Thursday 3 May 2012

Why the "Memorandum" Will not be Changed

By my count, every single party running in the current Greek elections is running against some aspect of the “Memorandum” (Greek: μνημόνιο). The most extreme parties are the smaller ones, such as LAOS, who state that they will expel the Troika’s monitoring team from Greece and form a grand coalition of southern European states to force the northern states to invest in “development.” Others on the left promise worker ownership of state assets (translation: nationalisation) and, at the extreme left, exit from the Eurozone.

Even the two main parties are hard-pressed to translate their promises of “resistance” or a better policy mix. Antonis Samaras gave a town hall meeting-style event at Lavrio yesterday. He was asked by a civil servant at the Ministry of Economics what could be done to avert the promised lay-off of 150,000 public sector workers. It was an answer he ducked with electoral boilerplate: that we need to re-deploy, hire some, allow natural departures to occur, etc.

PASOK has taken a different tack, promising an exit from the “Memorandum” (translation: an end to austerity) in 3 years: this is legally and financially impossible. The Memorandum stays in place until the loans are repaid or refinanced.

The reason he ducked the question is because the Eurozone creditors, ECB and IMF have put strict conditions on the disbursement of the bail-out packages. These can be seen on the Ministry of Finance’s website in English. These conditions have been approved by the Greek parliament with a majority vote, although of course certain politicians will no doubt claim they were not informed, or lied to, or tricked, or they did not read the Memorandum even while they voted for it.

These conditions were also the product of negotiations between the three parties supporting the Papademos government (PASOK, ND, LAOS). They carry the personal signature of two of these leaders, Samaras and Venizelos. LAOS withdrew from the government and voted against, except two MPs who subsequently defected to ND.

Parenthesis: to suggest, as Mr. Karatzaferis did in his recent press conference, that he was not aware of the conditions of the second bail-out, or doesn’t today understand its conditionality structure, is pure hypocrisy. He was involved in every session of its negotiation. He did, however, withdraw from the government before voting against it.

If we look at the conditionality in the second bail-out, there are a number of clauses which many people, providing they actually read it, will support:

·    Reduction of the public sector through headcount reduction, most of which is through attrition, early retirement and a hiring freeze
·    Reduction in public spending on generic and branded pharmaceuticals and pharmacist margins
·    Restructuring of government operations
·    Better budgeting, auditing and spending controls
·    A clearer plan for privatisation
·    Reduction in employer IKA contribution rates (net fall from 44% to 39% payroll costs)

The irony is that while many of these conditions actually promote smaller government and a free(er) market economy, many of those who profess themselves to be liberals are against them.

The objective economic and restructuring problems that the government faces, however, are manifest:

·    The way in which many reforms have been implemented have reduced middle-class and working-class pensions and wages to unsustainable rates, particularly given the cost of living, poor quality of public sector services, the low starting point of most pensions and wages, and high taxation. This has had the effect of driving hundreds of thousands of people into abject poverty and wage slavery, given that bank loans have remained at current values.

·    The reforms have not been prioritized or implemented correctly, giving the impression that while the government sector remains intact, the private sector is suffering. Nothing could be further from the truth. The government has made efforts to improve state operations, and the total headcount has already declined significantly. Yet many initiatives have been stalled (some due to objective complexity, some due to political manipulation). In fact, had interest and emergency social spending paid by the government not doubled between 2010 and 2012, Greece would be largely in line with its deficit reduction targets at the present time. 

·    There are no victories to speak of which the average citizen can understand or related to. At the same time, the economic cycle continues to deteriorate, with business closures and unemployment increasing. PSI, which is the largest single debt restructuring in history, and which represents a major achievement, is ignored or misunderstood by both voters and politicians.

·    By front-loading cuts in expenditure and higher taxes, accompanied with the longer-term loss of competitiveness and the shorter-term recession, the government is exacerbating both the GDP decline, higher unemployment and lower wages. Unfortunately, this is inevitable (absent nationalisation or expropriation of assets) given Greece’s fiscal situation.

No amount of pre-election promises change the fact that Greece has signed these conditions, and will be expected to adhere to them by its creditors. While minor points may be negotiated, no one is counting on a full renegotiation, or changes to any of the core points. To suggest otherwise is to engage in either deliberate misinformation or very wishful thinking.

We should not forget that the bail-out funds have been granted in their large majority by European taxpayers from other Eurozone countries. Their tax income (through sovereign lending) is paying for the continued operation of the Greek government, including the payment of pensions, healthcare costs, wages, and every other spending line. Some of these countries are actually borrowing at a higher rate and lending Greece at a lower rate, so not only are they increasing their liabilities, but losing money on the loans to Greece in the process.

Should a new political constellation now emerge and say that Greece will not stick to its promises, despite the fact that its European partners have already complied with theirs (PSI has taken place, the large majority of the two bailouts has been disbursed), then Greece truly has no place in the Eurozone or the European Union.

It would be a betrayal of epic proportions, and would establish the reputation of Greece and the Greeks for generations to come in terms I prefer not to write on this page.

The root causes of the Greek debt crisis remain the same: high public spending and high tax evasion. This has been leavened by all the other issues we are familiar with: corruption, nepotism, recycling political incompetents, a dysfunctional justice system, etc.

These are purely Greek domestic issues and Greek outcomes, and they have to be solved in Greece according to its European obligations. The sooner this is accepted and resolved, the sooner the crisis will end.

© Philip Ammerman, 2012

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