Opinion, Berkeley Blogs

Urgently needed: An international initiative on Greece

By Gérard Roland

Do not hold your breath on Sunday's deadline for credible Greek proposals to come up to unlock the Greek crisis. This is mostly a trap to accelerate Grexit. At best, it is a Pontius Pilates move by German Chancellor Angela Merkel -- to wash herself of the responsibility of Greece spiraling into chaos.

Let us be frank. It is impossible by Sunday to regain trust between the Greek government and Eurozone countries. That trust has been absent since Syriza came to power. Greek Prime Minister Alexis Tsipras does not believe that the eurozone is ready to provide debt relief and eurozone countries do not believe the Greek government is able to balance its budget. They are probably both right, so no additional trust will be gained by Sunday, contrary to the very disappointing remarks by Donald Tusk.

The gap between Greece and the eurozone has become wider in the last week, mostly because all deadlines have passed. The IMF was not paid back and the deadline for the extension of the previous bailout package passed. Greek banks have been closed for more than a week and the Greek economy is sliding further into the abyss. On the German side, this is interpreted as a necessity for Greece to do even more efforts to balance its budget (this is how I understand Merkel's position, even though I hope to be wrong). On the Greek side, this is interpreted as even more need for debt relief.

The Tsipras government does not seem to be able to come up with a proposal of its own. That would include, obviously, debt relief, but also ideas on overhauling the Greek state apparatus and institutions, some sensible plans to return to budget balance, and reforms that produce growth (it seems that radical deregulation is probably one of the only options right now).

Tsipras' move to unite all democratic Greek parties behind him in the negotiations is good politics and helps to heal the rift cause within Greece on the referendum. But it will not help produce quickly a credible plan for reform. With all clientelistic parties at the table with Tsipras, there is hardly any chance that reform against clientelism will be proposed. Whatever document they may come up with will be deemed non credible by eurozone countries. Thus Grexit seems nearly inevitable. I can already imagine the hypocritical declarations of so-called anti-austerity politicians, like French president François Hollande, blaming Greece for its misery.

Do not hold your breath either on the advantages of Grexit. In theory, one can imagine that a strong devaluation related to a return to the Drachma can boost Greek exports and competitiveness in the short run. This is if it is done professionally. There do not seem to be such plans in Greece. Tsipras will probably have the instinct of nationalizing the banks and start issuing IOUs. The latter will inflate with lightning speed. With further economic chaos, I do not exclude a fascist coup in Greece and a civil war.

One idea that is circulating is that if Grexit is successful, it will give ideas to the Italians and the Spanish. Do not count on that either. Mediterranean countries signed up to the euro because they wanted to be disciplined into becoming competitive. Europe was not able to deliver that to them, but they still hope that the European anchor will help them reform. With Greece out of the Euro and possibly the EU, I only see recriminations and tensions on all sides, with nobody assuming leadership. A continuation of the current situation, but ten times worse.

What can be done? In Tsipras's mind, he is fighting for all Europeans against the disastrous austerity policies imposed in Europe by the Chancellor Brünings of today. But Tsipras cannot lead this fight, whatever his political talent, given the fragile state of his country. His economic talent is probably inversely related to his political talent. Greece urgently needs aid and a complete reconstruction of its institutions. The Greek government is not able to do this. The troika is not able to do this. Germans were not able to rebuild their institutions after WWII. They had to rely on the allies, mostly the Americans. Germans do not seem to have the needed expertise to help Greece rebuild its institutions. Tsipras should recognize humbly that his government is not able to come up with the necessary reforms. He should call for an international initiative to help rebuild Greece.

Not just Europeans should help. There is more expertise in the United States in how to help Greece than in the European Commission, especially among development experts, political economists, political and legal scholars.

Expertise is scarce and one should exclude nobody a priori. There is a lot of expertise in the Greek diaspora. If Greek intellectuals outside Greece were called for help, they could provide critical input to build a new Greece, just like the Germans living outside Germany during WWII played a critical role in reconstructing Germany from its Nazi ashes.

Economists have started doing research on state capacity and state building in recent years (Besley-Persson, 2007 or Acemoglu-Robinson, 2012 are examples of this). If such an international initiative can take place -- with experts having NO political mandate from any institution -- this is the only way, in my view, that the Greek economy can now be helped in the short run and kept in the EU. This is the only solution I see to help prevent a catastrophe by Sunday.

Do not expect much in the coming days from the German government. The French and Italian governments can play a critical role by unilaterally deciding to forgive Greece the money owed to them. This would provide substantial debt relief and might create a positive dynamic. Without an initiative like this, all words of support to Greece from Hollande, Moscovici, Renzi et al. will be pure hypocrisy.

Debt relief to Greece is bad for Italian and French debt. Of course.

However, there really should be -- as economist Thomas Piketty proposed a few days ago -- an initiative for a European-wide debt conference to reduce the debts of individual European countries. Economists have made many proposals on this in the past two years.

It is time for Europe to end the terrible austerity that has devastated millions of lives since 2008. If Tsipras's political courage can lead to this, the Greek crisis will have helped European construction. But it is time for other European leaders to show leadership. If not, the future of European construction will be in severe jeopardy.