Once again, Greece spent days battling rumors that it is about to default. Realistically, whether and how Greece defaults comes down to a single question: what is Europe’s patience with Greece? Will the ‘troika’ hold back the disbursement of an installment if Greece misses its targets? Or will it look the other way, agree to an exemption and live to fight another day?
The problem is this: Europe is in no better position to let Greece default now versus 18 months ago. Yet Greece is exhausting the troika’s patience. Mainly this is a dispute about why Greece is missing its targets. According to the Greek side, it is all about the recession, which is bigger than anticipated. Yet the recession does not explain the slow progress in passing reforms or the slow implementation of reforms passed. It does not explain the lack of political will to unsettle constituencies, nor does it explain the political math that politicians engage in when deciding which laws to pass and implement.
So the Greek government and the troika are speaking past each other. While the Greek side is explaining why it is missing its targets, the troika is saying, “OK. But what about all those other things we’ve talked about?” If Greece made a sincere effort to reform and the weight of the recession somehow derailed the numbers, then it would be easy for the troika to look the other way. But with less progress on reforms, the failure to meet budget targets is harder to oversee, much less to forgive.
The government also refuses to see how its own actions are making the recession worse. The most recent measure – effectively to levy a new property tax – was particularly depressing. It was depressing because when confronted with the inadequacy of its own measures, the Greek government chose a blatant “grab” measure over an effort to accelerate other changes.
What changes? For one, it seems inconceivable that there is still so little progress in collecting tax arrears – a mere fraction of those would obviate the need for this latest measure. Second, the government is not moving boldly enough to shrink the public sector wage bill. If the government made progress on those two areas, it could easily lower taxes and boost household income to re-start private consumption.
Greece is now entering a critical phase: it started with a very sincere effort to reform and an impressive fiscal consolidation in 2010. It then slowed down the reform agenda, provoking an intense reaction from those people who saw that it was shirking from its commitment to change the Greek economy and political system. Over time, the reform agenda has become more ambitious in theory but feebler in practice.
Now, the government is faced with its own limitations and is looking to merely grab money. I have never believed that Greece’s task is impossible – yet I am increasingly convinced that the government is trying to do just enough to secure the next tranche. Cosmetic change trumps fundamental reform. In that context, the troika may still decide that it cannot afford Greece to fail. But that game will be different – to paraphrase the old Soviet joke, “Greece will pretend to reform and the troika will pretend that Greece is reforming.” The whole point of the program is to provide a framework for change - if it becomes merely a pretext for delaying the inevitable, then what good does it do for Greece?