The new Greek crisis: Time for compromise

However Brussels is not in a winning position either.

In the eurozone, the fiscal balance will remain negative through the coming years, while government debt is close to 95 percent. If the eurozone was an aspiring member of the region, it would not be able join it today.

Things are not likely to get better soon. The expectation is that real GDP growth in the eurozone will hover around 0.7 percent in 2015 and remain at 1 percent for the next half a decade.

In the short term, growth in Germany and Spain, which currently drive regional growth, is likely to decelerate. France and Italy can expect another year of underperformance.

Germany’s recent growth surprise was based on private consumption and net exports – both of which will take a hit if European turmoil prevails.

And despite the weakening euro, the eurozone inflation rate remains very low.

So long as Europe’s political stability remains at risk, the ECB’s sovereign quantitative easing (QE) cannot give a critical boost to growth or inflation.

European Commission president Jean-Claude Juncker’s much-touted €315 billion investment plan hopes to build on €5 billion from the European Investment Bank and €16 billion from the EU budget. It is very unlikely it will achieve a 15-fold leverage of “private and public investment”.

The longer the Greek talks take, the greater the possible subsequent economic harm and market volatility.

Greek debt is systemic

Today, we know that when the board of the International Monetary Fund (IMF) met in May 2010 and approved Greece’s first bailout, many emerging economies opposed the Troika’s bailout and supported debt cancellation.

To them, the Greek crisis was the latest link in a chain of debt crises since the liberalisation of bank lending in the 1970s, including the debt crises in Africa and Latin America in the 1980s and early 1990s, East Asia’s financial crisis in 1997-98 and the subsequent defaults in Russia and Argentina.

When the Troika’s (IMF, ECB and EC) bailouts began in Europe in 2010, some estimates indicated that €310 billion had already been lent to the Greek government by banks and the European financial sector. Thereafter, the Troika sent another €252 billion to Athens.

Today, the Greek government debt still hovers around €317 billion. Less than 10 percent of the total is said to have gone to the Greek people.

Most went to European and Greek banks, which lent money to Greek governments and state bureaucracies, whose corruption were known to Brussels, Frankfurt and Washington DC.

The bailout was an attempt to contain contagion from Greece. These policies relied on projections that were flawed, as IMF chief economists would acknowledge later, and schedules that were not viable, as critics warned three years ago.

Toward a compromise

The new government, still finding its feet, has moderated its demands, backing away from an initial demand for debt forgiveness. Finance minister Yanis Varoufakis is instead proposing a “menu of debt swaps”.

Syriza has also expressed a willingness to reach primary surplus at the cost of some of its spending pledges.

There is another element to the talks.

Brussels is for the first time negotiating with a Greek leadership that wants to go after “corrupt elites” and restore “rule of law” in government bureaucracies.

Meanwhile, both sides are entwined. A sustained recovery in Greece is not possible so long as political risks cloud its economic prospects. Nor is a sustained recovery viable in the eurozone so long as economic risks fog the region’s political prospects.

Despite all the posturing, a compromise is still possible between Greece and its creditors. The costs of a failure would be prohibitive.

Dan Steinbock is research director of International Business at the India,China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore)