17 Jan 2018
Leading economists propose deep-rooted reform of the governance of the euro area
16 Jul 2015
This time its stricken parliament had all but run out of options, and on Wednesday night passed the austerity bill demanded by its eurozone creditors as a first step to re-open negotiations over an 85 billion euro bailout package.
While the bill passed comfortably through parliament - 229 votes to 64 - it met high-profile opposition from within Alexis Tsipras's governing Syriza party, and included tight measures such as VAT increases and pension curbs.
Greece’s eventual acceptance of terms - after months of protracted posturing - should start the process of disentanglement of what has been a complex, bitter and presently, violent situation.
But in other ways it ignites more concerns than it quashes. London Business School academics Richard Portes and Michael Jacobides scrutinise the impact of the likely new deal.
Such has been the voracity of its stance that Greece now finds itself hamstrung by implications far more binding than those its people opposed in the 5 July referendum.
And not only has the agreement split the Syriza party - deputy finance minister Nadia Valavani resigned hours before the vote - it has also provoked civil unrest on the streets of Athens.
Richard Portes, Professor of Economics, London Business School and author of ‘Greece: seeking a way forward’, wonders if the new deal is sustainable, given that tight deadlines prompted the rapid drafting of legislation, which may need amending in the light of day.
“Last night the Prime Minister said he didn't believe in the deal but would vote for it all the same. This is not helpful,” he said.
“Syriza will break up and rely on support from other parties and an election in October is likely. In Greece you used to have two main parties. Now it is fragmented.”
Of course, it’s not just the political disagreements within Greece itself that are set to boil over. The day before the deadline, details of the International Monetary Fund’s (IMF) ‘debt sustainability analysis’ were leaked. They made plain its thinking that large-scale debt relief will be required (potentially over the next 30 years) in order for Greece to re-emerge as any sort of presence.
Such a moratorium on repayments flies in the face of the wishes of eurozone finance ministers, not least Angela Merkel who has made clear Germany’s stance that a “debt haircut” would be unacceptable.
Professor Portes comments: “The German approach to Greece has been too draconian. The macroeconomic basis of this programme simply doesn't hold. It has been implemented elsewhere in the eurozone and it is misguided.”
It goes without saying that, as with any severe austerity package, consideration has to be given to the damaging effects on the Greek people and the murky prospects of a nation desperately short on resources.
Professor Portes believes this to be a real and immediate threat.
"The brain drain isn't a hypothetical danger. It's happening and may well accelerate,” he said. “Greece should bring back its diaspora - lawyers, economists in the next few months. It should bring them into the elaboration of this programme.
“Greece doesn't currently own this programme. To get ownership it has to do it right. It needs the expertise of its diaspora."
In his assessment of the latest agreement, Michael Jacobides, Associate Professor of Strategy and Entrepreneurship, London Business School, points to the fact Greece was ultimately forced to accept the lesser of two damaging situations.
“The terms and conditions of this deal, compared to where we were in November, suggest that this must be the most expensive “on-the-job” training in human history,” he argues.
“The Greek government, after five months of posturing, lecturing, boasting, and losing sight of the Greek economy and public administration (let alone the interests and desires of its creditors) came around to the realisation that the alternative was too scary to contemplate.
“For all of its intellectual simplicity, Grexit under today’s economic conditions would have led to economic collapse, and possibly civic meltdown.”
While now they seem a long way off, there are glimmers of light at the end of Greece’s tunnel of rehabilitation.
By the time it arrived at crunch time, the playing field had changed. Its creditors had responded to the collapse of its financial sector and flatlining economy - correctly determining far more help would be needed.
But Dr Jacobides claims there could be positives to extract from the rigid nature of the eventual deal.
“On the upside, there seems to be a much greater push for structural transformation in this deal than in the last deal brokered by the EU,” he points out.
“The emphasis on promoting competition, improving the public service, and changing the governance structure can bring significant fruits.
“This, in conjunction with the 35B investment programme, can help counter-weight the downsides from aggressive cuts in spending and tax hikes.”
Ultimately, in order for any fruit to be borne, Greece needs to commit to venturing into the unknown; breaking with long-standing practice and taking ownership of its own management.
The proof, as Dr Jacobides says, “will be in the (implementation) pudding.”