tag:theconversation.com,2011:/us/topics/greece-deal-18665/articlesGreece deal – The Conversation2017-08-03T21:09:30Ztag:theconversation.com,2011:article/806582017-08-03T21:09:30Z2017-08-03T21:09:30ZHow Greece could escape debtors’ prison – if Europe opens the door<figure><img src="https://images.theconversation.com/files/180918/original/file-20170803-17289-k8cmre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">European Council President Donald Tusk and Greek Prime Minister Alexis Tsipras address the press. </span> <span class="attribution"><span class="source">AP Photo/Thanassis Stavrakis</span></span></figcaption></figure><p>Greece has acted out a European tragedy for more than seven years. But some signs suggest Greece may finally, in the <a href="https://www.nytimes.com/2017/07/24/business/dealbook/greece-debt-bonds.html">words of its economy minister</a>, be on the way to becoming a “normal country” again. </p>
<p>Greece’s creditors <a href="https://www.theguardian.com/world/2017/jun/16/creditors-agree-terms-to-disburse-greeces-85bn-bailout-funds">have disbursed</a> another chunk of funds as part of Greece’s current, €86 billion (US$100 billion) bailout, and the country recently <a href="https://www.omfif.org/analysis/commentary/2017/july/greek-bond-issue-is-mixed-blessing/">tested the bond markets</a> for the first time in three years, planning to borrow more from private investors soon. <a href="https://www.nytimes.com/2017/07/24/business/dealbook/greece-debt-bonds.html">Some now believe</a> Greece may soon follow fellow bailed-out countries <a href="http://business.financialpost.com/investing/global-investor/how-ireland-pulled-off-an-economic-miracle-that-rivals-china-india/wcm/33bcb34c-35df-4817-954f-1e887fb24c0b">Ireland</a> and <a href="https://www.ft.com/content/ea7f2a22-4219-11e7-82b6-896b95f30f58">Portugal</a> in their revivals. </p>
<p>But despite the <a href="http://www.tornosnews.gr/en/greek-news/politics/26354-french-ambassador-in-athens-chantepy-optimism-returns-to-greece.html">wave of optimism</a>, Greece’s staggering amount of debt looms menacingly over the country’s economy and future. And the International Monetary Fund (IMF), while endorsing Athens’ reform program, is urging its fellow creditors to offer Greece much <a href="http://www.imf.org/en/News/Articles/2017/07/20/pr17294-greece-imf-executive-board-approves-in-principle-stand-by-arrangement">greater debt relief</a>. </p>
<p>In my recent book, “<a href="https://global.oup.com/academic/product/tangled-governance-9780198801801?cc=us&lang=en&">Tangled Governance</a>,” I examined the financial rescue programs for euro area countries, including three for Greece, and the conflicts over them. My own research supports the view that Greece needs to finally be released from debtors’ prison but for political reasons more than the financial arithmetic at the core of the institutions’ debt analyses. </p>
<p>And there’s a way to do that which makes the pain bearable for everyone and opens a path back to normalcy. </p>
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<span class="caption">Protesting hospital staff sit in front of a wall they built in front of the Greek Finance Ministry with a banner depicting their leaders wearing ties that read ‘Ministry of broken promises’ and ‘We drown in debt and bailouts.’</span>
<span class="attribution"><span class="source">AP Photo/Petros Giannakouris</span></span>
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<h2>A great depression</h2>
<p>Over the last seven years, we have witnessed many 11th-hour crisis meetings and last-minute rescues that, after much brinkmanship and grinding of teeth, each time seemed to narrowly avert the Greece’s ejection from the euro area. </p>
<p>You’d be forgiven for becoming numb to the continual travails of a modestly sized country in the southeastern corner of Europe. That would be a mistake: Greece’s tenuous position in the euro area weakens long-term confidence in European integration. Moreover, as a key NATO ally, located in a strategic corner of a volatile region, its economic and political stability are essential to European security. </p>
<p>To stabilize its finances and avoid expulsion from the euro area, Greece <a href="https://ec.europa.eu/info/sites/info/files/compliance_report-to_ewg_2017_06_21.pdf">has undertaken a wrenching series</a> of government layoffs, budget and pension cuts, and tax reforms, among other measures, at the insistence of the IMF, European Commission (EC) and European Central Bank, which together make up the so-called troika of public lenders to the beleaguered country. </p>
<p>So far, the troika has lent Greece about <a href="https://www.esm.europa.eu/assistance/greece">€265 billion</a> in three separate bailouts, with the latest one set to expire next summer. Separately, Greece managed to restructure its private sector debt in 2012, reducing the amount it owed investors by about 53 percent.</p>
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<p>Despite all this, Greece still owes a total of about €320 billion in debt, and its economy <a href="https://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html?_r=0">has suffered the equivalent</a> of the Great Depression in the United States in the 1930s, having shrunk by a fourth. Unemployment is running at nearly 25 percent, and youth poverty, which soared during the crisis, <a href="http://www.oecd.org/eco/surveys/economic-survey-greece.htm">remains near 36 percent</a>.</p>
<p>But now that the latest disbursement of funds has been agreed to, does that mean the worst is behind Greece?</p>
<h2>Moment of truth</h2>
<p>Sadly, no one should be confident that Greece’s recovery will become self-sustaining. It is particularly vulnerable to another European recession, whenever that might come. And with the end of the current bailout on the horizon, its creditors are sharply divided about what to do next. </p>
<p>For the moment, they’re waiting for <a href="https://www.reuters.com/article/us-germany-election-pollsters-idUSKBN1AH4DP">Germany’s national elections</a> in September to come and go so that domestic politics don’t get in the way. Debt relief before then could have been costly at the polls for the governing coalition. But once talks resume this fall, they are certain to be contentious. </p>
<p>The euro members, which have put up the lion’s share of the loans so far, remain deeply reluctant to offer Greece more than minimal debt relief. The IMF, on the other hand, <a href="https://www.imf.org/en/Publications/CR/Issues/2017/02/07/Greece-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44630">has argued forcefully</a> that Greece’s debt won’t become sustainable without substantial relief. It suggests doing that by keeping interest rates at today’s lows, extending grace periods and allowing Greece to defer paying back its loans until decades past the current due date of 2060. </p>
<p>Part of the problem is that the European creditors <a href="https://ec.europa.eu/info/sites/info/files/compliance_report-to_ewg_2017_06_21.pdf">are holding onto a rather rosy scenario</a> of how much Greece’s economy can be expected to grow beyond the near-term recovery and thus generate enough tax revenue to pay off its debt in the long term. The European Commission expects Greece to grow 1.5 percent every year, on average, until 2030 and 1.25 percent thereafter.</p>
<p>The IMF, on the other hand, <a href="http://www.imf.org/en/Publications/CR/Issues/2017/07/20/Greece-Request-for-Stand-By-Arrangement-Press-Release-Staff-Report-and-Statement-by-the-45110">projects growth</a> of just 1 percent a year beginning in 2022. </p>
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<p>While the difference may seem small, the cumulative effect on Greece’s ability to pay back its debt is decisive. The larger the economy, the smaller the relative size of the debt and interest payments, and the easier it will be to run budget surpluses to repay debt. If the EC is wrong, Greece will have a very hard time meeting its debt payments in two or three decades without major relief.</p>
<p>Ultimately, however, the ability and willingness of Greece to service its debt rests on political considerations, not economic ones, just as does the question of debt relief. </p>
<p>It looks like European creditors want to use the debt burden to keep Greece on a very short leash to prevent backsliding on economic reforms, albeit ones that are essential for the country to get back on its feet. </p>
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<span class="caption">Retirees wait for a bank branch to open to receive their monthly pension payments.</span>
<span class="attribution"><span class="source">AP Photo/Thanassis Stavrakis</span></span>
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<h2>A way out of the impasse</h2>
<p>As a long-term strategy, however, using debt as leverage over reform is doomed and will prevent Greece from a full recovery. There are two principal reasons for this: </p>
<ol>
<li><p>Private investors will tend to avoid committing to projects in Greece as long as its debt remains so high that periodic renegotiation is likely.</p></li>
<li><p>More importantly, European decision-making throughout the euro crisis <a href="http://bruegel.org/wp-content/uploads/2017/06/Henning-Presentation-FINAL.pdf">amply demonstrates</a> that Greece’s creditors are hamstrung by their own domestic politics. That prevents them from pursuing the optimal course of action, even when the admittedly formidable political barriers in Greece have been overcome, and has contributed to many delays. </p></li>
</ol>
<p>A way out of this impasse, however, is to make the size of Greece’s debt payments <a href="https://www.imf.org/en/About/Key-Issues/state-contingent-debt-instruments">contingent on growth outcomes</a>. If Greece rebounds quickly and maintains high growth, debt relief can remain relatively modest. If Greece grows more slowly, as the IMF and others predict, then payments on the debt can be reduced and deferred automatically – without requiring creditors to come together and overcome domestic political hurdles every time.</p>
<p>Eurozone finance ministers <a href="http://www.consilium.europa.eu/en/press/press-releases/2017/06/15-eurogroup-statement-greece/?utm_source=dsms-auto&utm_medium=email&utm_campaign=Eurogroup+statement+on+Greece">recently floated</a> this as a possibility for Greece. Given the political constraints of the key players, as my analysis of the crisis suggests, it’s the best way forward, and proponents should fight for its robust adoption so that Greece’s debt payments are significantly reduced if growth proves to be weak. </p>
<p>If Greece’s European creditors truly believe that their neighbor’s prospects are as rosy as they say – rather than a ploy to avoid granting relief now – then they should have little problem signing on to the new mechanism. </p>
