With Greece again appearing to be edging towards the brink of a "Grexit," financial markets are sensitive to daily headline news about EU negotiations, and what a potential default would mean now for Greece and EU integration policy.
Greece's Syriza and the question of the European Union's political will:
Is a compromise agreement enough to keep the EU from "dis-integrating?"
I am of the view that the immediate risk that Greece will leave the EU is overstated and will be surmounted as a "compromise" agreement in May. Syriza and Greece will likely bear the brunt of the anticipated compromise, as Syriza moderates its policy to meet the demands of its creditors and pressure from the European Union. A default and a "Grexit" from the EU will be avoided near term. If Greece were to exit now, it would not be due to the political will of the EU or Greece, but rather a financial market "accident" due to the months of political brinkmanship between all parties and an investor panic.
The EU, however, has missed an opportunity to recognize the legitimacy and truth in many of Syriza's assertions. It is EU integration policy needs to evolve to keep the European Union together in the years to come.
A compromise will emerge in May, at the expense of Syriza's anti-establishment "radicalism."
Compromise between Syriza and the EU has been the likely outcome since Syriza won Greek elections in January, as it is in no one's best interest, not the EU and certainly not Greece, to see a Greek "exit" either from the Eurozone or the EU. As is often the case, "radical" parties, become more moderate post-election, when faced with the institutional demands of elected office. Syriza has been slow to evolve from a "radical," anti-establishment, platform, but will likely do so now, even at the expense of losing the more "radical" factions within the party, given the calendar of debt payments looming in May.
In anticipation of a compromise, Syriza will likely show a greater degree of true reform and austerity measures in Brussels, please its creditors, and also find a way to justify a compromise to its Greek constituency (who are mostly pro-Euro, but anti-austerity). A Greek "referendum" remains unlikely. The EU is aware that Greece cannot meet all of its demands, adding to the likelihood of a compromise.
The Syriza win in Greece could have been good for EU integration policy had the influential policy makers within the EU, the IMF, and the ECB acknowledged the merit of Syriza's viewpoints.
Syriza came to power on humanitarian grounds, reflecting the political will of its constituency, the Greek people, that the policy of austerity, as it has been implemented, has not produced economic growth. Even the IMF acknowledges that point. Austerity policy, as implemented, contributed to the collapse of the Greek economy in the post global financial crisis era.
Syriza acknowledges the need to cut Greece's public sector and create a more favorable investment and business climate. However, Syriza correctly voices that austerity and cost efficiencies don't necessarily produce economic growth. Greece needs to stimulate growth and employment not only to resolve its humanitarian crisis, but also to remain solvent to be able to pay back its many creditors. To pay back the debt, Greece would require a fundamentally different business model, one that would put Greece on a sustainable development strategy that includes competitive export sectors that create employment.
The heart of the euro crisis in the post global financial crisis era is the divergence in competitiveness and productivity between the underlying real economies of member states, now roughly divided between core and periphery.
The missed opportunity in recent months is on behalf of the EU, as EU integration policy has failed to evolve despite the evidence that austerity policy, as implemented in recent years, has failed to truly integrate the European Union. By many measures, there are high degrees of divergence in competitiveness and productivity in underlying EU member state economies. Aggregate economic growth numbers for the EU mask the divergence between member states.
EU integration policy is based in the Maastricht Treaty of 1992, which has austerity as its cornerstone to measure debt containment and fiscal consolidation. The Treaty doesn't, however, measure the costs of fiscal consolidation in terms of lost economic growth, the cost of lost output, nor unemployment.As with many other "peripheral" countries, Greece's achieving Maastricht "convergence criteria" and qualifying for entry into what is now the Eurozone did not result in Greece's becoming more competitive and productive. In short, over 20 years after the Maastricht Treaty, Germany is still producing and exporting BMWs, and Greece is still producing and exporting olives.As expressed in 2014 by Mr. George Provopoulos, Governor of the Bank of Greece from 2008-2014:
"Back in 2001 it was expected that Greece's inclusion in the core of European economies would act as a catalyst to accelerate its real convergence with the advanced European countries. Unfortunately, these expectations did not materialise ."
As long as EU policy fails to address the underlying crisis of competiveness between EU member states, of which Greece is an extreme example, the EU will continue further on the path of what I have referred to as "dis-integration," a deconvergence economically, politically, and socially, between member states. The "core" and "periphery" will remain apart in competiveness and productivity, solidifying at least a two-tier EU, creating an uncertain future for the viability of the sustainable integration of the European Union as a whole. It is now broadly understood and recognized that EU integration policy must not only ensure debt sustainability and market confidence, but also must be complemented with a sustainable growth strategy, as Syriza asserts.
Footnote: Quote from George A Provopoulos: "The Chronicle of the great crisis - The Bank of Greece 2008-2013" Speech by Mr. George Provopoulos, Governor of the Bank of Greece, on the publication of "The Chronicle of the great crisis - The Bank of Greece 2008-2013", Athens, 11 June 2014.