Skip to main content
greece_atm001
Order from Chaos

Can Europe be reborn from past errors?

The dialogue between Greece and its European partners has deteriorated. Witnesses at last Saturday’s negotiations describe Greek leaders’ conduct as unscrupulous. After four months, Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis finally accepted the significantly reduced fiscal targets that the European Commission conceded. But Athens’ counterproposal for reaching those goals risked choking economic growth, and at that point negotiators doubted that the government had any actual credibility or ability to revive the country. A few concrete examples told by participants give a better understanding of the nature of the negotiation and lead to the surprising conclusion that Syriza’s plans were more recessionary and austerity-driven than the European ones.

Flawed economic plans

Rather than raising the age of retirement and, eventually, cutting the wealthier pensions, Athens wanted to increase social security and health contributions by 3.9 percent. That would have negated the employment-stimulating measures introduced last July and put pressure on the cost of labor.  

The Greek economy would have further suffered if the government raised the minimum wage for new hires, which would have created yet another obstacle for young people to enter the labor market. Athens’ other proposal, introducing a 12 percent retroactive tax on business profits, would have deterred foreign direct investment—effectively invalidating European Commission President Jean-Claude Juncker’s plan to funnel 35 billion euros to Greece.

Varoufakis’ plan for the amortization of fiscal arrears was so generous that it nullified any incentive to regularly pay taxes—this, in a country where fiscal evasion is epidemic and damaging honest taxpayers. Then, Athens sought to help forgive private debts against banks that, again, were so generous that they incentivized debtors to stop repaying their loans—this, at a time when nonperforming loans make up more than 40 percent of bank total credits, pushing the Greek banking system to its knees.

A dose of rationality

According to European negotiators, Brussels has sought to give Greece’s reform plans a dose of rationality. However, the climate created by the surprise referendum announcement has derailed all attempts to reach a compromise. Disillusion turned into indignation in Brussels when Greek officials accused European leaders of wanting to cut salaries and humiliate the Greek populace. This hostile propaganda destroyed any residual trust and endangered the hope that a final-hour agreement would be reached.

The negotiations have exposed the limits of national politics in the face of European interdependence. Even democratic national institutions can become mere instruments of propaganda if one does not take into account the EU context. The upcoming referendum asks Greeks to either support or veto a proposal that no longer exists—one that the Eurogroup withdrew last Saturday. Leaders in Brussels don’t consider this giving voice to the people, but a mark of populism. After all, the language is adversarial and the mood governing negotiations is no longer one of even prosaic convenience. This is no longer an ideological problem that juxtaposes legitimate principles of the radical left with the functioning of advanced economies.

As a Greek newspaper appropriately put it: “The fact that the referendum proposed by Syriza was supported by nationalists of Anel [the Independent Greeks party] and neo-Nazis of Golden Dawn suggests that the real division in our society is no longer between the right or left, but the different ways that we see ourselves with respect to others.” A Greek minister confessed that the referendum started out as a negotiating tactic, but it took on a life of its own—now, no one knows how to turn back the clock.

The lesson for the future

The possibility of finding a final agreement still exists. All Greece needs to do is accept the European Commission proposal, which is very close to what Athens considered acceptable three weeks ago. And European leaders must discuss the inevitable foreign debt restructuring. Tsipras could then proclaim that he had defended voters’ interests, while his European partners can count on a long-term solution—though the cost for the taxpayers of the other eurozone countries would increase by another 100 billion euros.

The dearth of transparency and compromise are fundamental problems of a negotiation that has been incredibly conflictual since the first signs of the Greek crisis. The first conflict sparked in 2009, with the falsification of accounts on the part of Greece, yielding a deficit adjustment from 3 percent to 16 percent. In 2010, the troika (European Commission, European Central Bank, International Monetary Fund) unilaterally imposed a brutal prescription that predicted a return to growth after two years of painful sacrifices. As we all know, these structural reforms conflicted with local interests and were never accepted by Greek politicians or Greek society. They were confirmed by parliament but were never realized, outside of indiscriminate spending cuts, which resulted in a 23 percent drop in Greek gross domestic product (GDP).

After these two phases of conflict came this year’s third phase, one rife with political opposition and adversarial rhetoric between the Syriza government and European institutions. When Greek public debt reached 180 percent of the country’s GDP, Syriza blamed the troika. It plainly ignored that if past Greek governments had not deviated from the rules of the Stability Pact then the Greek debt would have been 60 percent of GDP. The crisis could have been avoided. For the third time, conflictual negotiations have blown a hole in the Greek economy, sent the country into recession, halved bank deposits, and led us to the threshold of this final crisis.

This dramatic sequence of events could be termed the first “War of Interdependence” for Europe. The real lesson, for both sides, is that one can’t manage a crisis with 19th century hostility between states, with terms imposed without consent, or with lies and deceit typical of past militaristic diplomacy. It is not material solidarity that is missing. On the contrary, that exists in abundance. What is lacking is mutual understanding. An area as politically and financially interdependent as the euroarea must have a transparent division of sovereignty. It is a new democratic order that we must construct, one that might be reborn thanks to Greece.

Read more in Carlo Bastasin’s recent book “Saving Europe: Anatomy of a Dream.”

A how-to guide for managing the end of the post-Cold War era. Read all the Order from Chaos content »

Get daily updates from Brookings