitude for substantial EU financial help over many years.

Yet within days, as critics began calling him everything from a high-stakes gambler, wondering if he had caved in, capitulated to the creditors or proving he was brilliantly restoring the nation’s dignity, Mr. Tsipras looked and sounded accommodating. Beginning by easing out his loyal but controversial, flamboyant, rock-star like finance minister Yanis Varoufakis we last described in this space at the end of February, and had become the “bete noire” of not only Mrs. Merkel and her staunchly-conservative finance minister  Wolfgang Schauble with whom he clashed constantly, angrily, violently.

His replacement who took office July 6 is a far lower-keyed, Oxford-educated economist, and Varoufakis’ deputy, Euclid Tsakalotos, 55, who gradually took on the tricky, indispensable role of getting fellow finance ministers and EU leaders to agree on a new bailout plan, though in some ways clearly resembling that of June 22.

His determined, conciliatory role and the ever-present leadership of Tsipras, strongly, closely backed by France’s Hollande and Italy’s leftist-leaning Prime Minister Mateo Renzi, help explain the gradual, successful outcome of this past weekend’s  negotiations, defusing most of the acrimonious, skeptical and lingering doubts among the German, Finn, Slovak, Irish, Dutch, and Baltic states’ delegates around the table. And among fellow Greeks.

Only two days ago, a key minister f Mr. Tsipras’ radical-left coalition, told reporters in Athens that the news in the emerging agreement covers not only painful reforms, but   all-important, creditor commitment to easing the nation’s debt burden and to a greatly-increased bailout sum that initially had been set at some 53 billion euros.

“We will have to live within our means,” she said. “We must support what the prime minister is doing; it’s this, primarily staying in the euro, or catastrophe,” said another party faithful. Responding to a New York Times reporter in an Athens café, another Greek, 41, summed up much of the nation’s sentiment: “There’s no need for uprising,” he said, “we have patience.”

 

 

Axel Krause is the Paris-based contributing editor of transAtlantic Magazine and for decades reported from Europe, including Greece, from Moscow, Central Europe and Washington. He is the author of Inside the New Europe.

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