<p>This will also give investors confidence that Greece in fact is returning to “normal” and they can commit to projects in the country. Finally, this will align the interests of everyone with those of the long-suffering Greek people.</p><img src="https://counter.theconversation.com/content/80658/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>C. Randall Henning receives funding from the Centre for International Governance Innovation (CIGI). </span></em></p>Europe is experiencing a wave of optimism that its seven-year Greek drama may be finally coming to a close. Only one way to do that: Share Greece’s pain.C. Randall Henning, Professor of International Economic Relations, American University School of International ServiceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/615392016-06-30T09:48:27Z2016-06-30T09:48:27ZIs there life after debt for Puerto Rico?<figure><img src="https://images.theconversation.com/files/128776/original/image-20160629-15251-73eb8t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">She certainly thinks so.</span> <span class="attribution"><span class="source">Puerto Rico parade via www.shutterstock.com</span></span></figcaption></figure><p>For years Puerto Rico borrowed to offset falling revenues as its economy and population declined. <a href="https://theconversation.com/can-puerto-rico-escape-its-72-billion-debt-trap-and-avoid-greeces-fate-59127">This was never sustainable</a>, and now the moment of reckoning has arrived. </p>
<p>In early May, Puerto Rico <a href="http://money.cnn.com/2016/05/02/investing/puerto-rico-default-may-1/">missed</a> most of a $422 million debt payment, providing the catalyst for the U.S. House of Representatives <a href="http://money.cnn.com/2016/06/09/investing/house-passes-puerto-rico-bill/">to enact a rescue plan</a> in early June. The plan, which has been under negotiation with the White House for months, would provide a process for restructuring the island’s $72 billion in debt and put an oversight board in charge of Puerto Rico’s finances. </p>
<p>With Puerto Rico <a href="http://www.reuters.com/article/us-puertorico-debt-idUSKCN0ZD1HQ">facing</a> a $2 billion debt payment on July 1, the <a href="http://www.reuters.com/article/us-puertorico-debt-senate-idUSKCN0ZF1XL">Senate passed the measure just in time</a> and sent it to the president for his signature. The legislation is needed to avoid a messy default because neither Puerto Rico nor its municipalities are eligible for debt relief under U.S. bankruptcy laws. </p>
<p>While the rescue plan establishes the foundation for debt reduction and a smaller deficit, it is not enough to ensure an end to the crisis. Ultimately, that will take a revival of Puerto Rico’s economy, something that the House bill does little to accomplish.</p>
<p>As <a href="https://theconversation.com/can-puerto-rico-escape-its-72-billion-debt-trap-and-avoid-greeces-fate-59127">I’ve argued before</a>, Puerto Rico already has many strengths that with further investment and some other changes could help jumpstart economic growth. Passage of a U.S. rescue is a good first start but will not be sufficient to put Puerto Rico on a path to sustainable growth.</p>
<h2>Greece’s lessons for Puerto Rico</h2>
<p>Greece’s debt crisis, which began in 2010, offers a cautionary tale of what happens when efforts at debt reduction aren’t accompanied by investment in GDP growth. </p>
<p>Despite <a href="http://www.nytimes.com/2013/04/16/business/global/greece-reaches-new-deal-with-lenders.html">two support packages</a> totaling €240 billion, a deal that provided a 35 percent write off on Greece’s debt and harsh austerity measures, Greece’s debt-to-GDP ratio continued to rise. </p>
<p>Greece’s GDP fell 18 percent from 2010 to 2015, while its unemployment rate rose to about 25 percent. Greece missed a $1.7 billion payment to the International Monetary Fund (IMF) in June 2015. And shortly afterward, the <a href="https://www.imf.org/external/pubs/cat/longres.aspx?sk=43044.0">IMF declared</a> Greece’s debt dynamics to be “unsustainable.” It stated that further haircuts on Greece’s debt and progress on economic reforms were needed. </p>
<p>And today, Greece’s economy remains extremely fragile. It <a href="http://www.tradingeconomics.com/greece/gdp-growth">hasn’t grown</a> since 2007.</p>
<p>In Puerto Rico, <a href="http://www.tradingeconomics.com/puerto-rico/gdp-growth-annual">economic activity has contracted</a> in all but one year since 2006, when tax incentives that had attracted businesses to the island expired. Puerto Rico’s population, meanwhile, <a href="http://www.pewresearch.org/fact-tank/2016/03/24/historic-population-losses-continue-across-puerto-rico/">has declined</a> by 9 percent in the past nine years as its citizens have left for better opportunities on the mainland. As U.S. citizens, Puerto Ricans can move to the 50 states and District of Columbia at will. </p>
<p>Reducing Puerto Rico’s debt – as Congress’ plan would do – should eventually help revive growth to the extent it frees up resources that can be used for other purposes, provided they are invested productively. But even if Puerto Rico manages to reduce the amount it owes and balance its budget, its debt will not necessarily be sustainable. This is because if the interest rate it pays on its debt exceeds the growth rate of the economy, its debt-to-GDP ratio — the measure that really matters — will continue to rise. </p>
<p>Markets typically require governments to pay fairly high interest rates after a debt crisis, and <a href="http://country.eiu.com/Puerto%20Rico">private forecasters</a> expect a continued decline in GDP growth through 2017. That means the U.S. bailout of the kind Congress just passed won’t necessarily be able to put its debt on a sustainable path. </p>
<p>Puerto Rico, like Greece, does not have the option of devaluing its currency to spur exports — a move the <a href="https://www.imf.org/external/pubs/ft/survey/so/2015/car031315a.htm">IMF believes</a> was important in Iceland’s recovery from its 2008 debt crisis.</p>
<h2>Play to your strengths</h2>
<p>So what can Puerto Rico do? </p>
<p>The rescue plan before Congress lacks any specific measures to spur growth, other than, perhaps, a provision for a temporary drop in the minimum wage for employees under the age of 25. The bill’s advocates, pointing to the unusually high unemployment among Puerto Rican youths, <a href="http://blogs.wsj.com/economics/2016/05/25/how-the-puerto-rico-bill-attacks-the-minimum-wage/">argue that it would encourage job creation</a>. </p>
<p><a href="http://dailycaller.com/2016/05/21/white-house-whines-about-minimum-wage-provision-in-puerto-rican-debt-bill/">Critics</a>, however, argue that reducing wages for young employees will simply accelerate migration to the mainland. </p>
<p>Puerto Rico’s <a href="http://taxfoundation.org/blog/tax-policy-helped-create-puerto-rico-s-fiscal-crisis">experience using tax breaks</a> – often at the center of policies intended to promote industry – suggests there’s no point going down that road again because they cannot be relied upon to propel future growth once they expire. For example, fixed investment in Puerto Rico fell 27 percent after federal tax breaks for investment expired, and there is little reason to expect future tax-based-investment would outlast the incentives that attracted them. </p>
<p>Rather than trying to compete with its neighbors in the Caribbean and Central America as a low-cost or low-tax producer of manufactured goods, Puerto Rico likely would do better to focus on its strengths in producing knowledge-based goods and services and in transportation and tourism. </p>
<p>Most economists agree that investments in human capital and infrastructure are necessary for growth. Here Puerto Rico has some strengths, such as relatively <a href="https://www.newyorkfed.org/regional/puertorico/index.html">high level of education</a>, <a href="http://www.internetworldstats.com/stats2.htm">80 percent internet penetration</a> and U.S. laws that <a href="http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/11/19/090224b0831e9d20/1_0/Rendered/PDF/Doing0business0ciency000Puerto0Rico.pdf">provide strong protection</a> for contracts and property rights. </p>
<p>Puerto Rico, as well, already has a fairly well developed transportation infrastructure. In 2014, the <a href="http://www.cepal.org">island’s ports</a> handled over 1.3 million in twenty-foot equivalent units (TEUs) – a measure of the capacity of a container ship – accounting for about 10% of the traffic moving through Caribbean ports. This is more than Veracruz, Mexico’s second largest port and only 20 percent less than Jamaica, a major transshipment center for the East Coast. Puerto Rico’s <a href="http://www.bgfpr.com/documents/PuertoRicoFiscalandEconomicGrowthPlan9.9.15.pdf">latest development plan</a> calls for an upgrade of its ports even as it recommends spending cuts elsewhere. </p>
<p>Tourism is also doing well in Puerto Rico. The island <a href="http://www.caribjournal.com/2016/03/18/puerto-rico-tourism-arrivals-are-rising/">had more than five million visitors</a> in 2015, up by over 20 percent since 2012, who spent $3.83 billion. Clearly, Puerto Rico’s climate and beaches are as attractive as ever. </p>
<p>Taken together, these factors seem to bode well for Puerto Rico’s future as a regional business hub concentrating on knowledge-based goods and services. Financial, professional and scientific services <a href="http://www.gdb-pur.com/economy/pr-monthly-economic-indicators-time-series.html">already account</a> for about 11 percent of Puerto Rico’s GDP, while pharmaceuticals and medical supplies make up 88 percent of the island’s exports.</p>
<p>And while a <a href="https://www.newyorkfed.org/outreach-and-education/puerto-rico/2014/report-challenges.html">recent Federal Reserve Bank of New York study</a> warned that the pharmaceutical industry, which is shrinking, does not appear to be positioned to be a strong driver of growth, the report noted that the Commonwealth’s development agenda seeks to capitalize on the industry’s presence to support spinoff industries such as medical devices and biopharma. </p>
<h2>Getting from here to there</h2>
<p>Despite these strengths, Puerto Rico faces some formidable obstacles preventing it from building on them and getting onto a long-term growth path. </p>
<p>One of the <a href="http://www.wsj.com/articles/aloha-puerto-rico-1465163389">main barriers</a> is the Merchant Marine Act of 1920, known as the Jones Act, which requires cargo shipped between U.S. ports (including Puerto Rico) be carried on U.S-flagged vessels, which are high-cost carriers. The act prevents a container ship carrying cars from Korea stopping at Puerto Rico and continuing on to Miami. </p>
<p>This translates into higher prices in Puerto Rico for mainland-sourced goods and is a severe limitation on the island’s ability to develop as a transshipment center. </p>
<p>Another obstacle is the red tape involved in doing business. Puerto Rico generally fares better in the World Bank’s Doing Business survey than most countries in Latin America, but there is room for improvement. Overall, <a href="http://www.doingbusiness.org/data/exploreeconomies/puerto-rico/">it ranked 51st</a> of 189 countries in 2016 and has dropped in the rankings in many categories in recent years. </p>
<p>Finally, the <a href="http://www.nytimes.com/2015/09/10/business/dealbook/puerto-rico-lays-out-5-year-plan-for-restructuring-its-debts.html?_r=0">Puerto Rican government’s five-year plan</a> includes cuts to spending on public education and health care, including a major reduction in funding for the state university system. Bringing government expenses into alignment with revenues is needed to restore Puerto Rico to solvency, but cuts to spending on education and health care will delay some of the improvements in human capital that foster long-term growth. And in the medium term, they will reduce GDP. </p>
