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Chicken sandwich

22 June 2015 By Hugo Dixon

If Greece collapses, there will be giant dollops of blame to go round. The biggest ones will stick on whoever behaves most unreasonably in the standoff between Athens and its creditors, which could easily end in default and disaster.

This linkage between the blame game and the game of chicken is one reason to hope the Greek crisis might, even at the 11th hour, have a satisfactory conclusion. Both sides have an incentive to accommodate each other’s reasonable positions; otherwise, they will be lambasted for failing to prevent an avoidable catastrophe.

In calling euro zone leaders to a summit this Monday evening, Donald Tusk, the European Council president, made a similar point: “The game of chicken needs to end, and so does the blame game.”

In the worst scenario, Greece could become a failed state if the two sides cannot reach a satisfactory accommodation. The rest of Europe will also suffer a body blow.

The recriminations, which will then fly, will be so bitter that they will inflict a second round of damage. The principal actors need to act responsibly over the next few days to avoid the worst of the backlash.

Of these, Alexis Tsipras, the Greek prime minister, has the most to lose. If he turns down an honourable compromise, he may be hounded from office.

But the creditors have a huge amount at stake too. If the euro zone is seen to have undermined a democratically elected government by making unreasonable demands, the sense that it is a benign community of nations will be damaged. The International Monetary Fund, the junior creditor, will also be in the firing line for lending its credibility (and money) to a programme that spectacularly failed.

As things stand, everybody deserves a share of the blame. Greece cooked the books to get into the euro in the first place. The country was riddled with corruption, inefficiency and tax evasion. It then lived beyond its means, racking up giant fiscal and trade deficits.

After the crisis hit, Athens dragged its heels on implementing needed deep-seated reforms – unlike other troubled countries in the euro zone such as Portugal, Ireland, Cyprus and Spain, which are now recovering.

Despite all the agony, Greece was beginning to turn the corner early last year. But then, following the European Parliament elections, the government of Antonis Samaras succumbed to populism and stopped implementing reforms leading to a standoff with the country’s creditors.

This, though, was nothing compared to Tsipras’ wild election promises. Since taking power in January, the Greek prime minister and his finance minister, Yanis Varoufakis, then exacerbated the problem by wasting time and making inflammatory comments about the country’s creditors.

The euro zone has a lot to answer for too. Its cardinal sin was its refusal, at the insistence of the European Central Bank, to let Greece default on its debt at the start of the crisis back in 2010.

At the time, Athens owed money to private creditors, who should have faced a “haircut”. Instead, the euro zone countries and the IMF lent Greece a huge amount of money, the bulk of which was used to pay off the private creditors.

The result has been to turn what would have been a dispute between Athens and a group of banks and pension funds into a poisonous battle between Europe’s nations. The IMF went along with this, against its better judgment.

The creditors’ second error was to focus too much on fiscal austerity and too little on deep-seated reforms. After its pre-crisis binge, the Greek economy was bound to shrink but it didn’t need to lose a quarter of its output.

So much for where the balance of blame lies. Provided everybody gives ground, it is still possible to reach a deal which unlocks cash from the creditors and so stops Athens going bust.

Such an agreement would have two essential elements: Greece would implement a series of reforms, in particular to its unsustainable pension system; and the euro zone would agree to negotiate in good faith on a subsequent deal to cut the country’s debt burden.

Tsipras would not have to accept any cuts in low-income pensions. But he would have to phase out early retirement schemes rapidly and cut supplementary pensions.

Greece would not have to produce a big budget surplus this year. But it would have to implement reforms now to tax collection, the public sector and value-added tax that would help sustain its finances in the medium term.

The euro zone countries would not have to accept an official haircut on the amount of money they are owed. Instead, Greece would be given a longer grace period before it needs to start repaying the debt and more time to finish the job.

What’s more, the euro zone would not agree to such rescheduling now. But it would commit to work hard to complete the job by, say, the end of the year provided Athens kept its side of the bargain. It would also promise that the IMF would vet the sustainability of Greece’s debt.

If either side put such a package on the table, the other side would be under huge pressure to agree – because, if it didn’t, it would be rightly criticised, not just by the Greek people but by fair-minded observers elsewhere.



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