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Greece isn't any old troubled debtor

Robert Peston
Economics editor

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What is very striking - and important - about the agonised talks between Greece and its creditors is that no European leader has tried to bind the feuding sides together with a call to European solidarity, or with any emotive rhetoric about how this great monetary project is all about prosperity and peace for all eurozone citizens.

Actually that is not quite true. The maverick Greek finance minister, Yanis Varoufakis, has repeatedly tried to play the "we-are-all-in-it-together" card. But he's been viewed by his eurozone peers as though he farted in the negotiating room.

There have been no great vision speeches by Angela Merkel or Francois Hollande or even Jean-Claude Juncker, no heart-rending empathy with the penury of Greek people, whose incomes have fallen by a quarter since they first started tightening their belts to meet the austerity requirements imposed on Greece by the initial bailouts.

Nor has any great sense been conveyed that maintaining the wholeness and integrity of the eurozone is a matter of passionate principle.

Instead the public and private debate has been couched in the language of national interests, rather than the imperative of keeping the so-called great European project on the road.

Probably the clearest and starkest manifestation was last night's enlightening blog by the chief economist of the IMF, Olivier Blanchard.

This French technocrat made it explicit that what is dividing the two sides is both simple to understand and - apparently - impossible to deliver in practice.

The creditors - eurozone nations, the European Central Bank and the IMF - have reduced the scale and pace of austerity that they insist on from Greece, but they still want greater cuts, equivalent to about 0.5% of GDP per year for the next three years, than Athens is prepared to deliver.


And the reason, according to Blanchard, is simply that every notch down in the budget surplus promised by Greece is a notch up in the quantity of the loans already provided to Greece that will eventually have to be written off.

This is how Blanchard puts it: "any further decrease in the primary surplus target, now or later, would probably require, however, haircuts". And what he means, just to remind you, is a brutal short-back-and-sides for Greece's official debts of €320bn, equivalent to 180% of its stagnating GDP.

To be clear, not all economists would accept that more austerity will improve the sustainability of the existing debts: some would argue that in an economy which is contracting once more, cuts will further undermine the recovery and make the debt burden even harder to bear.

And some of them would say the creditors are in self-harming denial, by not cracking on with debt write-offs today, to give Greece a chance to climb out from under the deadening burden of its massive indebtedness.

The nub of the whole mess is captured when Blanchard says "there is a limit to how much financing and debt relief official creditors are willing and realistically able to provide given that they have their own taxpayers to consider".

Or to put it another way, Mrs Merkel and Mr Hollande don't want the backlash from their own citizens of being seen to let the Greeks off what they owe.

Regressive cuts

Now it is not just the quantum of austerity that divides Athens from its creditors, it is also the method of execution. So the eurozone and IMF want further pension cuts and an increase in VAT on electricity (inter alia).

These measures are toxic for the Greek Syriza government because they are regressive, they disproportionately hurt the poorer Greeks who elected Syriza.

So "why insist on pensions?", says Blanchard.

His answer is that pension expenditure in Greece is 16% of GDP, and "transfers from the budget to the pension system are close to 10% of GDP".

Now here in Britain we would think that public spending on pensions of close to a tenth of GDP is incredibly lavish: the equivalent figure for the UK, and indeed for most anglophone countries like the US and Canada, is much lower (at around 6% of GDP in Britain, according to the GDP).

But in the UK, US and Canada, private pension saving is much higher than on the continent of Europe. And Greece's government spending on pensions, as a share of GDP, is very much in the ballpark of spending in the rest of the eurozone: on the basis of the last official OECD figures, which admittedly are five years old, Greece spent less than Italy, France and Austria on pensions and only a bit more than Germany.

And there is another thing: in 2009 the OECD calculated that Greek government cash spending on old-age and survivors benefits was 13% of its GDP. If the equivalent figure today is 10%, which is what Blanchard seems to suggest, that implies the outlay on pensions has already been reduced by around 40%, given that Greece's GDP has shrunk by a quarter.

That said, on the basis of the last Eurostat figures, which are for 2012, Greece's old-age outlay - including disability and incapacity payments - was considerably higher than the euro area average.

So the stats are murky. But it is worth pointing out that Greece has proportionately more old people than the eurozone average, and more poor people (thanks to five years of slump).


In other words, it is not obvious that there is outrageous excess in the Greek pension system (and there certainly isn't in comparison with provision in Blanchard's French home).

But to get back to where I started, which is the impression created that what is going on in Brussels is qualitatively the same as the kind of matter-of-fact talks that take place when a big indebted business gets into trouble, rather than a profound debate about the nature of economic and social ties between eurozone members.

If those talks collapse, and Greece defaults on its debts - and then is on a path to exit from the euro - that would probably lead to a revolution in perceptions about what the euro is all about.

At that point, monetary union will have been shown to be a question of economic convenience for its members, rather than profound supra-national destiny.

To state the obvious, which seems however to be lost on the leaders of the eurozone, once the euro is not forever for any member, it is not forever for all members.

And once that clonking penny drops for global investors, the notion that the whole project will fall apart - not tomorrow, but one day - will increasingly become the default view.

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