By Alejandro Chafuen, Forbes
Last week Europe was hit with a terrorist attack that has raised awareness about the need to change how to deal with 21st century security threats. European unity will be tested again soon, but the question now will become how to deal with economic threats. Much will depend on Germany’s influence.
In Greece, the polls indicate that the radical left-wing party, Syriza, is poised to win the election on January 25. When I write “radical,” I mean it. In their words, the party “is based upon the Marxist and wider emancipatory thought and history, it strives to process it further by utilizing every significant theoretical contribution … it coalesces support from the communist, radical, reformist, anti-capitalist, revolutionary, and libertarian left in its entirety, leftist socialists, democrats, left wing feminists and radical environmentalists.”
Many analysts, including Forbes contributors, are predicting that a Syriza victory will lead to Greece abandoning the euro to avoid the disciplined economic reforms needed to pay off their euro-denominated debt: a Grexit, a new word in the international political jargon which will become commonplace during these next months. The euro has enemies even among advocates of free-markets. Others have argued that the euro has worked well to prevent the type of populist monetary nationalism that took many countries to ruin. One of the most prominent is Jesús Huerta de Soto, a renowned free-market Spanish economist of the Austrian tradition. In a paper delivered in 2012, he argued that the euro “is acting as a proxy of the gold standard disciplining politicians and putting a limit to the growth of the welfare state.” In the same paper, however, he cautioned that, “It is quite possible that once the historical memory of recent financial and monetary developments begins to fade, the European Central Bank (ECB) might retort to their past mistaken policies by giving impulse and accommodating to a new credit expansion bubble.” And so it seems. The ECB is debating the amount and condition for a round of debt monetization (quantitative easing). The figure discussed is €500 billion ($590 billion) and the ECB might make an exception to allow the purchase of Greek debt despite its low grade.
Apart from the Greeks, the only country with actors who can help influence Greece’s future is Germany. Two years ago it was unthinkable in the minds of most relevant political and economic German leaders that they would not do the utmost to prevent a Grexit by supporting and participating in a bailout. The exposure was too great as well as the possibility of a domino effect. As one of those German leaders told me off the record “the unthinkable is no more.” As reported in Spiegel, “Contrary to its rhetoric, the Federal government is prepared to let Greece withdraw from the eurozone if necessary, according to information from Der Spiegel. Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble (both from the CDU) believe that an exit from the common currency as acceptable.”
During these last years, German banks and industries have been hedging their decisions in case the Greek crisis would continue. They do not see serious structural reforms happening in Greece. And now they see a likely political winner that advocates the return to old and failed welfare state practices. Alexander Skouras, in charge of Greek outreach for the Atlas Network, summarizes some of Syriza’s welfare state promises: free electricity and food stamps for 300,000 households; a State Housing Program; reintroduction of the 13th pension per year for retirees earning less than €700 per month (an 8 percent increase); free and universal healthcare; free public transportation for lower incomes; increasing the minimum wage to €751 from €510 per month; and a change in the labor laws to make it harder to fire and strengthen collective bargaining agreements.
Skouras adds that Syriza’s platform to deal with the debt shifts the burden totally to outsiders. They seek a haircut of the larger part of the Greek debt, a growth clause for debt payments, a payment moratorium, an exclusion of the Public Investment Program from the stability and growth pact and economic policy coordination, a European “New Deal” with public expenses to stimulate growth, and quantitative easing through the direct purchase of Greek bonds by the ECB.
The Germans, who began tackling their own welfare state problems at the turn of the century, have little patience for this new re-energized populism. They embarked on gradual but persistent structural reforms. Last year they celebrated the 10th anniversary of some of the reforms. Chancellor Gerhard Schröder, who started the reforms, did not capture the political benefit of these reforms.To help with the liberalization process, the Friedrich Naumann Foundation—similar to a free-market think tank—sponsored programs and research to pave the ground for the liberalization of the labor market. It was not easy for the Germans, but enlightened leadership and the social cohesion of their civil society helped them push ahead. No such leadership or cohesion is seen in Greece today.
How do Greek scholars and analysts see the immediate future? Will a triumph of the radical left lead to Greece abandoning the euro? According to Athanasios Tsiouras, a director at the Liberty Forum of Greece, “Most potential Syriza voters believe that Greece’s lenders are bluffing and are going to keep on bailing out Greece, no matter what. Only the lenders can address this misconception in a convincing manner.” He adds, “If the radical left sticks to its campaign promises, they may leave little room for any other solution than abandoning the euro.”
Campaign promises are seldom good predictors for economic policy. According to Dr. Aristides Hatzis, who teaches law and economics at the University of Athens, “an overwhelming majority (75 percent) wish for Greece to stay in the eurozone “at any cost.” A government that will be held responsible for Greece’s exit from the eurozone will have to persuade Greek people that this is for their own good.” Thirty percent of Greek imports are for their energy sector, and it also imports a sizeable amount of its food and pharmaceuticals, so a devaluation would lead to much suffering and a likely economic contraction.
What about the possibility of contagion? Which countries will be more affected by the continued upheaval in Greece? From an economic point of view, given the small size of the economy, Greece will bear most of the economic burden. The political impact however, might be significant. Populist parties in Spain and France might receive a boost if during the first months of a potential Syriza government they seem successful. Spain is watching closely. Pedro Schwartz, based in Madrid and president of the Mont Pelerin Society, notes that as the elections in Spain are not scheduled until the end of 2015, a failure of Syriza would take steam out of Podemos—the rising political force in Spain. Podemos (which means “we can” in Spanish), has similar radical views and won 8 percent in the recent European elections and many are forecasting that it might achieve power in Spain.
Professor Hatzis cautions that “if Germany yields to a radical Greek government this is going to give incentives to the Spanish, Italian and French voters to play the same game of brinkmanship.” On the other hand, if Germany does not yield and Greece leaves the euro (not wanting to comply with lender-mandated economic reforms) other European countries will face new major pressures for increased monetary nationalism.
Left-wing interventionists like to point out the case of Argentina, which after a major devaluation in 2001 (300 percent) experienced fast economic growth. Yet the fast rates of growth were aided by a boom in the price of Argentine exports and the fact that they were mostly self-sufficient in food and energy. As those factors are not present, Greece “cannot print its way out of recession” argues Tsiouras.
During the oil bonanza years, which is now drying up, left-wing populist governments in Latin America had the help of the largesse of Venezuela. The radical left in Greece does not have major foreign economic benefactors. Hatzis mentions that Syriza still receives positive coverage from several international publications, such as the New York Times and Libération in France. But that will not help solve their economic woes.
The most optimistic scenario for the prospect of free-market reform in Greece would require an end to the bailouts thereby leading to Greek economic reform … or Greece abandoning the euro. More soft aid would consolidate left-wing populism for at least a decade. Without a bailout, the continued troubles would diminish the chances that another country, like Spain, will be captured by left-wing populists and join ranks with Syriza. Only then would the voices of moderation in Greece have a chance to start winning some space. There is no short term solution that will put Greece on a fast road to freedom and prosperity. They need a change in economic culture and that takes time. Not a tragedy, but a reality.
