Irresistible Force Meets Immovable Object

Greece is expected to submit a more complete list of reforms in order to free up funds so the country can service its obligations.  Four times the Greek government has provided lists and four times the European group of finance minister rejected it. 

The IMF, which violated its own rules over the objections of its senior staff in its extensive exposure to Greece, insist that Syriza, abandon its anti-austerity drive and institute the necessary reforms to avoid default.  The unelected and unrepresentative IMF leadership has indicated that it has no obligation to take seriously the desires of the Greek electorate.  

The issue of contention appears to come down to the Greek government's unwillingness to include additional cuts in pensions and further labor market reforms into is proposals.  Just the Greek government appears to have under-estimated the resolve of the both core and peripheral countries not to relax their demands, so too have the official creditors under-estimated the resolve of the Greek government, as inexperienced and clumsy as it may be. 

Greek officials have studied Keynes' Economic Consequences of Peace, or at least have taken it to heart, more than others in Europe.  The implications appear to have been lost on the creditors.  Leaving the moral arguments aside, Greece's debt in the present form is unsustainable.    The extend and pretend game requires complicity from all parties.  The new Greek government is the first government that says no. 

The Syriza government is widely perceived to be left-wing.  Even in his column today,  Paul Krugman says it is "genuinely left-wing (as opposed to center-left)..."  But what does this really mean?  Such calculus does not grasp the realignment being spurred by the economic and financial crisis.  Syriza endorses a permanent budget surplus.  Since when is that a leftist program?  It wants to crackdown on rent seeking behavior and promote profit-seeking behavior.  Leftist agenda?  

It is true that it wants to preserve a social safety net, but that is not only a leftist position.  One will find, for example, that the National Front in France advocates a similar position.  Anti-austerity cuts across the political spectrum in Italy as well.   It is one of the few issues on which Berlusconi and Grillo seem to agree. 

The official creditors insist that the entire responsibility rests with Greece to make adjust.  One principle that was enshrined in the ERM and other European institutions before EMU was reciprocity.  Recall that at Bretton Woods, Keynes lost his argument that both the strong and weak countries ought to share the burden of adjustment.  Representing the key creditor country, America's  Harry Dexter White successfully rebuffed such efforts.  However, the ERM was predicated on such a principle and operationally, both the Bundesbank and the peripheral central banks would intervene to defend the currency bands. 

Reciprocity was part of the glue that held the region together.  It is now being eschewed.  In the early days of the crisis, before the EFSF and ESM; before the ECB developed new capacities, bilateral loans from other eurozone members aided Greece.  This helped forge a group of national government creditors, even while many are still debtors themselves except to Greece.   Some are counting on re-payment for their own debt/deficit calculations.  A default by Greece would worsen the fiscal condition of other members. 

There are two key points that must be recognized and resolved for the crisis to end.  First, European officials want to argue that EMU is irreversible.  Many say that Greece exaggerated its performance to get into EMU in the first place.  If it did, it was not alone.  In fact, the liberal interpretation that allowed Germany and France in was wide enough to let other peripheral countries join.  Even if Greece ought not to be in the EMU, as some argue, that train has already left the station.  The issue now begins with Greece being a member.   A Grexit would resolve the issue for ever more that the EMU is reversible. 

Second, Greek debt is not sustainable.  It has reached economic and political limits.  For the last few months, the argument is been cast as either Greece makes the necessary reforms,  or it leaves EMU and defaults.   US states failed in the 19th century or some US cities failed, including most recently Detroit,  No one seriously contemplated them (city or state) from leaving the union.    Just as Europe has devised rules and procedures (standardize) the failure of financial institutions, it needs to do the same with regions and states.  And it needs to do this within the confines of monetary union.   Greece is once again proving to be the catalyst for the evolution of Europe.