At 6pm eastern time on Tuesday, Greece became the first advanced country to default on its debt with the IMF. Failing to pay $1.8 billion, it also became the largest defaulter in the 71 years of the fund. This happened because Greece and its creditors failed to reach an agreement on extending a bailout programme that has helped Athens make its payments since 2010.
After the Papandreou government admitted to extensive accounting fraud in 2009, Greece was kept afloat by its eurozone partners and the IMF, which absorbed most of the debt it owed to private institutions (mostly German and French banks). Since then, Greece has undergone draconian austerity cuts, which have ravaged the country and led to the victory of Syriza.
The extensive negotiations between Greece and its creditors saw Greek Prime Minister Alexis Tsipras asking for debt relief and a softening of austerity. But the creditors insisted that fresh aid would come only if Syriza adopted an austerity programme similar to previous governments.
Last weekend, Tsipras abandoned the negotiation table and called for a referendum on July 5 on the terms of the bailout extension. He has been accused of irresponsibility. But really, he only exposed a simple truth: the negotiation had never been a negotiation, but a farce. The two sides’ positions were far apart in January. Syriza wanted an end to austerity, which was harsher than expected while failing to bring the promised benefits. And it wanted the debt burden to be lifted. The creditors wanted their money back — though the IMF has always been open to debt restructuring — and more austerity.
But there was some common ground: both sides agreed that the Greek economy is broken and needs radical reform. While Syriza focused on the reorganisation of the state, putting together a functional tax-collection system and reducing inefficiency, the troika demands classic Washington consensus reforms: pension cuts, labour market reform, privatisation.
One aspect of structural reforms is neglected in the public debate. Sequencing is crucial: implementing structural reforms in bad times, when the economy is not able to absorb the short-run costs of such reforms, causes excessive disruption and reduces potential long-run benefits. This is why the joint implementation of austerity and structural reforms is particularly pernicious. Their short-run contractionary effects reinforce each other and could be self-defeating, resulting in no improvement in productivity or public finances. The troika’s reforms and drastic cuts were doomed to fail from the start.
Since Syriza came to power, most of the concessions have been made by the Greek government. On retirement age, size of the budget surplus (the Greek government thus gave up trying to stop austerity and simply wanted to soften it), VAT and privatisation, we are closer to the troika’s initial positions. But the Greek government repeatedly argued that some reforms, like improving tax-collection capacity, demanded an increase in spending. Reforms need to be disconnected from austerity to maximise their chances to work. Like the Papandreou government in 2010, Syriza also asked for time and money. It got neither.
Tsipras had only two red lines he would and could not cross: increasing taxes on the rich (most notably, large corporations) and further cuts to already low pensions. Crossing these would mean betraying his mandate, and simply continuing with the policies of the previous government. But the creditors were not ready to make minor concessions, raising doubts about their intentions. The past week is proof that the underlying issues are political, not economic. Creditors cannot afford an alternative to the policies followed since 2010 to materialise.
A few weeks before the elections in Spain, Syriza needed to be made an example of. You cannot survive in Europe if you don’t embrace austerity and reforms. Tsipras, like George Papandreou, was left with only one option: asking for the Greek people’s opinion. The Greek standoff has threatened the existence of the euro. But it seems that for European leaders, the survival of the euro is less important than acknowledging that the policies followed so far were wrong.
The writer is deputy department director at OFCE Sciences Po, Paris.