Greece’s Fatal Mistake, and Europe’s

Voters could pull the plug on efforts to reconcile the eurozone’s need for growth with its inability to reform.

By Joseph C. Sternberg

Jan. 22, 2015 6:52 p.m. ET


Greek voters, foreigners worry, are on the verge of plunging the eurozone into another crisis if parliamentary elections on Sunday put an anti-euro party in power. That optimistically assumes a crisis can be averted if voters change their minds at the last minute. The bigger problem on display in this campaign is that another eurozone crisis is coming anyway.

That’s not to minimize the severity of the jam into which Greek voters could push the eurozone. The left-wing Syriza party has a lead in the polls and an unrealistic policy agenda, to put it kindly. The party’s grand idea is that the rest of the eurozone is sufficiently desperate to keep Greece in the fold that the country’s creditors will accept significant write-downs on their debt holdings. Syriza also seems to think it can conjure up the billions of euros necessary to reverse hated fiscal tightening.

It’s not clear that Greeks buy this. The party’s support, currently pegged at around 33%, appears to be wide but not deep. Polls suggest some three-quarters of the electorate want to stay in the euro. So with its bargain-hard strategy for dealing with the country’s creditors, Syriza is threatening to take a hostage that many of its voters presumably aren’t prepared to kill.

Conventional wisdom holds that a win for the party should best be viewed as a protest vote against the current government rather than as an endorsement of the more radical elements of Syriza’s own agenda, something leader Alexis Tsipras would forget at his peril if he’s the next prime minister. But politicians perilously forget reality all the time. Hence the worry that Mr. Tsipras will overplay his hand in negotiations with creditors, and Greece will end up accidentally leaving the euro without a viable plan for what to do next.

Not that the center-right New Democracy party and current Prime Minister Antonis Samaras are any better. Mr. Samaras trumpets the fact that Greece has posted a small primary budget surplus (excluding debt service) and the economy is returning ever so tentatively to growth. So what? This has been accomplished mainly through deep but erratically distributed cuts to salaries and pensions, coupled with steep and haphazardly imposed new taxes. Supply-side reforms are almost entirely absent. As a result, unlucky households are left earning less and still paying high prices to Greece’s politically powerful and unreformed sectors such as power and professional services.

Mr. Samaras is on firmer ground with a campaign of fear, warning Greeks that a Syriza victory would precipitate a much-dreaded loss of the euro. But even under Mr. Samaras’s allegedly steady hand Greece has tripped into another moment of high drama. He may not be as willing as Syriza to take steps that could push Greece out of the euro, but he’s not willing to undertake the broader policy reforms that would assure Greece can stay in it either.

Given those choices, it’s easy to see why cynicism is growing. The bright spot in this election is a party of professionals, Potami (“The River”), which could come in third on Sunday with enough seats to play kingmaker if Syriza doesn’t win an outright majority. Their status as political outsiders is a big part of their appeal. The fact that they’re mainly creatures of the center left could allow them to join a coalition government led by Syriza—and then, one hopes, moderate the larger party’s more radical urges.

But at this early stage Potami still is more flicker than flame. Vague appeals to competence and “acting in the national interest” work fine in a campaign, but less so once a party needs to make decisions in parliament. Potami’s candidates and supporters encompass such a broad range of opinions about what constitutes the national interest, from libertarian to center left, that a lot of people inevitably will end up disappointed.

The problem no one yet has an answer for is how successfully the old system has entrenched itself, as journalist Yannis Palaiologos describes in his illuminating study “The Thirteenth Labour of Hercules.” Greek politicians spent several generations divvying up spoils to those, mostly of the middle class, with the right connections. What remains now is a web of powerful unions, a bloated bureaucracy full of political hires, and a protected professional class that repulses all efforts at reform. They haven’t exactly benefited from the general malaise since 2009, but they’ve been shielded from its worst effects. They aim to keep it that way.

This is different in degree but not in kind to what’s happening in many other parts of Europe. The fatal mistake Athens made was to conduct its patronage politics via an unusually large state sector, leaving the system vulnerable to acute fiscal strain. The Germans, French and Italians have developed very similar protected special-interest constituencies in their own economies. They’ve just been subtle enough to coddle their patronage networks not exclusively through handouts but also via strict labor laws and anticompetitive regulations that trigger a fiscal emergency only slowly by stifling revenue-generating growth.

The main danger of a Syriza victory on Sunday is that the party might, deliberately or accidentally, pull the plug on half a decade’s worth of efforts to reconcile the eurozone’s need for growth with its political inability to reform itself. If, so far into this rolling crisis, no one anywhere yet has a handle on how to do that, the eurozone has far bigger problems than one parliamentary vote in a small Aegean state.

Mr. Sternberg is editorial-page editor of The Wall Street Journal Europe.

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