<p>It would be wrong to dismiss Puerto Rico’s potential for growth, but only a relentless optimist would think growth will resume soon – particularly without the kinds of policies that will actually encourage it.</p><img src="https://counter.theconversation.com/content/61539/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Gendreau does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Congress just passed a bailout for Puerto Rico – in the nick of time – yet it’s not enough to solve the island’s biggest challenge: returning to growth.Brian Gendreau, Director, Latin American Business Environment program, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/456842015-08-26T09:51:09Z2015-08-26T09:51:09Z‘Hamilton’: the Broadway hip-hop musical every European leader should see<figure><img src="https://images.theconversation.com/files/92952/original/image-20150825-15920-1rgsvp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hamilton is shown whispering into Ben Franklin’s ear in Howard Chandler Christy’s depiction of the signing of the Constitution.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/uscapitol/6263666566/in/photolist-23sHQ9-axuVR9-4R48Yd-eUBrK5-7pNvhq-ise3F7-wQWG59-oyZ3wQ-ia9QAN-5AM4Te-5AM4PK">US Capitol/flickr</a></span></figcaption></figure><p>What do the new Broadway hip-hop musical <a href="http://www.hamiltonbroadway.com">“Hamilton”</a> and Europe’s debt crisis have in common? A great deal, actually.</p>
<p>“Hamilton,” which opened on August 6, celebrates the life and public career of one of our nation’s greatest statesmen, Alexander Hamilton, our first secretary of the treasury under President George Washington and the lead author of the most important and influential commentary on the Constitution, The Federalist. </p>
<p>European leaders such as German Chancellor Angela Merkel and Greek Prime Minster Alexis Tsipras, who <a href="http://www.nytimes.com/2015/07/30/world/europe/how-germany-prevailed-in-the-greek-bailout.html">squared off</a> recently over the latter’s desperate need for another bailout, should book front-row seats, because “Hamilton” has important lessons for them about debt and government. </p>
<h2>Hamilton’s stroke of genius</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=880&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=880&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=880&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1106&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1106&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1106&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Hamilton used the Roman pen-name Publius on his essays in The Federalist.</span>
<span class="attribution"><span class="source">US Treasury Department</span></span>
</figcaption>
</figure>
<p>Hamilton was instrumental in transforming the United States into a true nation, in particular by his policies and actions as treasury secretary, and the musical conveys the scope and drama of his achievement. </p>
<p>One of Hamilton’s most brilliant and successful policies was to have the federal government <a href="http://founders.archives.gov/?q=Ancestor%3AARHN-01-06-02-0076-0002&s=1511311111&r=1">assume</a> the Revolutionary War debts of the states, which it did in 1790. </p>
<p>Hamilton recognized that the United States would be better able than individual states to make regular payments on those debts and ultimately to retire them. Further, he recognized that the government could use the debt as a means to stimulate economic growth, bolster the strength of the new nation’s currency and shore up its honor in the community of nations – by showing that the US would meet its obligations.</p>
<p>One key insight also drove Hamilton’s policy. He saw that consolidating state debts into a single national pool would require a single national policy. No longer would the United States be plagued by divergent or conflicting state policies. Hamilton ensured that his plan would promote national unity. </p>
<p>To this day, scholars of American constitutional and legal history like us, who try hard to maintain their objectivity in interpreting the past, find it difficult not to admire Hamilton’s constitutional, legal, economic and political creativity. And rarely have Hamilton and his policies seemed more relevant than today, particularly for Europe as it struggles to prevent Greece’s debt crisis from ripping apart the eurozone and potentially the European Union. </p>
<h2>A clash of nations</h2>
<p>In this crisis, we see individual European nations clashing with one another.</p>
<p>Germany and its supporters have insisted on imposing strict austerity measures on Greece in exchange for a third bailout needed to prevent the collapse of the Greek economy – even at the price of stripping Greece of its sovereign power to determine the structure and workings of its economy and society. </p>
<p>Some even charge Merkel with seeking to turn Greece into a colonial satellite by means of Germany’s economic clout, as it did with its <a href="http://www.amazon.com/Inside-Hitlers-Greece-Experience-Occupation/dp/0300089236/ref=sr_1_1?ie=UTF8&qid=1440440396&sr=8-1&keywords=mazower+greece">military might</a> during World War II. </p>
<p>Nor have Greece’s political leaders played innocent roles. By holding a referendum on the EU’s proposed bailout for Greece, Tsipras and his government sought to blackmail Merkel into abandoning her demands for austerity by <a href="http://www.theguardian.com/world/2015/mar/22/german-anger-towards-greece-mounts-over-bailout-as-tsipras-meets-merkel">asking</a> for reparations for the Nazis’ occupation of Greece and implying current leaders are bent on ignoring Greek democracy and the democratically expressed wishes of the Greek people.</p>
<p>Tsipras refused to follow the consensus-building rules by which the EU has governed itself. In our view, his embrace of populist, hardball politics has done serious harm to the mechanisms of European governance, risking destroying them. </p>
<h2>Preventing destructive political conflicts</h2>
<p>In the 1790s, by contrast, the federal government’s assumption of state debts under Hamilton’s guidance prevented similar destructive political conflicts in the early United States. </p>
<p>When Hamilton proposed his plan to bolster the nation’s public credit, he did so within the context of a constitutional system in which there was a general government, at least arguably supreme in certain spheres of activity over the states. In addition, it was within the context of a union that many Americans saw as necessary to their new independence and ability to create a nation and maintain their liberties. </p>
<p>Vigorous, contentious debates within Congress and the public could thus unfold without threatening to burst the Union or the Constitution – even though some states, which had already paid their Revolutionary War debts, resented that the federal government would relieve other states of their burdens.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=428&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=428&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=428&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=538&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=538&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=538&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">America’s founding fathers weren’t immune to destructive political conflicts. Hamilton and his contemporaries, however, successfully turned politics into a peaceful war of words and ideas. In this anti-Republican cartoon, Jefferson is the one standing on a table.</span>
<span class="attribution"><span class="source">Federalist cartoon via www.shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Lessons for Europe</h2>
<p>Did Hamilton and other founding fathers of the United States behave better than Europeans today? </p>
<p>To be sure, political leaders at all times and in all places will do what they must to please supporters and constituents who place their selfish fears and interests ahead of the need to maintain rational government. By contrast with most of his contemporaries, Hamilton’s defiant candor, which sometimes amounted to tactlessness, often made him and his policies more enemies than friends.</p>
<p>Even so, Hamilton understood, as did most politicians of his time, that the way to avoid irrational politics was to create governmental structures for a federal republic that channeled decision-making in productive directions. </p>
<p>In helping to create the first system of national politics, Hamilton and other founding fathers devised a system that forced voters who wanted to make effective and constructive political choices to unite behind centrist candidates and to make binary choices between partisan alternatives. </p>
<p>A case in point is the election of 1800, when voters rejected many of Hamilton’s domestic and foreign policies, elected his archrival Thomas Jefferson to the presidency and gave the Jeffersonian Republicans control of Congress. This result testifies further to the wisdom of the system that Hamilton helped create in Philadelphia in 1787. That system often showed its ability to contain and damp down heated disagreement over major policy issues. </p>
<p>Indeed, one aspect of the 1800 election that showed the Constitution’s strength and resiliency was the peaceful transfer of power from the Federalists to the Republicans, when President John Adams stepped down from office after losing, making way for Jefferson to become the third president. Behind the scenes, Hamilton urged his fellow Federalists not to block Jefferson’s election, though he admitted his dislike of Jefferson and his political views.</p>
<h2>An end to blackmail and conquest</h2>
<p>The Greek debt crisis is only the latest problem demonstrating the need to create European political structures that can prevent games of blackmail and conquest and give citizens the political power to attain the economy and society they desire. </p>
<p>Europeans themselves are aware of the need for such strengthening and reform. As the European Commission’s 2015 report “Completing Europe’s Economic and Monetary Union” (EMU) <a href="http://ec.europa.eu/priorities/economic-monetary-union/docs/5-presidents-report_en.pdf">notes</a>:</p>
<blockquote>
<p>A complete EMU is not an end in itself. It is a means to create a better and fairer life for all citizens, to prepare the Union for future global challenges and to enable each of its members to prosper.</p>
</blockquote>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=988&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=988&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=988&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1242&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1242&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1242&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jean Omer Marie Gabriel Monnet, considered the EU’s founding father, saw the American model as the right one for Europe.</span>
