The Greek people have already paid highly for their own governments’ mistakes. Photo: Getty
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The Greek people have paid for their governments’ mistakes – and for the errors of the Troika

The meltdown in Athens and the mistakes of the IMF.

To make sense of the confrontation between the Syriza government in Greece and the Troika (the European Commission, the European Central Bank and the International Monetary Fund), it is vital to understand the one big mistake that each side made. The mistake on the Greek side is well known. In the years following the formation of the eurozone, the Greek government borrowed far more than it should, sometimes secretly. When the full extent of that fiscal profligacy became known, the financial markets realised that default was a distinct possibility, and the government was no longer able to borrow from them.

Over the next few years the Troika provided large sums of money to “bail out Greece”. The minor share of that provided new loans to the Greek government so that it could gradually balance its books. When Greece complains about the austerity imposed on it by the Troika, it is important to understand that without Troika assistance it would have had to endure something even worse and far more immediate. The government was spending much more than it received in taxes, and from the moment it stopped being able to borrow from the markets it would have had to end this. Almost certainly the banking system would have collapsed, and the government would not have had the resources to support its banks.

The Troika’s big mistake was what it did with the larger part of its rescue package. If it had done nothing, the Greek government would have been forced to default on its debt, and those who owned that debt (Greece’s creditors) would have received very little or nothing. Instead, the Troika partly bailed out these creditors, who included many of their own leading banks, in Germany and France in particular. In effect, what the Troika did was to buy much of the Greek government debt owned by these private-sector institutions, at discounted prices. From the Greek government’s point of view, this replaced private-sector debt with debt owned by the Troika.

Why was this partial bailout of Greece’s private-sector creditors a mistake? It meant that the remainder of the rescue package, designed to ease the Greek government’s transition to balance, was far too small. The Troika thought that the Greek government could quickly cut spending and raise taxes with little consequence for the rest of the Greek economy. It was completely and predictably wrong. Sharp and intense austerity played a great part in reducing GDP by 25 per cent and creating mass unemployment.

Imposing less austerity on Greece, producing a more modest decline in Greek output, would have required additional loans from European governments. If this had been available in addition to the existing package, it would have saddled Greece with a debt it surely could not have repaid, and may have been unacceptable to European voters. This is why the partial bailout of Greece’s original creditors was such an error. If it had not been done, and some of that money had been used to allow less austerity to be imposed on the Greek people, we would not be at the present impasse.

Over the past year the Greek government has managed to achieve approximate primary budget balance: its taxes cover all its spending, excluding interest payments. It is no longer asking for more money to cover spending, but simply additional loans to pay back interest and maturing loans. In short, it needs money from the Troika to repay the Troika. As the price of these loans, the Troika is demanding yet more austerity. The Syriza government wants to avoid this to give the economy a chance to recover.

From a macroeconomic viewpoint, this is reasonable, because it would probably be in the long-term interests of the Troika. The OECD estimates that Greece has unused resources worth at least 10 per cent of GDP. A pause in austerity would allow demand to increase, reducing unemployment and generating more taxes. The Greek government could use some of the additional revenue to start repaying its loans.

So why does the Troika insist on continuing with austerity? The Troika contains many different views and interests. Some may still not believe, despite all the evidence, that austerity hurts growth. Perhaps others are happy to see a left-wing government fail, because it does not accept the received wisdom from Brussels and Frankfurt on what good economic policy involves.

Another explanation is that eurozone governments have become victims of their media’s rhetoric. The impression the media conveys is that all of the Troika’s loans have gone to cover Greek government spending. In fact, most went to bail out Greece’s previous creditors and any further loans will just repay existing loans. But to people in the eurozone it seems as if the Troika is transferring more of their money to Greek citizens. In these circumstances, the politicians need to appear to be tough on Greece. They fear that to change policy now would lead their electorates to ask why previous policies have failed, which would expose the Troika’s big mistake.

The Greek people have already paid highly for their own governments’ mistakes before 2010. Now it seems they must suffer as a result of the Troika’s errors. That the governments of the eurozone continue to display a macroeconomic understanding of fiscal policy equivalent to that of Angela Merkel’s imagined Swabian housewife is perhaps not surprising – it has been a consistent pattern since the eurozone began. More surprising is the behaviour of the IMF, established to represent the international community and full of hundreds of economists. That it had the means to stop this happening but chose not to do so is equally tragic.

