Stalemate can be replaced with sanity in eurozone dealings with Greece

8/4/2015

By Reza Moghadam *

If Athens cannot deliver critical reforms, it better leave the eurozone, writes Reza Moghadam

Τhere is a growing sense of fatalism about Greece. Negotiations with the eurozone are not working. Indeed in their current form they are dangerous, prone to triggering a recession, bank run or accidental exit from the euro. A new approach is needed before time runs out.

Discussions on the long-overdue tranche of eurozone funding continue to follow a timeless pattern. An urgent meeting of the euro group of eurozone finance ministers is called. It cannot reach agreement so a follow-up meeting of eurozone deputy finance ministers is convened; or a convocation of the European Commission, European Central Bank and International Monetary Fund — the bailout-monitoring institutions previously known as the troika. When this, too, fails to yield results it is agreed that there will be a request for a list of actions. However the list requires elaboration and agreement in a subsequent euro group meeting. So the process starts again.

Both sides have wasted time and politicised the situation. The leftwing Syriza government has been generous in providing advice on the architectural shortcomings of the eurozone and mishandling of the Greek crisis. But it has failed to take actions commensurate with the country’s existential crisis. The eurozone, for its part, has been insufficiently mindful of the government’s electoral mandate, its inexperience and more generally of the institutional shortcomings of the Greek system.

Europe is demanding implementation, in the next few weeks, of a long and comprehensive list of actions that previous governments were unable to deliver in the space of a few years.

Now that Yanis Varoufakis has assured Christine Lagarde, IMF managing director, that Greece will honour its April repayment to the IMF, there is a short window of opportunity to instigate the necessary new approach. It could be based on three components: actual implementation of a few core actions to test the new government; short-term financing to remove the threat of default in the next three months; and a new programme to provide a blueprint for reform and financing for the next two to three years. If Greece cannot deliver such a limited but critical set of reforms, it had better prepare to leave the eurozone.

First, instead of the preoccupation with producing ever-longer lists of commitments, the focus needs to shift to implementation of a few significant actions. The government’s commitment to reform is thereby tested and trust is established. Accepting actions in a limited number of areas would establish priorities and take account of Athens’ capacity to deliver. Measures could include urgent approval of laws to put in place independent revenue administration; eliminate generous early retirement payments; reform value added tax policy and enforcement; and introduce punitive anti-corruption measures. These are well-trodden areas. Greece can and should put these reforms in place within four weeks.

Second, in return for approval of these measures, the eurozone would provide Athens with sufficient funding for the next three months to meet its external obligations, which are mainly to official creditors. This would remove the immediate threat of capital controls and exit from the eurozone. More importantly, it would head off the loss in confidence and forced fiscal contraction that threatens a recessionary tailspin.

Third, both parties should start defining the contents and parameters of a longer-term reform programme that would be put in place before the very large repayments to the ECB and IMF in July and August. This would comprise growth-enhancing measures such as product and labour market reforms; as well as resolution of the bad assets in the banking system.

A solution to Greece’s debt overhang is also needed. If debt reduction is a bridge too far, a more pragmatic approach could consider two avenues. One is a debt-equity swap: the eurozone could exchange some of its claims for equity in banks and companies that are to be privatised, reducing the debt burden and providing incentives for privatisation. It would also offer an incentive for much-needed investment. Additionally, Europe could replace shorter-term, more expensive IMF and ECB financing with cheaper, longer-term European Stability Mechanism funding, thus removing the incessant threat of default to official creditors.

They say the definition of madness is repeating the same action and expecting a different result. It is time to introduce sanity to the Greek-eurozone negotiations.

* The writer is vice-chairman of global capital markets at Morgan Stanley and former head of the IMF European department

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