Geoffrey Hosking, Emeritus Professor of Russian History at UCL’s School of Slavonic and East European Studies, gives his view of what went wrong before and during the Greek crisis, and of the challenges that now lie ahead. To him the problem is centrally one of a lack of trust.
The Greek crisis goes back a long way, and at several stages demonstrated the dangers of a loss of trust.
The epic began with the creation of the euro, which was set up without several of the trust-generating stabilisers of national currencies: a common fiscal policy, a central ministry of finance and a central bank empowered to act as a lender of last resort. Without these essentials, the euro lacked the full and credible commitment of all its members, an essential prerequisite of mutual trust. A member nation could no longer cope with serious crises by devaluing its currency, yet no provision was made for a solidarity fund (the euro equivalent of the IMF) to deal with crises collectively.
The euro’s founders were aware of the problem, and endeavoured to overcome it by requiring member states to sign a Stability and Growth Pact, which committed them to hold their annual budget deficits below 3 per cent. In 2003, however, France and Germany both exceeded the limit and decided mutually not to enforce the rule, so that each could promote growth in its own way. A first breach of trust! And one denied seven years later to Greece!
A further trust-destroying element was added to the already dubious brew by the financial crisis of 2008 and after. Among euro nations, Greece proved the least able to deal with it, and had to appeal for a eurozone bailout. It received two huge loans in 2010 and 2011, in which the IMF also joined. But the lenders imposed conditions which actually damaged the Greek economy further: privatisation of state-owned assets, tax rises and large cuts in state expenditure, especially on welfare.
These conditions made no sense. It has long been known that in a deflationary depression, national governments should act counter-cyclically, investing in the creation of new wealth, even at the cost of temporarily increasing their own deficit. European politicians are still obsessed by the lessons of the 1970s, when the problem was the exact opposite: high inflation. Imposing 1970s’ medicine on a 2010s’ crisis had the result that the Greek economy is now 25 per cent smaller than in 2010, while youth unemployment is at 50-60 per cent: effectively the condemnation of a whole generation of young people to penury which could well last for life.
The economic policy of Syriza, when it was elected to government, was thus essentially correct: there was no point in sticking to a demonstrably hopeless policy such as the eurotroika (EU Commission, ECB and IMF) was still trying to impose as a condition for a further loan. But to make that argument stick, Syriza needed to conduct negotiations in a restrained and reasoned manner. It would have helped if they had made an appeal to EU and IMF to help them identify Greece’s numerous tax evaders and start collecting revenue from them; that would have pleased their voters, it would have been in full accord with their ideology, and it would have been perverse of the troika to reject the idea. Syriza could also have used the intended referendum as a negotiating ploy during the negotiations instead of suddenly springing it on everyone once the negotiations had broken down: after all, it is perfectly reasonable that the Greek people should themselves decide whether they were prepared to continue tolerating these huge burdens.
Instead Tsipras and his colleagues lost no opportunity to insult their interlocutors, calling them ‘dictators’ and even ‘terrorists’.
The troika, disgracefully, responded in kind: Christine Lagarde remarked wearily that she would like to negotiate with adults, implying that Syriza’s people were irresponsible adolescents. Wolfgang Schäuble rejected Greek demands out of hand, saying openly that he had not bothered to read them. Moreover, the IMF recently published a paper arguing that inequality was bad for economic growth, while continuing to demand that the Greek government impose more inequality on its own people. A precondition for trust, surely, is that you practise what you preach! After the negotiations had completely broken down, the IMF also admitted that Greece would need serious debt relief. Why did they not say so during the negotiations? It might have been a game-changer, because it was precisely what Tsipras was demanding. Essentially, the IMF was negotiating in bad faith; no wonder Tsipras distrusts them!
These mutual insults, recriminations and the wilful failure to understand the other side’s position have destroyed all trust between the two sides. Yet a certain measure of mutual trust is essential if both Greece and the euro are to come out of this without destroying each other. Negotiators would do well to begin by apologising to each other for their appalling behaviour. Greece has actually begun to do so: Varoufakis’s resignation is a tacit apology for his particularly inflammatory remarks. It is difficult to imagine the eurotroika responding in kind, so negotiations, if they take place at all, are likely to be exceedingly fractious and difficult. Both sides need to realise that creating trust requires trustworthy behaviour!
Geoffrey Hosking OBE FBA FRHistS is a historian of Russia and the Soviet Union. Now Emeritus, he was Professor of Russian History at the School of Slavonic and East European Studies at UCL from 1984 to 2007.
Note: The views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.