<span class="attribution"><span class="source">Monnet statue via www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>Hamilton’s career, and the American founding experience in general, offer insight as to how those structures might be built. </p>
<p>Statesmen such as the late Jean Monnet – considered the <a href="https://www.foreignaffairs.com/reviews/review-essay/1977-04-01/what-jean-monnet-wrought">founding father</a> of the European Union – and modern scholars such as British political philosopher Larry Siedentop have often <a href="http://www.amazon.com/Democracy-Europe-Larry-Siedentop/dp/0231123779/ref=sr_1_4?ie=UTF8&qid=1440440601&sr=8-4&keywords=siedentop">invoked</a> the American example as a model for a United States of Europe, or of a European Union beyond what we see today. </p>
<p>While recognizing that ethnicity, religion and national heritage may serve as barriers to such a union, these scholars and statesmen have argued for a rational recognition among Europeans of their many shared interests. That step would help to replace self-interested and bitter squabbling among nation-states with a rational means of controlling nationalist resentments, emotions and suspicions. </p>
<p>In the US founding era (comprising the years from the 1760s through the 1830s), even though the early states had few sensible reasons to remain separate and many good reasons to coalesce, suspicions, jealousies and resentments comparable to those plaguing Europe today reigned. </p>
<p>These suspicions and resentments, and Americans’ fears of a too-powerful general government, were so strong that, during the framing of the US Constitution in 1787, the delegates to the Federal Convention specifically crossed out the words “nation” or “national” from the working draft. Even so, they created a government strong enough to protect national interests while checked and balanced enough to safeguard democratic governance and individual rights.</p>
<h2>Lessons for US</h2>
<p>Not only Europeans could learn a thing or two about rational political decision-making from the new musical “Hamilton.” Americans, also plagued today by a vicious, bitter, either/or form of political conflict, could benefit from the lessons of Hamilton and the other founding fathers.</p>
<p>Those who see “Hamilton” will gain a renewed appreciation for the need to preserve rationality in American politics. The musical’s presentation of complex and difficult policy disputes between Hamilton and Jefferson as well-staged, well-written rap battles shows how words and arguments matter. The show’s author, Lin-Manuel Miranda, recognizes the power of words not only in his use of hip-hop and rap forms but in his close attention to getting the substance of his rap lyrics right. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=972&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=972&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=972&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The title page of THE FEDERALIST, written by Hamilton, James Madison and John Jay to support and explain the Constitution.</span>
<span class="attribution"><span class="source">Federal Hall National Memorial</span></span>
</figcaption>
</figure>
<p>The play is pervaded by one great insight: the power of language and reason. That power not only enables Miranda’s Hamilton to transcend his humble roots and vault into political leadership of the Revolution and of the creation of an American constitutional republic, it also enables all the founding fathers who appear in the show – Hamilton, Washington, Jefferson, Madison and Burr – to order the American political world with words. </p>
<p>“Hamilton” reminds us once again of the power of reason and of words in the political realm, and of the need for reason to anchor that political world and to direct its course.</p>
<p>Perhaps “Hamilton” might persuade Americans who see it, whether conservative or progressive, of the foolishness of hardball politics and of the need to nurture institutions that promote compromise and to accept it as a legitimate means of getting political things done. </p>
<p>It may convince people that their leaders cannot satisfy every interest demanding satisfaction, and it also may emphasize the need to show respect to their opponents as well as to the values by which those opponents live.</p><img src="https://counter.theconversation.com/content/45684/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Alexander Hamilton and the policies he pursued as America’s first treasury secretary set the US on a course of national unity. That’s just what Europe needs today.William E. Nelson, Weinfeld Professor of Law, New York UniversityR B Bernstein, Lecturer in Political Science, City College of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/464492015-08-21T14:41:11Z2015-08-21T14:41:11ZTsipras’ second chance: Greece to hold elections<p>Elections have become a national sport in Greece. The country has had five different prime ministers in the last five years. </p>
<p>My prediction is that this number is not going to change anytime soon. </p>
<p>Greek Prime Minister Alexis Tsipras <a href="http://www.wsj.com/articles/greek-prime-minister-alexis-tsipras-expected-to-announce-whether-greece-will-go-to-elections-1440077601">has resigned</a> and called for new elections in a bid to consolidate his power and push through the country’s bailout deal. </p>
<p>Odds are Tsipras will emerge a winner in the elections, expected to take place on September 20. This is not a testament to his leadership skills, but rather due to the vacuum of leadership in Greek politics. Opposition parties, such as New Democracy and PASOK, have been completely discredited because of their disastrous management of the country over the last 40 years. </p>
<p>Only the centrist To Potami party could emerge as a competitor to Syriza. As they say – keep your enemies close. So, if Tsipras does not emerge as a clear winner to form a government on his own, I expect him to form a coalition government with To Potami.</p>
<p>Either way, the new elections give Tsipras another chance to get Greece’s financial house in order.</p>
<h2>How we got here</h2>
<p>Seven months ago, <a href="http://www.forbes.com/sites/hbsworkingknowledge/2015/01/29/what-the-greek-elections-mean-for-the-economy/">I suggested</a> that the Greek government’s actions – or inactions – would destroy an enormous amount of value. Unfortunately, I was right. </p>
<p>My conservative estimate is that the average Greek employee would need to work an additional year and a half to make up for the value in the economy destroyed in the last year. </p>
<p>One can arrive at this conclusion by analyzing data from the Athens Stock Exchange, IMF, Bank of Greece, Eurostat, OECD and European Commission: €30 billion was lost in government bank holdings held in the <a href="http://www.hfsf.gr/files/HFSF_Interim_January_March_2015_en.pdf">Hellenic Financial Stability Fund</a>. Another €13 billion was lost in <a href="http://www.bankofgreece.gr/Pages/en/Statistics/accounts.aspx">non-bank equity holdings</a>. From the €26 billion recorded by the <a href="https://www.imf.org/external/pubs/cat/longres.aspx?sk=25781.0">IMF</a> in non-financial assets held for privatization, about €10 billion of value has been destroyed. The sum is €53 billion in losses. </p>
<p>One also needs to account for opportunity costs due to sources such as lost tax revenue and increases in unemployment benefits. This is difficult to estimate, but one simple calculation for the former would be to assume that a 5% GDP contraction would proportionately contract tax revenues by the ratio of tax revenues to GDP, which in 2013 was close to <a href="https://stats.oecd.org/Index.aspx?DataSetCode=REV">33%</a>. Given a GDP of €180 billion this would translate into another €3 billion of losses. </p>
<p>Of course actual tax losses could be much higher if GDP losses persist for multiple years. Even ignoring this loss as well as increases in unemployment benefits and any potential losses from the new bank recapitalization, €56 billion of losses have been incurred. </p>
<p>This amounts to €16,000 per each of Greece’s approximately <a href="http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/General/GREECE_IN_FIGURES_2014_EN.pdf">3.5 million workers</a>.</p>
<p>With an average net wage close to €900, this amounts to a full 18 months of hard work.</p>
<h2>How to undo the damage</h2>
<p>This value destruction can be reversed if Greece changes its focus. </p>
<p>Greece needs a turnaround, and with any turnaround strategy, focus is key. Where milk or bread is sold or whether stores will open on Sundays is not going to put Greece in a trajectory of growth. The IMF and the European partners are dead wrong, in my view, to focus on these issues instead of the elephant in the room. </p>
<p>The elephant in the room is the public sector, which has a budget of close to €80 billion and 650,000 employees. </p>
<p>Increasing accountability and improving governance in the public sector could have massive economic consequences because it could restore confidence and trust in the country. </p>
<h2>A 100-day plan</h2>
<p>Here is one 100-day plan on how to achieve this:</p>
<ol>
<li><p>The Greek government can increase the transparency and management of its assets and liabilities by reporting an up-to-date balance sheet of its accounts (which is currently does not). Thus, it should adopt accrual accounting and <a href="https://www.ifac.org/public-sector">International Public Sector Accounting Standards</a>. Within 30 days, the government should then report its net debt position under international standards. This is much lower than the frequently reported gross debt number that uses nominal value. The former is lower than <a href="http://www.hbs.edu/faculty/Pages/item.aspx?num=49288">50% of GDP while the latter is close to 180%</a>.</p></li>
<li><p>The government should then relentlessly educate credit rating agencies that its net debt does not justify such a low credit rating. Having secured European Stability Mechanism financing and having such a low net debt number justifies a better credit rating. A BB credit rating would be perfectly possible within 100 days. </p></li>
<li><p>The government should do whatever is necessary for Greek government bonds to be included in the European Central Bank’s quantitative easing program. This will improve liquidity and set the foundation for economic growth.</p></li>
<li><p>With a commitment to transparency, a better credit rating and being part of ECB’s quantitative easing, my estimate is that 10-year Greek government bonds could trade close to 3% yield within 100 days. Now they trade close to 10%. This would open the doors for Greece to tap the market and issue a bond. </p></li>
<li><p>Within this sequence of events, it would not be unrealistic to expect a 50% increase in the Athens Stock Exchange index leading to a gain of approximately €15 billion. </p></li>
</ol>
<p>Greece used to have GDP-per-capita levels almost double that of the poorest countries in the European Union. Now it has just 20% higher than them. </p>
