Financial Times
February 12, 2012
Two years ago, most European policymakers still believed that Greece would pull through. They lacked experience in managing financial crises. They did not even consult with policymakers in other parts of the world who had dealt with crises in previous decades. Armed with ignorance and arrogance, they ended up repeating everyone else’s mistakes. They thought they were clever when they came up with the idea of an expansionary fiscal contraction. And they thought that a voluntary private sector involvement (PSI) could really help.
Having failed to learn from the mistakes of others, some of them are now beginning to learn from their own. In some northern European capitals, policymakers are beginning to understand that the Greek programme has been an unmitigated failure. They have lost trust in Greek politics. As we enter year five of a depression, and the certainty that Greek gross domestic product will fall further under the influence of austerity, they are on the verge of giving up on Greece.
But they are also inherently risk-averse, and prone to stick to procedure. They feel they must pretend to take the latest Greek austerity programme seriously, while simultaneously giving the impression that they will safeguard their own taxpayers’ interests. The Greek coalition parties have reached an agreement that should, at least formally, satisfy the demands of European finance ministers. The Greek parliament will accept it. The eurogroup will also accept it. Separately, the Greek bondholders will reach an agreement on PSI.
The Bundestag could still derail it, as public opinion in Germany is currently turning extremely nervous at the prospect of a futile €130bn programme. But my central expectation, however, is that the programme will happen. A period of calm will set in, but after a few months it will become clear the cuts in Greek wages and pensions will have worsened the depression. Europe’s policymakers will also find out that, in such a desolate environment, even a reduced target for privatisations is unrealistic. Greek GDP fell 6 per cent in 2011, and continues to decelerate at a similar rate this year. And before long, another round of haircuts beckons.
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