The Greek Puzzle and the Eurozone's Trap

The eurozone authorities are blackmailing the Greek government and people. Yet, Greece should become an opportunity to change the failed policies of the eurozone.

Over the past three months Greece is the economic issue most present in the European economic press. Yet, predictions on the outcome of the Greek puzzle remain uncertain. In any case, the time of its solution is coming nearer. Let's try to summarize the data we have at the middle of April. The government Tsipras has scraped the bottom of the barrel using all possible resources to repay the debt of around 400 million euro due to the IMF. But this has only served to get a breath of fresh air for a few weeks. Between May and June other shares of debt worth more than two billion to be repaid to the IMF will expire.

But this is not the only a side of the problem. Starting with May, under current financial pressures, the Greek government cannot pay some 2.4 billion euro of pensions and salaries to public employees. To do so it should issue short-term securities financed by the central bank and/or private banks, but the ECB has put a veto on these operations.

At this point, the ghost of default materializes. The government is forced to impose a restriction on the withdrawal of private savings from banks and impose capital controls as did Cyprus with the consent of the European authorities, but not allowed to Greece. The possible outcome would be Grexit.

The ancient Greek tragedies are dominated by fate, and therefore devoid of alternative solutions. Fate must to be accomplished. But twenty-five centuries after Aeschylus, fate is being determined by Berlin and Brussels. The outcome is by no means fatal. In fact, the bailout agreed with Greece in past years allowed a final tranche of 7.2 billion euro. If this commitment would be maintained, the shadow of default would be removed. But the eurozone authorities pose as a condition the total repudiation of the commitments that Tsipras government has assumed vis-à-vis the country.

None of the overall commitments made by the Greek government towards the European authorities is considered a sufficient price for an acceptable compromise. Not just the pledge to entirely repay the huge debt accumulated by previous governments, through its agreed restructuring. It is not enough to commit to radical reforms in the system of taxation to make it more efficient and more equitable. Nor to hugely reform the administration’s structures to increase efficiency and reduce costs. Nor to keep the already undertaken privatizations, carrying out the ongoing ones, including the Piraeus port, nor to allow in principle for others.

No, the government must renounce to all commitments to the Greek people: the increase of pensions for the poorest; the increase of the legal minimum wage that, even returning to the previous level of about 750 Euros per month, would still be the half of that in force in Germany, France or Belgium, to mention a few. If there should be a further increase in VAT this would worsen a situation in which consumption has collapsed under the impact of wage reduction by 40 percent and with an unemployment rate of 25 percent of the workforce. In addition, of course, the final liquidation of the national collective bargaining. It is clear that the powerful eurozone authorities are blackmailing the Greek government and people.

A key question is what is the rationale of the eurozone authorities? In other words, may we speak of political myopia, especially in Germany, or there is a clear willingness to force the government to exit from the euro? Clearly many European governments consider the position of the Greek government a dangerous and unbearable source of contagion. If the government of a small and weak peripheral country could freely break the iron discipline of the eurozone, other troubled countries could be tempted to follow the same path.

It is not a coincidence that centre-right governments consider a compromise with Greece a disavowal of their own austerity policies. On the other hand, a likely Grexit spawns alarm in the French and Italian centre-left governments. They don’t trust in a smooth exit of Greece from the euro. They fear that the break would dangerously show that the eurozone is not irreversible: financial markets could revive their attack, and a new burst in spreads could reverse the protective mantle of quantitative easing, revealing its limits for the most exposed countries.

François Hollande and Matteo Renzi, at the helm of the Italian and French governments, are aware of the risk of an effective contagion stemming from a Grexit. Yet they do not have the strength to open the argument in the decision-making European Council of Ministers and the Eurogroup to allow an acceptable compromise with Greece.

On the contrary, we can see a number of opinion makers who prefer to put the issue in terms of an fake question: whether it is better to stay in the euro or getting out. An alternative aimed  to announce the apocalypse following an exit from the euro, while the problem with which a center-left government should today cope with is not the exit from the euro, but the exit from the trap of the eurozone’s current policy.

It a matter of fact that the continuation of the austerity and structural reforms makes it impossible any effective recovery of growth and the cut of mass unemployment . Is there an alternative to this gloomy situation? To begin with, the most immediate and effective one is a large, comprehensive and targeted revival of public investment in order to boost the growth, expanding the demand and stimulating private investment.

The choice of this road does not imply an exit from the euro, but a radical reversal of policy so far implemented in the eurozone. Is it possible?

Let’s put that France and Italy, and after- Rajoy Spain - to name just three countries that alone account for more than half of the eurozone economy – state they do not want in any way give up the euro, but do want policy changes, starting with two measures that no one could rationally judge inappropriate: First, the exclusion from budget constraints (the parameter of three percent of GDP and the hypothetical balanced budget) of all the expenses destined to public investment; second, the postponement of debt cuts as demanded by the Fiscal Compact, to enable sustainable growth and a recovery of employment.

This stance would unavoidably clash with the ideology and policies now prevailing in the eurozone. But it would open the ideological and political cage that paralyzes any attempt to reverse the current trend which threatens apocalypse. The first step in this direction should be the backing of the Greek government in its unpaired confrontation with Berlin and Brussels. Greece should cease to be a problem to become an opportunity to change the failed policies of the eurozone. A new direction not only is possible but necessary.