<p>New elections will give Tsipras a second opportunity to reverse that trend. Let’s hope he does not waste it again.</p><img src="https://counter.theconversation.com/content/46449/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Serafeim does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Elections will give Alexis Tspiras another chance to put Greece’s financial house in order. Here’s what he should do after the government reforms in September.George Serafeim, Jakurski Family Associate Professor of Business Administration, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/450252015-07-27T05:25:10Z2015-07-27T05:25:10ZIn defence of Germany: why the EU’s biggest champion doesn’t deserve the vitriol<p>Anti-German sentiment that has been simmering in Greece for the past few years has boiled over in recent weeks in response to the <a href="https://theconversation.com/tsipras-may-have-just-done-the-best-deal-possible-for-greece-44613">conditions</a> Germany has imposed on the country in return for financial bail outs. This was most clearly demonstrated by the hashtag <a href="https://twitter.com/hashtag/BoycottGermany?src=hash">#BoycottGermany</a> that sprung up <a href="http://www.bbc.co.uk/news/blogs-trending-33538098">in response to the conditions of the deal</a>. </p>
<p>Perhaps inevitably, Greek newspapers have long drawn on Germany’s unsavoury past with photomontages of Angela Merkel <a href="http://www.dailymail.co.uk/news/article-2101614/Greece-debt-crisis-Greeks-brand-Germans-Nazis-taking-control-economy.html">sporting a swastika armband</a>, and depictions of the German finance minister, Wolfgang Schäuble, as a leading Nazi, <a href="http://www.timesofisrael.com/greek-cartoon-depicts-german-finance-minister-as-nazi/">threatening to make soap from Greeks’ fat</a>. </p>
<p>Newspapers are also quick to remind Germans how they (or rather West Germans) were helped to get back on their feet by other countries during the early 1950s when they were in dire need following defeat in the World War II. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"621048504782331904"}"></div></p>
<h2>Anti-Greek sentiment in Germany</h2>
<p>Meanwhile, exasperation with Greece, and the single currency in general, has grown within Germany in recent years, demonstrated by electoral success for the anti-euro (though not anti-EU) party, the Alternative For Germany (AfD), which only just <a href="https://theconversation.com/merkel-must-manoeuvre-to-see-off-euroscepticism-in-germany-18633">failed to reach the 5% threshold</a> required to gain seats in the Bundestag at the last federal election in 2013. </p>
<p>This suggests while pro-Europeanism was for decades compulsory in the Federal Republic, many Germans finally feel that the time has come to break the taboo surrounding euroscepticism and to express sentiments that are common in many other European countries, most notably Britain. After all, Germans gave up the trusty Deutschmark on condition, or at least on the assumption, that they would not later be asked to bail out other countries within the eurozone. Many western Germans also feel that they have <a href="http://www.theguardian.com/commentisfree/2015/jul/17/germany-greece-wolfgang-schauble-bailout">already had to bail out</a> eastern Germany. </p>
<p>But anecdotal evidence suggests that on both sides, and particularly among Greeks, animosity is directed more at politicians than at ordinary citizens. Greece is a popular holiday destination for Germans, and Western German cities are home to <a href="http://www.thatsgreece.com/info/greece-abroad-The-Greeks-in-Germany">thousands of people of Greek descent</a> whose parents or grandparents came to the country as guestworkers during the 1950s and 1960s.</p>
<h2>Unfair criticism?</h2>
<p>Does Germany deserve the criticism? It certainly is hard to deny that Berlin calls the shots in the EU today, but this is arguably more by accident than design. People forget that the very first European community, the European Coal and Steel Community, founded with the <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV:xy0022">Treaty of Paris</a> in 1951, was designed to constrain West Germany and to prevent it ever dominating Europe militarily again. </p>
<p>At the heart of the European project was the Franco-German relationship which over the decades has been reminiscent of a seesaw, with France originally the heavyweight, followed by many years with a more balanced relationship. </p>
<p>France, like other European countries, particularly Britain and Poland, was concerned about the prospect of German reunification, fearing that reunited Germany would become too dominant and that Germany would become the more weighty partner on the seesaw between Paris and Berlin, perhaps with good reason – indeed their relationship has <a href="http://www.economist.com/node/21532283">famously been described</a> as designed “to hide the strength of Germany and the weakness of France”. But at the time, leading German politicians sought to allay such fears, stating that they were <a href="http://www.washingtonpost.com/archive/politics/1990/02/14/east-west-agree-on-german-unity-talks-troop-levels/675910ea-0069-4635-95d9-a2da7c1dafb3/">striving for</a> a “European Germany” and not “a German Europe”.</p>
<p>The <a href="http://www.eurotreaties.com/maastrichtec.pdf">Maastricht Treaty of 1992</a>, which paved the way to the single currency, aimed to link reunited Germany irrevocably to the EU, and was an attempt by Kohl and then French president François Mitterrand to bind their successors to the European project. </p>
<p>Greeks in particular should also bear in mind the <a href="http://news.bbc.co.uk/1/hi/world/europe/8036097.stm">enormous contributions</a> Germany has made to the EU budget over the years, in spite of the economic difficulties of incorporating the former East Germany into the Federal Republic, especially during the 1990s. Germany has also played a key humanitarian role in accepting <a href="http://www.unhcr.org/cgi-bin/texis/vtx/page?page=49e48e5f6&submit=GO">large numbers of refugees and asylum seekers</a> from various trouble spots, not least from former Yugoslavia.</p>
<p>At present, the volume of asylum seekers and refugees arriving in Germany has become politically difficult to manage, and Merkel recently hit the headlines for telling a tearful young refugee that <a href="http://www.bbc.co.uk/news/world-europe-33555619">Germany cannot accept everyone</a>.</p>
<h2>Damned if they do …</h2>
<p>In many ways Germany cannot win. It gets criticised for being too proactive, and also for not doing enough. This is most noticeable in defence and security matters at an international level, especially in NATO. The country has been criticised, particularly by the US, for <a href="http://www.thetimes.co.uk/tto/opinion/columnists/article4195915.ece">not contributing enough</a> in terms of military intervention and peacekeeping in countries such as Afghanistan, and <a href="http://www.nytimes.com/2013/11/05/opinion/bittner-rethinking-german-pacifism.html">pacifism is widespread</a> among the German population. But if Germany were to be overtly keen on military intervention one can be sure that this would also be seized upon by critics who would quickly resort to tired old allusions to Germany’s past. </p>
<p>Whether or not Angela Merkel can win the battle to save Greece and even the euro as a whole, not to mention her own reputation and legacy, remains to be seen. So far she has demonstrated an unwavering commitment to the future of the single currency and the European project, inherited from her mentor during the 1990s, Helmut Kohl. Her domestic personal ratings <a href="http://www.dw.com/en/more-than-half-of-germans-back-merkels-approach-to-greece-poll/a-18584118">remain largely undamaged</a> by the eurocrisis, with most Germans still regarding her as a “safe pair of hands”, a theme which helped her earn re-election in 2013.</p>
<p>There are clearly grounds for criticising the current package offered to Greece, in particular, the absence of debt relief, and the proposed sale and privatisation of Greek assets will remind many people of the measures imposed on eastern Germany in the early 1990s, which led to <a href="http://www.irishtimes.com/business/economy/the-pathway-to-germany-s-low-unemployment-1.2123286">mass unemployment</a>. </p>
<p>But maybe there would be less animosity all round if the Greek government and media could bring themselves to adopt that old British adage: “Don’t mention the war.”</p><img src="https://counter.theconversation.com/content/45025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joanna Mckay does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When it comes to Europe, Germany can’t win either way.Joanna Mckay, Senior Lecturer in Politics, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/448902015-07-20T18:01:39Z2015-07-20T18:01:39ZFrom Greece to Iran: the importance of credibility<figure><img src="https://images.theconversation.com/files/89045/original/image-20150720-12543-59ux7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A billboard in Tehran.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Iran_2007_074_Tehran_Grand_Ayatollah_Sayyed_Ali_Hosseini_Khamenei_(1732472092).jpg">David Holt</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Lord Palmerston, Britain’s 19th-century prime minister, was reputedly the first person <a href="http://thinkexist.com/quotation/nations-have-no-permanent-friends-or-allies-they/771609.html">to have coined the phrase</a> that</p>
<blockquote>
<p>Nations have no permanent friends or allies, they only have permanent interests. </p>
</blockquote>
<p>Many statesman have staked their careers on that claim, none more famously than Ronald Reagan when <a href="https://answers.yahoo.com/question/index?qid=20061230230553AAjxN4c">he quoted</a> an old Russian proverb in referring to his negotiations with then Soviet President Mikhail Gorbachev about an arms control treaty,</p>
<blockquote>
<p>Trust, but verify. </p>
</blockquote>
<p>The gist of both is that sometimes countries have to take a chance and make deals with people that they don’t trust because the possible benefits outweigh the obvious costs. </p>
<p>They have to put aside the historical track record – the facts – in order to try to create a new relationship beneficial to everyone. In effect, you need to stick to your interests and ignore everything else.</p>
<p>After many years of friction and negotiation, there is something deeply symbolic in the fact that a deal between Greece and the other members of the EU, and between Iran and the permanent members of UN’s Security Council plus Germany, was concluded in the same week.</p>
<p>In both cases, the critics can understandably point to the track record of failure and deceit. In both cases, the advocates can suggest that the terms of the final agreements take into account that distrust in building safeguards for implementation – the “verify” component. </p>
<p>But in the end, progress – in one case toward mutual prosperity and in the other toward nuclear stability – involves a substantial leap of faith where none appears justified. </p>
<p>So looking at both agreements, why did all sides reach an agreement? </p>
<p>And whose reputation has suffered in their aftermath?</p>
<h2>Greece: whose reputation is really on the line?</h2>
<p>Of the two, the outcome of the negotiations between Greece and its eurozone partners was perhaps more predictable – Greek defiance followed by capitulation. </p>
