Wednesday, February 11, 2015

A new start for Greece - essential elements of a deal

by Guntram B. Wolff


February 11, 2015

Greece's new government under prime minister Alexis Tsipras – in power for not even two weeks – has had a rollercoaster ride. In the face of crisis, it has exercised brinkmanship. It unilaterally declared that it would not respect the agreement between Greece's previous government and the country's creditors, and would increase government spending and be insolvent at the same time. The response has been predictable: the rest of the euro area and in particular the European Central Bank and Germany, felt blackmailed and called its bluff. The ECB made access to ECB liquidity more difficult for Greek banks, while Merkel’s administration has signalled that a Greek exit from the euro area is considered manageable.

Arguably, this was a necessary but insufficient response. It was necessary, because a monetary system cannot function credibly if a small part of the union can hold the core of the system to ransom. A country cannot unilaterally decide to increase expenditure at the expense of other parts of the union and hope to receive ECB funding for it. It can also not unilaterally refute agreements between its previous government and the European partners.

However, the response has so far been insufficient. The new Greek government has been voted into office with a strong mandate to change course both with domestic economic policy and in terms of relationships with its partners. Ignoring this vote is not an option. Greeks need a realistic perspective that their daily lives will improve. This perspective cannot be the result of gambling, unilateral action or blackmail. Instead, it needs to be the result of serious domestic action and an agreement between the partners of the Eurogroup. So what are the essential elements of a deal?


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