Saving the economy: What should Greece do next?

Stephen Horvath (A-Level Student, Westminster School)

On 1 June, Vicky Pryce, the Chief Economic Adviser to the Centre for Economic Business Research, spoke to SEESOX on “Saving the economy: What should Greece do next?” Kalypso Nicolaïdis, Professor of International Relations and Fellow at St. Antony’s, was the chair.

Initially looking at the question of how Greece had arrived in such a problematic economic position, Pryce commented how the Greek crisis came as a surprise in 2010 (when she was Head of the Government economic service), and carried unreasonable caricatures that crowded out sensible solutions.

Pryce stated that Greek entry to the Eurozone created an unstable system that prevented Greece from being able to respond to a crisis, as it could not devalue its currency and had no clear lender of last resort. Interest rates for Greek government borrowing had fallen 90% since entering the Euro, which encouraged unsustainable borrowing, as did the removal of balance of payments constraints. She was keen to emphasise that the unsustainable borrowing of the government did not justify the stereotype of the ‘profligate Greek:’ according to OECD studies, Greeks worked some of the longest hours and had one of the lowest household debt to income rates within the Eurozone. The initial bailout of the banks in response to the 2008 crisis made the Greek problem even worse, she claimed, by transferring the debt of Greek banks, which had overstretched themselves throughout the Eurozone, to Greek taxpayers. This issue was scarcely rectified by the debt relief program: of the €120 billion forgiven, only €6 billion of it was governmental debt.
The actions of the European institutions have made it much harder for Greece to get out of this mess, Pryce argued. The disputes over annual budgets had been allowed to become a bigger source of tension than they were worth, with Samaras’ proposed 2015 Budget being rejected at the end of 2014 over just a €2 billion difference. Moreover, the ECB’s inability to buy junk-rated Greek bonds through quantitative easing scared off banks from investing in Greece.

In the present round of negotiations, Pryce considered the right-left divide an obstacle to success for Syriza because right wing national leaders in the EU do not want to cave to Syriza at risk of empowering their own domestic leftists, particularly in Spain and Portugal. Professor Nicoalïdis pressed Pryce on her characterisation of Syriza as being a largely mainstream force in governance, and Pryce suggested that Tspiras and his team were the strong moderates in a party with a smaller radical wing. Tspiras’ strategy is to deal with the Greece’s long-term debt, caused by the maturing of bonds in 2020, as this would substantially reduce the annual debt repayments. Greeks, above all, want the certainty and stability of a new agreement so that economic activity can resume. Part of this agreement and return to normality needs to allow the ECB to buy Greek bonds through QE and kick-start the banking sector. Whilst blaming the Europeans and the international institutions for the severity of the crisis, she remained hopeful that a partial solution was within reach.