<p>The Greeks have stressed that they feel “humiliated.” But whose reputation has really suffered as a result of these events?</p>
<p>When the euro was created in 1999, strict laws were created about budgetary expenditures that all partners had to follow. Members of the eurozone have to respect the <a href="https://en.wikipedia.org/wiki/Stability_and_Growth_Pact">Stability and Growth Pact</a>, which sets agreed limits on <a href="https://en.wikipedia.org/wiki/Government_budget">deficits</a> and <a href="https://en.wikipedia.org/wiki/National_debt">national debt</a>. Each member country has to stay within the limits on government deficits (3% of GDP) and debt (60% of GDP). Eurozone member states face fines if they exceed these amounts. If a country broke the rules in three consecutive years, the <a href="http://www.civitas.org.uk/eufacts/FSINST/IN1.php">European Commission</a> could impose a hefty fine of up to 0.5% of its GDP.</p>
<p>Greece became a member in 2001 and inherited these rules. But it was an unspoken secret that Greece was unprepared to meet these requirements. Like other members, it routinely ignored them. </p>
<p>Indeed, <a href="http://ec.europa.eu/geninfo/query/resultaction.jsp?query_source=ECFIN&QueryText=Greece+2005&swlang=en&x=0&y=0">proceedings</a> were initiated against Greece as early as 2005 but were abandoned, largely for political reasons. If countries like France could flout the rules, then why not Greece, a country with a small economy that was far less important to the health of Europe’s economy? By 2006, even <a href="http://www.civitas.org.uk/eufacts/FSECON/EC10.php">Germany’s debt</a> exceeded the 60% limit.</p>
<p>The pact’s guidelines were reformed in 2011 to allow for greater flexibility. Nonetheless, everyone trundled along, pretending that Greece’s behavior was acceptable when it clearly wasn’t. </p>
<p>Yet German and French banks had spend years pouring tens of billions of euros into Greece in search of profit, ignoring the <a href="http://www.theguardian.com/world/datablog/2015/jun/19/the-greek-debt-what-creditors-may-stand-to-lose">growing mountain</a> of Greek debt. </p>
<p>Their investment behavior was reckless, similar to American banks before the Great Recession. But, like their American counterparts, they anticipated that they wouldn’t have to pay the bills if things didn’t work out. They would snare the benefits but avoid the costs – what economists call <a href="http://economictimes.indiatimes.com/definition/moral-hazard">“moral hazard.”</a> </p>
<p>The French and German bankers were right. In 2012 they faced oblivion under a mountain of Greek debt. By this year, all but a small fraction of the debt had been moved from their balance sheets to those of their national governments and to international creditors. The <a href="http://www.bbc.co.uk/news/world-europe-33399718">exposure of these banks</a> has now been significantly reduced. </p>
<p>Greece may feel <a href="http://www.bbc.co.uk/news/world-europe-33527917">humiliated</a>. Its reputation may have suffered to the point that many suspect that the <a href="http://www.nytimes.com/2015/07/13/world/europe/greece-debt-plan.html">final agreement</a> can’t even – or simply won’t – be implemented by any Greek government. </p>
<p>But the agreement <a href="http://www.nytimes.com/2015/07/18/world/europe/germany-risks-reputation-with-harsh-tone-on-greek-debt-crisis.html">masks a challenge</a> to the credibility of the French, the Germans and everyone else that ignored their own rules in search of profit – and then chastised the Greeks for their financial folly. </p>
<p>And ultimately, as was the case in the US in the first Obama administration, it is the <a href="http://www.nytimes.com/2015/07/18/world/europe/germany-risks-reputation-with-harsh-tone-on-greek-debt-crisis.html">taxpaying citizens</a> of these countries who will foot the bill. </p>
<h2>Which Iran negotiated the deal?</h2>
<p>The deal with Iran is even more complex, in large part because it is hard for the Western powers to know who is in charge – and credible. </p>
<p>The representatives of supposedly moderate President Hassan Rouhani <a href="http://www.wsj.com/articles/back-home-irans-leader-tries-to-sell-nuclear-deal-1437081590">declared victory</a> last week because the agreement allows Iran to escape from the crushing weight of UN and American sanctions and provided the opportunity for greater future collaboration with the West on a number of issues. </p>
<p>But, on July 18, Iran’s Supreme Leader Ayatollah Ali Khamenei <a href="http://www.nytimes.com/aponline/2015/07/18/world/middleeast/ap-ml-iran-nuclear.html?_r=0">undermined</a> any spirit of detente by declaring Iran’s avowed opposition to the US and calling once again for the total destruction of Israel, which he described in his speech as a “terrorist, baby-killer government.” </p>
<p>While his speech may have been designed to appease hard-liners at home, the effect abroad will be to undermine President Obama’s efforts to convince the US Congress that it should verify the agreement and to reinforce Israeli Prime Minister <a href="http://www.nytimes.com/aponline/2015/07/19/world/middleeast/ap-ml-israel-iran.html">Benjamin Netanyahu’s claim </a>that it is a “historic mistake.” </p>
<p>Both Iran’s credibility as a member of the “community of nations” and the agreement’s credibility in portending a new collaboration with the West, was, I would argue, swiftly and brutally destroyed.</p>
<p>President Obama’s credibility also suffered a major setback, unless he can convince his Republican opponents that Iran can be boxed in by the terms of the agreement, despite its reinforced reputation as an ambitious and unrelenting threat to the US and its regional allies.</p>
<h2>Verify – but trust?</h2>
<p>So, as a new week starts, the question remains: will either the July 13 Greece agreement or July 14 Iran deal achieve its promise for, respectively, prosperity and greater policy coordination in Europe and nuclear stability in the Middle East? </p>
<p>One thing is clear: when it comes to statecraft, “trust” is just as important as “verify” when it comes to negotiating truly momentous agreements. </p>
<p>In its absence, the prospects for peace and prosperity look grim.</p><img src="https://counter.theconversation.com/content/44890/count.gif" alt="The Conversation" width="1" height="1" />
Lord Palmerston, Britain’s 19th-century prime minister, was reputedly the first person to have coined the phrase that Nations have no permanent friends or allies, they only have permanent interests. Many…Simon Reich, Professor in The Division of Global Affairs and The Department of Political Science, Rutgers University - NewarkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/447442015-07-20T10:27:40Z2015-07-20T10:27:40ZReading between the lines of Greece’s bailout: debt relief is inevitable – just not yet<figure><img src="https://images.theconversation.com/files/88944/original/image-20150720-2328-1qz1x3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How to explain Greece's bailout puzzle? </span> <span class="attribution"><span class="source">Greece puzzle via www.shutterstock.com</span></span></figcaption></figure><p>At first glance, the latest developments in the Greek bailout saga seem a little puzzling, particularly those concerning debt relief. </p>
<p>The current <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">proposal</a> from Greece’s eurozone creditors does not offer debt relief. To the contrary, it <a href="http://www.bbc.com/news/business-33505555">emphasizes</a> that debt relief is not involved: “nominal haircuts on the debt cannot be undertaken.” </p>
<p>Yet the day after Greece agreed to the proposal, the International Monetary Fund <a href="http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf">released</a> a report showing that Greece cannot possibly pay back its current debt. This position is hardly surprising in itself -– the IMF has been saying as much for months. But the timing was mystifying because the IMF had initially endorsed the proposal. In fact the eurozone countries would <a href="http://blogs.wsj.com/moneybeat/2015/07/13/heres-what-the-greek-deal-entails/">not have agreed</a> to the proposal otherwise. </p>
<p>Truth be told, no one seems to think the latest bailout (alone) will work, the official word notwithstanding. Whether it’s the <a href="http://www.wsj.com/articles/germanys-schauble-dismisses-greek-haircut-option-1437032027">German finance minister</a>, the <a href="http://www.telegraph.co.uk/finance/economics/11743163/Greece-news-live-Brussels-prepares-to-release-emergency-loan-to-get-Greece-through-July.html">Greek prime minister</a> who agreed to the deal, the <a href="http://www.bloomberg.com/news/articles/2015-07-17/greek-bailout-needs-debt-reduction-imf-s-lagarde-says">head of the IMF</a> or the pundits, there’s a “Greek” chorus in the background wailing that this bailout will just bring another crisis.</p>
<p>In other words, it’s a puzzle any way you look at it. If debt relief will ultimately be essential, why not just provide it now? Why insist on fiscal and structural reforms that will increase Greece’s economic pain? </p>
<p>Could it be that eurozone leaders are simply setting the stage, however quietly, for significant debt forgiveness in the not-too-distant future? </p>
<p>Here’s why that idea may not be so far-fetched – and why there probably isn’t any better time than now, with Greece’s banks in crisis, to pursue reforms as a step toward debt relief. We just need to read between the lines.</p>
<h2>Why debt relief must wait</h2>
<p>First of all, proposing debt relief today would be politically dangerous for leaders in the eurozone creditor countries. Their voters <a href="http://www.washingtonpost.com/blogs/monkey-cage/wp/2015/07/12/other-europeans-say-they-cant-trust-greece-the-problem-goes-both-ways/">do not trust</a> Greece, given the country’s many unfulfilled promises of reform, and many view debt forgiveness as unfair. </p>
<p>It’s difficult for pensioners in Latvia, who <a href="http://ec.europa.eu/economy_finance/publications/publication14992_en.pdf">retire</a> on average at 63, to see why it’s fair for them to sacrifice to help pensioners in Greece, who retire on average at 60 – and <a href="http://greece.greekreporter.com/2014/12/04/75-of-greek-pensioners-enjoy-early-retirement/">sometimes</a> at 50. It’s difficult for voters in Finland, who <a href="http://www.kpmg.com/global/en/issuesandinsights/articlespublications/vat-gst-essentials/pages/finland.aspx">pay</a> a value-added tax (VAT) of 24%, to see why it’s fair for them to be taxed to support voters on Greek islands, many of whom <a href="http://www.ekathimerini.com/199529/article/ekathimerini/business/four-tier-vat-status-for-islands">pay</a> a VAT of only 13%. </p>
<p>So Europe’s leaders face a catch-22. Greece cannot recover without debt relief, but Europe’s voters will not approve such forgiveness. To complicate matters further, the Greeks think they merit relief since they have already implemented some reforms and their economy is suffering.</p>
