The Greek Debt and the German Acquiescence
Initially, Germany stood firm in saying Greece would have to sign the existing loan program in order to secure an extension, but this was always an untenable position, says Professor James K. Galbraith, academic colleague and advisor to Greek Finance Minister Yanis Varoufakis
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome back to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
This is part two of a conversation I am having with James K. Galbraith. Professor Galbraith has been in Athens and in Europe advising Yanis Varoufakis, the finance minister of Greece, through these negotiations for the loan extension.
James K. Galbraith teaches at LBJ’s school of public affairs at University of Texas in Austin. He’s the author of The End of Normal: The Great Crisis and the Future of Growth.
Thank you so much for joining me again, James.
JAMES K. GALBRAITH, PROF. ECONOMICS, LBJ SCHOOL: It’s very good to be with you.
PERIES: James, you wrote in Social Europe that it was not Athens, but in fact it may have been the creditor parties that had taken a step back naming the mixed messages from Germany. How is that so?
GALBRAITH: What happened was that at the end of the day, the creditor countries and the creditor institutions took a step back. There had been through the entire process a very firm position taken by the German government that you had to sign up to the existing loan program, all of its conditions, lock stock and barrel, no changes that the elections have really meant nothing.
This was an untenable position. It was a position that over the time of these discussions lost the sympathy of the European Commission, and I think also of the International Monetary Fund, and also of several other major governments. And it was a position from which the German government at the end of the day took a step back, agreeing to the essence of the Greek position all along, which was to have a financing arrangement that would be in place over a four-month period, and then discussions about the specific terms, based upon a list that was submitted yesterday to the institutions.
So that strikes me–I wouldn’t call that a capitulation; I would say that what happened was that the German government, having taken a very tough line through the process, took a step back from that tough line in order to secure a basic framework agreement for going forward. And that’s where we are now.
PERIES: James, back in Athens, once the extension is confirmed, now, there’s going to be a great expectation in terms of SYRIZA now being able to deliver on some of the pledges they made shortly after the election, for example, hiring back the cleaning ladies and the pledges made to voters in terms of labor, in terms of minimum wage, etc. How are they going to deliver on all this?
GALBRAITH: Well, to begin with, the issue of the cleaning lady, these were women who had been sacked illegally under the previous government. And they have been hired back. It’s a very small fraction of the civil service reductions that had already occurred, and it is not, I think, financially problematic in any serious ways. It’s an issue of some symbolic importance, but it’s not a question of the fiscal stability of the Greek state.
So they’re going forward with measures which can be carried out–and there are quite a number of things that can be done within the limits of the previous, of the ongoing–of the new agreement. And then they will be working on the measures that remain to be discussed, but that have to be discussed with the partner institutions.
How they handled the existing–the ongoing fiscal crunch is a question that’s going to have to be taken up, and quite soon. What happened over the previous two months was that within the framework of a fear-driven election campaign, and then the subsequent tension over these negotiations, which was accompanied by a very tough policy by the European Central Bank, which provided support to the Greek banks but only in small increments, there was an enormous amount of withdrawal of deposits from the Greek banking system, and also a great shortfall of tax revenues, as people withheld the taxes that were already due. And those things are going to cause, are causing trouble for the fiscal position of the Greek state.
So we shall see whether having achieved an agreement which provides some basis for hope for financial stability, whether the deposits come back in and whether people start meeting their tax bills, in which case that problem might be somewhat mitigated. If it isn’t, that’s going to obviously be a question that’s going to have to be taken up in the context of the discussions that are about to happen.
PERIES: James, the Greek oligarchs, the rich, mainly, are causing a run on the banks, anticipating capital controls. Is this actually happening?
