This is a novel approach to getting the Greeks to do what the international lenders (aka the Troika) want: tell them that not only can they not choose their own prime minister, but if they don’t get their policies right, the eurozone will put their own commissioner in charge of making the decisions. Or else they won’t get the next tranche of their bail-out money.
What is this about? Naturally it’s caused Greek public opinion to explode in fury. The sober-minded middle classes can put up with with a bit of external intervention to break domestic political log-jams. And while the ‘technocratic’ government is trying hard to do what is asked of them, it’s found it difficult to fix the faulty revenue system and to make hard spending cut choices for an economy that is already contracting horribly sharply. But the historical and political insensitivity of the proposal leaves me astonished. Sebastian Dellepiane has reminded me that economists seem to find it all too easy to dispatch politics into the rubbish bin when they are convinced they have the right technical answers – see this amazing piece of finger-wagging to Argentina in 2002.
It seems so obvious both from economic theory and from empirical evidence that what Europe badly needs right now is a policy mix that will generate economic growth and facilitate job creation. The forthcoming EU summit is at least going to talk about this (though I’m not holding my breath). So why the heavy warnings?
Some commentators seem to think it is not really a warning shot to Greece at all, and not the start of a campaign to force them out of the eurozone, since this is still officially anathema. Rather it’s a warning of a particularly unsubtle kind (‘Germany doesn’t do “subtle” very well’) to other heavily indebted countries (Ireland, Portugal, Spain) not to think about going after a similar kind of PSI (private sector involvement) deal. All creditors in future are going to be repaid in full for everything. Now. Or else.
It’s hard not to be really dispirited by all this. Everyone except the top decision-makers in the EU seem to agree that it is damaging to require heavily indebted countries to undertake further crushing fiscal contractions in the middle of a recession, and indeed that trying to do intensive deleveraging without any growth might even itself trigger a debt explosion. The President of the World Bank thinks it is German’s responsibility to show decisive leadership in stimulating the European economy and generating growth. But with Merket beset by government colleagues criticizing her for ‘watering down’ the so-called fiscal pact, how likely is this?