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A question of principle

15 June 2015 By Edward Hadas

The Greek debt negotiations are not running aground over principles. They’re not disputes about substantial sums of money. Politics and pride led to the latest rupture of talks on Sunday evening. A deal can still be done, if only these powerful forces of division can be overcome.

It sometimes sounds like there is a passionate argument over grand principles of regional solidarity and domestic sovereignty. The Greek government speaks of red lines which cannot be crossed, most notably on state pensions. The euro zone and the International Monetary Fund declaim about fiscal responsibility and economic realism.

However, there is far more agreement than dispute. All concur that Greece’s economy cannot thrive without tackling tax evasion and curbing the government’s clientalism and smothering bureaucracy. To judge from the latest writings of Yanis Varoufakis, the Greek finance minister, and Olivier Blanchard, the lead economist at the IMF, there is no longer any dispute over the need for many years of Greek fiscal restraint, accompanied by many years of subsidised financing. Also, everyone admits the original restructuring plans worked very badly.

Crucially, both sides recognise that small losses are better than big losses. And the potential losses from compromise are indeed small.

For the Greeks, a full surrender to the creditors’ latest fiscal demands would reduce government spending by about 2 billion euros, an easily manageable 1 percent of GDP. For the euro zone, a full surrender would add an almost invisible 0.02 percent of euro zone GDP to their financing commitment.

The potential losses from failure are many times larger for both sides. If Greece loses the support of the euro zone, its financial system would crash, its economy would almost certainly follow and institutional reform would probably be crushed. There would be less money for the creditors, who would also have to reckon with the uncertainty of a loss of confidence in the euro zone project.

With the differences so small and the potential damage so great, a deal can still be done. The main obstacle now is politics, mainly on the Greek side. The ruling Syriza party is divided. On both sides, there is also pride to be given up. That’s hard, but the alternative is a mighty fall.


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