Simon Wren-Lewis is Professor of Economic Policy in the Blavatnik School of Government at the University of Oxford

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 01 July 2015 issue of the New Statesman, Crisis Europe

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The Prevent strategy needs a rethink, not a rebrand

A bad policy by any other name is still a bad policy.

Yesterday the Home Affairs Select Committee published its report on radicalization in the UK. While the focus of the coverage has been on its claim that social media companies like Facebook, Twitter and YouTube are “consciously failing” to combat the promotion of terrorism and extremism, it also reported on Prevent. The report rightly engages with criticism of Prevent, acknowledging how it has affected the Muslim community and calling for it to become more transparent:

“The concerns about Prevent amongst the communities most affected by it must be addressed. Otherwise it will continue to be viewed with suspicion by many, and by some as “toxic”… The government must be more transparent about what it is doing on the Prevent strategy, including by publicising its engagement activities, and providing updates on outcomes, through an easily accessible online portal.”

While this acknowledgement is good news, it is hard to see how real change will occur. As I have written previously, as Prevent has become more entrenched in British society, it has also become more secretive. For example, in August 2013, I lodged FOI requests to designated Prevent priority areas, asking for the most up-to-date Prevent funding information, including what projects received funding and details of any project engaging specifically with far-right extremism. I lodged almost identical requests between 2008 and 2009, all of which were successful. All but one of the 2013 requests were denied.

This denial is significant. Before the 2011 review, the Prevent strategy distributed money to help local authorities fight violent extremism and in doing so identified priority areas based solely on demographics. Any local authority with a Muslim population of at least five per cent was automatically given Prevent funding. The 2011 review pledged to end this. It further promised to expand Prevent to include far-right extremism and stop its use in community cohesion projects. Through these FOI requests I was trying to find out whether or not the 2011 pledges had been met. But with the blanket denial of information, I was left in the dark.

It is telling that the report’s concerns with Prevent are not new and have in fact been highlighted in several reports by the same Home Affairs Select Committee, as well as numerous reports by NGOs. But nothing has changed. In fact, the only change proposed by the report is to give Prevent a new name: Engage. But the problem was never the name. Prevent relies on the premise that terrorism and extremism are inherently connected with Islam, and until this is changed, it will continue to be at best counter-productive, and at worst, deeply discriminatory.

In his evidence to the committee, David Anderson, the independent ombudsman of terrorism legislation, has called for an independent review of the Prevent strategy. This would be a start. However, more is required. What is needed is a radical new approach to counter-terrorism and counter-extremism, one that targets all forms of extremism and that does not stigmatise or stereotype those affected.

Such an approach has been pioneered in the Danish town of Aarhus. Faced with increased numbers of youngsters leaving Aarhus for Syria, police officers made it clear that those who had travelled to Syria were welcome to come home, where they would receive help with going back to school, finding a place to live and whatever else was necessary for them to find their way back to Danish society.  Known as the ‘Aarhus model’, this approach focuses on inclusion, mentorship and non-criminalisation. It is the opposite of Prevent, which has from its very start framed British Muslims as a particularly deviant suspect community.

We need to change the narrative of counter-terrorism in the UK, but a narrative is not changed by a new title. Just as a rose by any other name would smell as sweet, a bad policy by any other name is still a bad policy. While the Home Affairs Select Committee concern about Prevent is welcomed, real action is needed. This will involve actually engaging with the Muslim community, listening to their concerns and not dismissing them as misunderstandings. It will require serious investigation of the damages caused by new Prevent statutory duty, something which the report does acknowledge as a concern.  Finally, real action on Prevent in particular, but extremism in general, will require developing a wide-ranging counter-extremism strategy that directly engages with far-right extremism. This has been notably absent from today’s report, even though far-right extremism is on the rise. After all, far-right extremists make up half of all counter-radicalization referrals in Yorkshire, and 30 per cent of the caseload in the east Midlands.

It will also require changing the way we think about those who are radicalized. The Aarhus model proves that such a change is possible. Radicalization is indeed a real problem, one imagines it will be even more so considering the country’s flagship counter-radicalization strategy remains problematic and ineffective. In the end, Prevent may be renamed a thousand times, but unless real effort is put in actually changing the strategy, it will remain toxic. 

Dr Maria Norris works at London School of Economics and Political Science. She tweets as @MariaWNorris.