<p>Economic activity <a href="http://money.cnn.com/2015/01/22/news/economy/greece-elections-austerity-syriza/">is down</a> by almost 30% since 2008. Prices are falling 2% per year. The banks are still closed, limiting Greeks to withdrawals of just €60 a day. Overall unemployment is 26%, and unemployment among the young is 50%. Homeless shelters are overwhelmed. Proper medical care is out of reach for many people.</p>
<p>Naturally the Greeks think they’ve suffered enough.</p>
<h2>Why insist on reform amidst the ruins</h2>
<p>Given the terrible economic pain in Greece, why do its eurozone creditors insist on fiscal and structural reforms that will make things even worse? Reform is critical financially, economically and politically.</p>
<p>Greece already owes more than it can pay, yet Greece’s government keeps borrowing more because it still runs a substantial <a href="http://www.tradingeconomics.com/greece/government-budget">budget deficit</a> every year.</p>
<p>The <a href="http://www.theguardian.com/business/2015/jul/13/greece-bailout-agreement-key-points-grexit">bailout plan</a> requires fiscal reforms that will dramatically reduce the need for borrowing: Greece must bring its pension system to financial sustainability via “comprehensive reform,” streamline VAT and broaden the tax base and introduce “quasi-automatic spending cuts” that kick in if the government can’t hit its targets. </p>
<p>Sustainable economic growth also requires structural reform. Existing Greek laws and regulations severely impede business activity and strangle job creation, all of which reduce tax revenues and make it hard for Greece to balance its budget. The deal aims to enhance competition, introduce greater labor-market flexibility and privatize certain industries. </p>
<p>History shows that these reforms will make a big difference to Greece’s economy. Similar reforms brought Germany to economic dominance within Europe and enabled China to explode onto the world economic scene. And the reforms are likely to pass: most Greeks strongly <a href="http://greece.greekreporter.com/2015/06/16/poll-7-in-10-greeks-want-the-euro-at-any-cost/">support</a> their country’s membership in the eurozone and are willing to pay a steep price to keep it. </p>
<p>But the political benefits of reform are just as critical as their financial and economic benefits. By implementing the reforms, Greece could alleviate voter distrust among its creditor countries and reduce the perceived unfairness in debt relief. Thus the deal could ultimately make it politically feasible for leaders in these countries to propose significant forgiveness. </p>
<p>The adjustments associated with reform will be very painful, and the Greek economy is already in bad shape. Indeed, it was to avoid such pain, or at least spread it out, that Greek voters so often opted to slow or stop reform in the past. Unfortunately, slowing reform over the past year led the country into greater debt, precipitating the current crisis, so the rest of Europe will no longer support that option. </p>
<p>And the one option still available to Greece -– spurning its creditors altogether –- would be even worse than reform because it would intensify the banking crisis. </p>
<h2>Banking crisis boosts Europe’s leverage</h2>
<p>It is the banking crisis – which began after Prime Minister Alexis Tsipras surprised everyone in late June with his call for a referendum, prompting the European Central Bank to cap how much Greek lenders could borrow – that gives creditors the most leverage over Greece. </p>
<p>To review: the <a href="http://www.abc.net.au/news/2015-07-18/greek-banks-to-reopen-monday-but-capital-controls-remain/6631014">bank closures</a> in Greece have sent the economy reeling, firms are closing at an accelerated rate, and Greek banks are at risk of insolvency. The banks have just reopened, but they’re still desperate for cash.</p>
<p>If the banks are not recapitalized soon, they’ll sharply curtail lending, and economic activity will fall precipitously. Greece would be forced out of the eurozone and would have to adopt a new, devalued currency. Greeks would find euro-denominated debts to foreigners more difficult to repay, and many would default. The defaults would delay the return to growth because foreign lenders would be even more reluctant to extend credit in the future. </p>
<p>Key to the new political calculus is Greece’s inability to recapitalize its own banks. Because it is so deeply in debt, the Greek government has no financial resources to spare. It is already behind in paying regular expenses. And the Greek central bank gave up the power to recapitalize the banks by printing new money when Greece joined the euro. </p>
<p>To recapitalize its banks and avoid economic implosion, Greece needs an immediate infusion of foreign funds. This gives Europe unprecedented leverage to help Greece help itself. By making current aid depend on immediate reform, Europe changes the calculus for Greek lawmakers when voting on reform proposals: it increases the payoff to voting Yes, because it helps Greek voters avoid a deeper banking crisis, and it reduces the costs to voting Yes, because the eurozone itself will take some of the political heat. </p>
<p>What’s in it for the eurozone? Its leaders would prefer to avoid the uncertainties and precedents of a Grexit. And in the long run a stronger Greek economy will import more of their products, supporting economic growth throughout the region. And, of course, a stronger Greek economy will need less debt relief; who can complain about that?</p>
<h2>What’s with the IMF?</h2>
<p>Another puzzle: why would the IMF acquiesce to the current agreement if it believes debt relief is critical? Keep in mind that the IMF wants to maximize its chances of being paid back. Those chances rise whenever Greece implements reforms, because they strengthen the economy. </p>
<p>The IMF could also benefit indirectly from reforms because they might alleviate the political opposition to debt relief. Forgiveness from other institutions frees up resources in Greece that can be used to pay back the IMF. </p>
<p>In short, another incentive for not insisting on immediate debt relief could be that waiting is required to make reform happen, and reform is politically necessary for actual debt relief to occur down the road.</p>
<h2>Clues that debt relief lies ahead</h2>
<p>If the Eurozone creditor governments do have in mind a long-run plan that includes significant debt relief, they clearly cannot openly discuss it today. </p>
<p>Nonetheless, their close cousins in the European Commission called this week for just that: an eventual “<a href="http://www.reuters.com/article/2015/07/15/eurozone-greece-eu-assessment-idUSB5N0ZA05420150715">reprofiling</a>” of Greece’s debt conditional on “a far-reaching and credible reform program.” Reprofiling amounts to implicit debt forgiveness through the lengthening of maturities, deferring of interest and similar adjustments. </p>
<p>The <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">eurozone plan</a> itself hints at this possibility. The first sentence highlights the importance of rebuilding trust. Specific reform proposals target the perception of unfairness, stressing that Greece should match policy standards elsewhere in Europe. For example, “labor market policies should be aligned with international and European best practices.” </p>
<p>And tucked in at the end is a brief but explicit hint of possible future forgiveness: </p>
<blockquote>
<p>Against this background, in the context of a possible future [European Stability Mechanisms] programme … the eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. </p>
</blockquote>
<p>Of course, this vague gesture toward forgiveness is immediately linked to the necessity of reform: “These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme.” </p>
<p>So Greeks and others who think the Germans are being a little harsh with their demands for austerity without debt relief should take heart. Good things may ultimately come to those who wait – and endure.</p><img src="https://counter.theconversation.com/content/44744/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carol Osler does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>No one seems to really believe the latest bailout plan will work without debt relief. But the only way to get Greece to adopt essential reforms is to pretend it isn’t in the cards.Carol Osler, Professor of Business, Brandeis UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/447992015-07-17T05:29:24Z2015-07-17T05:29:24ZGreek austerity may be an economic tale but children are the human cost<figure><img src="https://images.theconversation.com/files/88686/original/image-20150716-5084-1nmln1a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A Greek tragedy.</span> <span class="attribution"><span class="source">Greece by Shutterstock</span></span></figcaption></figure><p>Many perspectives have been shared about the social and economic repercussions that the third EU bailout proposal for <a href="https://theconversation.com/uk/topics/greece">Greece</a> may have. The impact of these tough austerity measures is yet to unfold for the country, for the other southern states, or indeed Europe as a whole. </p>
<p>But moving beyond a purely economic lens, there is already evidence about the extent of deprivation and youth unemployment of more than 50% during the past five years of the first and second bailout programmes, meaning that the likely effects of the third are easier to predict, <a href="http://core.ac.uk/download/pdf/6223887.pdf#page=22">at least for this generation</a>.</p>
<p>The links between poverty and a range of risk factors for child mental health problems and related outcomes <a href="http://jama.jamanetwork.com/article.aspx?articleid=197462">is well established</a>. Nevertheless, the reality hit home a few weeks ago when I joined the <a href="http://www.sos-childrensvillages.org/">Children’s SOS Villages</a> in Greece in training their prospective new carers, or “mothers” and “aunts” as they are widely called. These carers work in a similar way to foster carers and residential care staff in other welfare systems. The villages were established in Austria after World War II to care for orphan children and since then their model has successfully spread across more than 120 countries.</p>
<p>Their model may slightly vary, but their target groups are typically children without parents, for a range of reasons, or those who have been abused and/or neglected. Consequently, it came as a surprise to realise the extent of child abandonment (neglect, an inability to care for them or even asking social services to look after them) for predominantly financial reasons since the beginning of the Greek crisis. </p>
<p>The organisation has responded <a href="http://www.soschildrensvillages.org.uk/sponsor-a-child/europe/greece?gclid=CLCFlZ6C4MYCFUnlwgodMTsN-A">by diversifying its remit</a> in Greece. In the absence of an increasingly <a href="https://theconversation.com/suicide-hiv-and-infant-deaths-soar-in-post-crash-greece-23492">stretched health</a> and <a href="http://esp.sagepub.com/content/21/5/501.short">social care sector</a>, they have now extended their services beyond the traditional villages to support, relieve and prevent abuse and neglect, running eight social centres in Greece’s major cities to help keep families together. </p>
<h2>Abandonment issues</h2>
