DIW: After the surrender, allow Syriza to claim victory at home

9/3/2015

By After Marcel Fratzscher*

The negotiations must be about which reforms can be implemented, writes Marcel Fratzscher

Europeans reacted with relief to what is widely seen as surrender last month by the Greek government in tense talks over an extension of the bailout programme for Athens. A return of the eurozone crisis had, it seemed, been averted or at least postponed. But Europe is about to repeat its biggest mistake of the past five years if it is trying to force the Greeks into a capitulation in the negotiations.

The first two Greek rescue programmes since 2010 failed mainly because ownership of the reforms was not taken by previous Athens governments or by the population at large. The governments therefore did the bare minimum required to secure the next programme payment.

At the same time they took every opportunity to attack the monitoring “troika” — the European Commission, the European Central Bank and the International Monetary Fund — and blame Europe and the euro for their plight.

Greece’s only chance to emerge from the crisis is to take responsibility for its reforms. And that can only happen if the government is strong at home. Negotiations can only ever be successful if both sides can legitimately claim victory. Germany knows this all too well.

Alexis Tsipras and his leftwing Syriza party enjoy tremendous popular support. The eurozone should seize this opportunity to help the government transform its popularity into a constructive reform programme, which will require the Greeks to be able to at least fulfil some of its election promises.

Europe must learn from its mistakes for the present negotiations. These talks must focus not on which reforms are best but rather on which can realistically be implemented.

The negotiations should lead to a third programme that addresses three challenges. Greece’s biggest problem is that it has had a failed state. The first two programmes did help improve institutions. The government now has to address the hardest reforms: curtailing the meddling of vested interests that keep markets and institutions from functioning. Syriza, a political newcomer, has a greater chance of success than the old political elites. The EU should push them harder, for example, finally to crack down on tax evasion by the wealthy and break up monopolies.

The second challenge is to close the government’s financing gap. This is rising as economic growth and tax revenues shrink — and will rise further if spending on social hardship is to increase. Greece will need a further €30bn-€40bn in the next three years. aside from reduced spending, Athens will need additional money from European partners.

The third challenge is to make the exorbitantly high sovereign debt sustainable. The best option is not an outright cut in the amount of debt but to link interest payments to growth. If this is low, the government should pay little in interest; if it resumes, more. That would not only improve Greece’s debt sustainability, but also the chances of creditors getting their money back.

The call by some German politicians and economists for Greece to quit the euro is nonsense; this would be the worst possible option for all sides. Greece’s problem is not that its products are too expensive in global markets but rather that it lacks efficient institutions and globally competitive products.

“Grexit” would not fix these problems. On the contrary, it would cause a deep depression, making the implementation of reforms even harder. And Europe would have to write off many of its financial claims.

So let us attempt a fresh start for Greece and give the government a real chance of success. The country can emerge from the crisis only if it takes responsibility for its reforms, and if its government can show something for its efforts and fulfil some of its election promises.

*The writer is president of DIW Berlin, a think-tank

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