Is the troika punishing Greece? Why?

2012-02-15

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Ever since September 2011 or even earlier, we have all been experiencing a crazy rollercoaster ride, regarding the situation in Greece. Every day there is information made public about the “increased” chances of Greece defaulting on its debt obligations, or about a statement of an EU official or other top-ranked politicians which disturbs the overall balance by asking for greater efforts from the Greek government as far as the implementation of its bailout programme is concerned and so on. In short Greece (and we) have been living in an environment of high political and economic uncertainty, which has had all sorts of negative implications on the Greek economy and the prospects of the Eurozone as a whole to recover from its systemic crisis.

Characteristic of this uncertainty – this dithering to be more precise – is that the decisions of the October 26 European Council summit concerning the restructuring of the Greek debt (the so-called PSI programme) and the second bailout to Greece have still not been implemented, even though they were first expected to be completed many weeks ago. To anyone familiar with EU politics, these delays are more than expected, given that the EU is a very complex, lumbering entity that has very poor reflexes, since it is neither a confederation, nor a federation, nor a union of sovereign states; thus lacking a coherent way of acting. Yet there is more to the delay than just the “natural” way things are done in Europe. It has to do with a tough bargaining process that is being held directly between Greece and the troika of international supporters (EU, ECB, IMF) and indirectly between Greece, the troika and the rest of the EU, with extra focus on other countries mired in recession or under bailout programmes.

To begin with: Greece agreed to implement a harsh set of austerity measures back in May 2010, in exchange for the 1st bailout worth €110 billion, that would be given in several installments. The government undertook the responsibility to diminish its deficit, in order to stop producing new debts, while it also committed itself to privatize several entities that belonged (belong) to the public, or even close them down. Whether the Greek government should have signed such a deal is another issue, the point is that it took certain responsibilities towards the troika who provided funding for whatever reason that may be (to save their skins of course, any talk about EU “solidarity” and “partnership” is unreal). For reasons that relate to political culture, incompetence and opportunism, those governing Greece did not stand up to their signatures, failing to implement whatever the agreement included (listen to podcast Greek crisis and Greek pseudo-nationalism). As such the Greek government is no longer considered a reliable partner, hence much stricter conditions need to be envisaged for the ends to be met. In other words, the unreliability of the Greek government has exhausted the patience of other European partners and has made them much less tolerant on all issues concerned. The result is a much harsher treatment than necessary from the side of the troika.

In addition here is what I wrote in a previous article of mine about the factors leading to the Greek failure, which describes the indirect bargaining between Greece, the troika and the rest of the EU:

• Greece was the first country to fall in the domino effect that commenced in 2008 and is still underway. For that the country has received most of the attention all these years, as it is (correctly) considered the weakest link in the euro chain. As such the treatment of Greece should “necessarily” have the following features:
• The European Union needs to show that it does not violate its own rules – the no-bailout clause for instance, or the “prohibition” of debt monetization or eurobonds by the ECB.
• Any support to Greece must be done in such a way so as to avoid moral hazard. In other words Greece must not be given away money which might seem like a “reward”. Instead it has to be “punished” (though such a word will never be used officially) for not complying with the rules governing the Euro architecture.
• The European Union needs to handle the situation in such a way that markets do not lose faith in its capacity to deal with its own issues. Therefore even if the situation in Greece deteriorates, it will be because of the “special” circumstances that apply to Greece – not due to the narrow-sighted troika policies.
• For as long as the broader eurozone is facing its systemic crisis (listen to 30-minute podcast) Greece must not be allowed to default on its creditors as that would (a) trigger a payment of the CDS contracts, with negative implications for the financial system, (b) would mortally wound several European banks that are directly or indirectly exposed to Greek debt, (c) it would create uncertainty about the prospects of other countries mired in recession or under bailout programmes.

In a nutshell the troika is being quite harsh on Greece and there are some good reasons justifying its behavior, while others are completely ridiculous and unfair. The Greek people are suffering firstly because of the irresponsibility and incompetence of their governors, secondly due to the political interests that are involved in the handling of the Greek crisis, which extend well beyond the borders of Greece itself.

Regardless of what will be the outcome of this preposterous shadow play, two things are certain. First the Greek people will continue to experience the worst economic depression in the history of Greece. Second the eurozone will continue to disintegrate. In both cases responsibility falls on all sides and there is no point to put the blame on any particular party. What is now needed the most is collective action and a coherent strategy to deal with our common crisis, something which I am afraid is completely off the table, as policy-makers cling on to their inane policies that have done much more harm than good these last years.