Give Greece's new leader a chance



    Jan 27, 2015

    Give Greece's new leader a chance

    ALEXIS Tsipras, leader of the left-wing Syriza coalition, is about to become prime minister of Greece. He will be the first European leader elected on an explicit promise to challenge the austerity policies that have prevailed since 2010.

    There will, of course, be many people warning him to abandon that promise, to behave "responsibly".

    So how has that responsibility thing worked out so far?

    To understand the political earthquake in Greece, it helps to look at Greece's May 2010 "standby arrangement" with the International Monetary Fund (IMF), under which the so-called troika - the IMF, European Central Bank (ECB) and the European Commission - extended loans to the country in return for a combination of austerity and reform.

    It is a remarkable document - in the worst way. The troika, while pretending to be hard-headed and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.

    You see, the economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment.

    Greece was in recession when the deal was reached, but the projections assumed that this downturn would end soon - that there would be only a small contraction in 2011 and that, by 2012, Greece would be recovering. Unemployment, the projections conceded, would rise substantially from 9.4 per cent in 2009 to almost 15 per cent in 2012, but would then begin coming down fairly quickly.

    What actually transpired was an economic and human nightmare.

    Far from ending in 2011, the Greek recession gathered momentum. Greece did not hit the bottom until last year and, by that point, it had experienced a full-fledged depression, with overall unemployment rising to 28 per cent and youth unemployment rising to almost 60 per cent.

    And the recovery now under way, such as it is, is barely visible, offering no prospect of returning to pre-crisis living standards for the foreseeable future. What went wrong?

    Fairly often, I encounter assertions to the effect that Greece did not carry through on its promises, that it failed to deliver the promised spending cuts. Nothing could be further from the truth.

    In reality, Greece imposed savage cuts in public services, the wages of government workers and social benefits. Thanks to repeated further waves of austerity, public spending was cut much more than the original programme envisaged, and it is currently about 20 per cent lower than it was in 2010.

    Yet, the Greek debt troubles are, if anything, worse than before the programme started.

    One reason is that the economic plunge has reduced revenues: The Greek government is collecting a substantially higher share of gross domestic product (GDP) in taxes than it used to, but GDP has fallen so quickly that the overall tax take is down.

    Furthermore, the plunge in GDP has caused a key fiscal indicator, the ratio of debt to GDP, to keep rising even though debt growth has slowed and Greece received some modest debt relief in 2012.

    Why were the original projections so wildly over-optimistic? As I said, because supposedly hard-headed officials were in reality engaged in fantasy economics.

    Both the European Commission and ECB decided to believe in the confidence fairy - that is, to claim that the direct job-destroying effects of spending cuts would be more than made up for by a surge in private-sector optimism.

    The IMF was more cautious, but it nonetheless grossly underestimated the damage that austerity would do.

    And here's the thing: If the troika had been truly realistic, it would have acknowledged that it was demanding the impossible.

    Two years after the Greek program began, the IMF looked for historical examples where Greek-type programmes, attempts to pay down debt through austerity without major debt relief or inflation, had been successful. It did not find any.

    So now that Mr Tsipras has won, and won big, European officials would be well advised to skip the lectures calling on him to act responsibly and go along with their programme.

    The fact is that they have no credibility; the programme they imposed on Greece never made sense. It had no chance of working. If anything, the problem with Syriza's plans may be that they are not radical enough.

    Debt relief and an easing of austerity would reduce the economic pain, but it is doubtful whether they are sufficient to produce a strong recovery.

    Still, it is not clear what more any Greek government can do unless it is prepared to abandon the euro, and the Greek public is not ready for that.

    In calling for a major change, Mr Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country's nightmare.