Monday, 14 November 2011

The Easy Part Is Over

Getting appointed interim Greek prime minister may prove to be the easiest part of the job for the academic central banker Lucas Papademos. Widely acknowledged as the prototypical bright technocrat required to lead Greece out of the economic swamp he will be sorely tested when his brief honeymoon ends. But the new coalition government has one thing its hapless predecessor never secured – wide public support. Recent polls show more than 70% support for the new government, while the two main parties are languishing with sharply lower numbers.

The formula for the beginning of Greece’s recovery has been well known for months, if not years. Reducing the state sector, reforming the ridiculous pension system, opening closed professions, selling state assets, starting to collect taxes, cleaning up the scandalous health care sector, and reforming the stagnant legal sector are just some of the steps required to stop the haemorrhaging from the state budget and get the country moving. The problem has been finding anyone with the political courage to implement these changes because their implementation spells the end of the corrupt patronage system that has dominated Greek politics for decades. In effect it is like asking Greek politicians to write their own political and, in some cases, financial obituaries.

For months the politicians have wasted time promising everything and delivering very little as the downward spiral of the Greek economy rotated faster and faster. The little social consensus existing in Greece was getting pulled apart in almost daily protests and strikes. The politicians were caught in the headlights unable to move as Germany, France, the International Monetary Fund, the European Commission and a host of others told them what they must do to secure additional assistance. The country was rapidly heading toward a disorderly default on its sovereign debt.

Terms of Debate Changed

In the middle of all this Prime Minister George Papandreou threw up his hands saying he could no longer cope with the conflicting demands and called for a referendum on the latest bailout package. However ill-timed, capricious, or irresponsible it was, this call served one very important function. It changed the terms of the debate within Greece. Suddenly the debate was no longer about this cut or that cut, this reform or that reform. It became simply “Do we want to stay in Euro and, ultimately, the European Union or revert to being a political and economic afterthought stuck onto the southeast corner of Europe?”

That set the stage for a few fevered days of politics when the main parties were pushed kicking and screaming into coalition discussions. The main opposition party demanded Papandreou’s resignation, and he dutifully – probably delightedly – complied. After much pushing and shoving they finally divided cabinet seats and settled on the only serious candidate for interim prime minister – Lucas Papademos, the former governor of the Bank of Greece and a vice chairman of the European Central Bank. The only mark against him is that he, like too many people in the EU and ECB, accepted at face value statistics prepared by the Greek government alleging that the country met the requirements to join the Euro in the first place.

The Communist party and another leftist party stayed out of coalition talks and refused to agree to any of the austerity program demanded by Greece’s creditors. This move is essentially irrelevant, and the joke going around Athens is that the Greek communists are the sole remaining distributor of a company that’s been out of business for years.

Papademos is supposed to remain as prime minister until elections are held sometime next year. Up until that time he is supposed to oversee the wholesale changes required to keep Greece in the Euro zone. No date has been set for the elections although the main opposition party New Democracy wants to hold them as soon as February. This date may well get pushed back if the country is in the middle of serious reform. Few people would be willing to sacrifice those gains for a return to petty politics. New Democracy has been stalwart in its opposition to anything since the crisis began, and its leader had resisted all calls for a coalition government of national unity. There are signs that the people are tired of this juvenile gamesmanship. If elections were held as early as February it is doubtful that any party would gain a majority, and the country would be forced right back into a coalition.

Sometime fairly soon the government has to come up with ways to get Greece moving again. You can accomplish only so much with cuts, then you have to start growing. It may well be true that Greece is unable to become competitive and grow within the Euro and may have to – someday – revert to the drachma. If the country has shown signs of stabilizing and the European banks are largely out of their Greek debt it may just be possible to arrange an orderly, well planned departure from the Euro. Once the panic and hysterical rhetoric have died down officials will have a chance to do the hard, honest analysis they should have done before Greece joined the Euro.

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