GALBRAITH: The impression that the Greek authorities had last week was that most of the money going out of the banks was simply ordinary people, middle-class households, who were worried about the possibility that the banks might close or that capital controls would be instituted, and that they were withdrawing cash in order not to be caught short if that happened, that this was not to a–it was not driven by oligarchs indulging in capital flight out of the country, at least not primarily so. So there is some hope that with stability the money will come back into the banks. After all, it’s not very safe to leave it in suitcases and closets in your apartment. That is–and that’s a possibility. But we’ll see what happens, because we really don’t. It’s really hard to know exactly until the circumstances tell you.
PERIES: James, you’re an insider now. Give us an inside look at how prepared the Greek government is to deal with the financial crisis, and also to manage the complexities coming up, perhaps, in four months again.
GALBRAITH: Well, first of all, it is a brand-new government. It is a government of people who have not previously been in government, in many cases not previously in politics. It is a government that was faced with an extremely short and high-pressure deadline to come up with negotiating positions, documents, and presentations for creditor institutions, partner institutions, that have been in place for a long time. So it was a very challenging business, and would have been for any government in that position, to maintain its position in these discussions, and discussions which also involved 18 other finance ministers.
I think it was quite remarkable that Yanis Varoufakis, the new finance minister, was able to pull off an agreement within the timeframe, that very tight February 28 deadline for the expiration of the existing program. And that’s a good–that augurs well for prospects going forward.
Right now, a major advantage of having the four-month window is that the government can begin to get their personnel in place, it can begin to define and implement the priorities that are immediately open to it, can begin to show progress on the very substantial areas where there is already agreement.
And much of what was being discussed here, by the way, were issues that are matters that are not politically controversial–going after tax evasion, cracking down on corruption, reform of public administration. Much of this is common ground already, and the issues were whether it could be spelled out with sufficient clarity so that the creditor institutions and partner governments were fully aware of and persuaded of what the Greek government’s position actually is. And I think that has largely been accomplished, and so that there is some breathing space for the government to, let’s say, consolidate its position and begin to get some work done.
PERIES: James, in spite of this extension agreement, Greece is still in a financial crisis. How are they positioning themselves to manage things four months now down the road?
GALBRAITH: Well, just to be clear about the terms that have been agreed to, what happened yesterday was that, first of all, the institutions and then the finance ministers agreed that the letter submitted by the Greek government was a sufficiently comprehensive basis for a start to discussions and negotiations on revision of terms of the existing arrangement and a possible new arrangement.
Those discussions should begin quite soon. They can be carried out over a four-month window. But there’s certainly, I think, reasonable hope that they won’t take that amount of time, that in fact the agreement can be reached on, first of all, the large areas of common ground, and then a reasonable accommodation on the areas of difference in a much shorter period of time.
And then you go forward from there having secured financing that will get you through the major repayments that are due this year. And after that, the situation becomes substantially more normal; that is to say, the government can go ahead and pursue its policies with a view to achieving some restoration of economic stability, economic growth, emelioration of the humanitarian crisis, and other major objectives that it has. So it’s not a question of preparing for negotiations that start in four months. It’s a question of getting the framework down now so that a governing program can go forward.
PERIES: And one of the agreements that I saw that was tabled, the list of compliances, requires the Greek government to condense the state itself from 16 ministries to ten ministries. Yet a robust civil service is really necessary if they’re going to do the things that they said they are going to do, which is to boost revenue by collecting taxes more efficiently and effectively. How are they going to do it with a smaller government in place?
GALBRAITH: Well, the restructuring of the structure of the ministry has already occurred. That was one of the very first things that Alexis Tsipras did was to consolidate ministries in a formal sense, and placing some under the authority of others. So I don’t know that that is something that–certainly not something that was imposed from the outside. It was a simplifying initiative in order to–in part to make the cabinet into a more wieldy, less unwieldy governing body than it had been before.
PERIES: Alright. Very well. James, thank you so much for giving us this insider view on what’s going on in Greece. And I hope you come back very soon and expand on this.
GALBRAITH: Thank you.
PERIES: And thank you for joining us on The Real News Network.
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