<p>A <a href="http://www.unicef-irc.org/publications/733">2014 UNICEF report</a> said that child poverty in Greece <a href="http://greece.greekreporter.com/2014/10/29/unicef-dramatic-increase-in-child-poverty/">had almost doubled</a> from 23% in 2008 to 40.5% in 2012, with migrant children particularly vulnerable. It found average family incomes were at 1998 levels, and 18% of households with children unable to afford a meal with meat, chicken, fish or a vegetable equivalent every second day.</p>
<p>But do parents really abandon children because they cannot feed them? Is this an alien pattern for the “developed” world, or just an accentuation of multiple vulnerabilities that were there in the first place? The answer is possibly both. Parents do not neglect their duties simply because they are poor, although a number of poverty-related factors such as overcrowding, poor housing, lack of basic needs and, crucially, unemployment, can adversely affect their own mental health <a href="http://link.springer.com/article/10.1007/s00127-006-0061-3#">and their parenting capacity</a>.</p>
<p>These in turn interact with the direct impact of deprivation on their children, things such as social exclusion and neighbourhood criminality. In the absence of protective factors like school attainment and sense of identity, it increases the risk of abuse, neglect and child mental health problems <a href="http://www.amazon.co.uk/Helping-Children-People-Experience-Trauma/dp/1846195837">that can persist</a> into adolescence and adult life.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/88692/original/image-20150716-5074-1c9hcot.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Being poor doesn’t make you a bad parent but protective.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-285448673/stock-photo-thessaloniki-greece-march-homeless-in-greece-face-continuing-financial-crisis-homeless.html?src=xQ-i1tNWVITsh-lSk_Sj3Q-1-10">Homeless by Shutterstock</a></span>
</figcaption>
</figure>
<p>So, is this evolving European situation different? And should we be alarmed about the potentially lasting effects on children and young people in this climate of austerity? Some characteristics of the socioeconomic circumstances in Greece, Spain and Portugal are different to what families may have faced in the previous 20 years. There has been a continuous deterioration of living standards, <a href="http://greece.greekreporter.com/2014/10/29/unicef-dramatic-increase-in-child-poverty/">increasingly below the poverty line</a>, now also affecting once stable and prosperous middle class families.</p>
<p>Exorbitant living costs contrasted with high unemployment for parents and youth alike have resulted in collective hopelessness, anger and marginalisation for large communities. Worryingly, these same communities in southern Europe now lack the protective family and social support networks of traditionally knit or rural societies, which have collapsed in urban centres, <a href="https://books.google.co.uk/books?hl=en&lr=&id=voJ_AgAAQBAJ&oi=fnd&pg=PP1&dq=family+in+southern+europe&ots=d-7sgc0a56&sig=YerA_DuA7C0XT1wkw7k3G6rfIQs#v=onepage&q=family%20in%20southern%20europe&f=false">often because of internal migration</a>. </p>
<p>If one adds the limited and constantly shrinking public welfare and health sector services, this imbalance is unprecedented, with unknown outcomes for Europe’s new generations. This does not exclude the north, where there have been dramatic public service and welfare cuts in England, with <a href="http://www.jrf.org.uk/a-uk-without-poverty?gclid=CKz28ejc38YCFdQZtAodLSkPXA">a corresponding rise</a> of children living in poverty. But in Greece the scale of austerity means that the fallout is not likely to be reversed until there is sustained economic growth with new opportunities for their children and youth.</p><img src="https://counter.theconversation.com/content/44799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Panos Vostanis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Being poor doesn’t make you a bad parent but families need protective factors to counter the negative ones.Panos Vostanis, Professor of Child Psychiatry, University of LeicesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/446242015-07-16T14:04:58Z2015-07-16T14:04:58ZGreek parliament passes debt agreement, but European democracy is on its knees<p>Almost as soon as the Greek deal was agreed, it began to come apart at the seams. <a href="http://www.bbc.co.uk/news/world-europe-33535205">Passage of the necessary legislation</a> through the Greek parliament led to Syriza splitting in two as Alexis Tsipras, the Greek prime minister, drew on the votes of the right to force through a deal which is worse than anything that was on offer before the referendum on July 5. </p>
<p>Germany’s finance minister, Wolfgang Schäuble, <a href="http://www.wsj.com/articles/grexit-favored-by-many-members-of-german-government-says-schauble-1436877063">revealed that</a> many in the German government actually want Greece to leave the euro, effectively admitting that the deal was deliberately designed to be as tough as possible to force Tsipras to reject it. <a href="http://www.bbc.co.uk/news/business-33534260">The deal’s passage through the German parliament</a> will not be straightforward, and Finnish politicians <a href="http://www.theguardian.com/business/2015/jul/14/finland-stand-in-way-greece-bailout-deal-finns-party">have also expressed deep scepticism</a>. </p>
<p>Meanwhile, the International Monetary Fund (IMF) has been engaging in a propaganda battle against its European partners in the Troika, leaking a memorandum in which it argues that <a href="http://www.theguardian.com/business/2015/jul/14/imf-report-greece-needs-more-debt-relief">Greece’s debt is unsustainable</a> and implying that the agreement will fail.</p>
<h2>Loss of sovereignty</h2>
<p>In forming the eurozone, the core member states of the EU <a href="http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that">gave up at a stroke much of the economic policy autonomy</a> that they had enjoyed in the past. The euro implied stringent (though not easily enforceable) rules on government borrowing, the hollowing out of national central banks, and as a result, the pooling of monetary policy decisions.</p>
<p>During the benign economic times of the first few years of the euro’s existence, this loss of national sovereignty appeared to have few obvious costs, and in any case the mainstream political parties in the member states were fully committed to the single currency and the institutions that sustained it. But the global financial crisis wrecked that illusion, and the choice to opt for fiscal <a href="http://ukcatalogue.oup.com/product/9780199389445.do">austerity</a> and a conservative approach to monetary policy has had dramatic consequences for the weaker economies of the European periphery.</p>
<p>Greece has been the prime victim of this crisis. The new government led by Tsipras demanded an end to the tough austerity measures imposed by its creditors – the IMF, the European Central Bank and the European Commission – in exchange for financial help to the heavily indebted Greek state. </p>
<p>But fatally, Tsipras, as it now appears, had no fallback strategy: what if the other European nations said no? Syriza aimed to renegotiate the terms of the financial assistance provided by the EU and the IMF, without having any credible bargaining counters. <a href="http://www.eubusiness.com/news-eu/greece-politics.136r">The hardline Schäuble</a> simply called Tsipras’s bluff, and faced with the alternative of a chaotic exit from the euro, a humiliated Greece fell into line with a programme that is even harsher than the original bailout Syriza was seeking to overturn.</p>
<h2>Echoes in southern Europe</h2>
<p>There is a little doubt that in their diplomatic game with Greece, the hardliners were playing a longer game. This autumn, elections will be held in Spain, where the new left populist party <a href="http://newleftreview.org/II/93/pablo-iglesias-understanding-podemos">Podemos</a> has quickly risen from nowhere to challenge the pro-euro orthodoxy.</p>
<p>In Italy, <a href="http://www.economist.com/news/europe/21635792-beppe-grillo-says-he-tired-and-his-movement-tired-his-autocratic-leadership-falling-star">Beppe Grillo’s Five Star Movement</a> has called for a referendum on Italy’s euro membership, and commands the support of more than 20% of Italian voters. In France, far-right Front National leader Marine Le Pen is <a href="http://www.spiegel.de/international/europe/interview-with-french-front-national-leader-marine-le-pen-a-972925.html">openly hostile to the euro</a>. </p>
<p>Concessions to Syriza would have helped the cause of these various anti-austerity parties in their respective national electoral arenas. But after Syriza’s abject humiliation, Spain’s conservative leader Mariano Rajoy, and also his Socialist opponent Pedro Sánchez, will enthusiastically point to the Greek disaster as an example of the dangers of seductive ideas of debt relief and euro exit, undercutting Podemos’ appeal.</p>
<p>This may well work as a short-term political strategy: the Greek debacle is enough to put anyone off the idea of challenging EU orthodoxy. Spain’s <a href="http://www.tradingeconomics.com/spain/gdp-growth">return to timid growth</a> will allow Rajoy to claim that austerity and reform works in the end, while a left populist government would plunge the country into chaos with capital controls, empty shops and <a href="http://www.bmj.com/content/351/bmj.h3804/rr">shortages of essential commodities</a>. It may not be enough to save Rajoy’s own government, but it should ensure that Podemos can be marginalised by some form of minority government led by either the conservative Popular Party or the Socialists, maybe with the help of the new pro-euro centre-right party Ciudadanos.</p>
<h2>Bitter medicine</h2>
<p>But what of the longer term consequences of the Schäuble method for dealing with recalcitrant debtors? It has now become clear that the European Union institutions cannot, and will not, accommodate the election of governments opposed to current eurozone policy. Not only will no concessions be made, but difficult governments will be punished for their insubordination, as Syriza has been.</p>
<p>The evidence that these reforms will actually promote growth in Greece is <a href="http://www.ft.com/cms/s/0/e9c6e16e-e349-11e4-9a82-00144feab7de.html#axzz3fxeR3Bvw">conspicuous by its absence</a>: to my knowledge, nobody in the Troika has come up with a precise estimate of the likely contribution to GDP of the liberalisation of the bakery sector (one of the measures contained in the agreement), or Sunday retail opening hours (a measure still resisted in Germany itself). Given that the economic consequences of privatisation and deregulation are a matter of some dispute in the research literature, the imposition of these reforms by administrative fiat subverts democracy to a remarkable degree. </p>
<p>If the reforms fail, who will be held accountable? Certainly not the people who designed them. Whatever happens, Greece can be accused of not going far enough, as indeed it has over fiscal policy, despite undergoing <a href="http://www.bruegel.org/nc/blog/detail/article/1580-should-other-eurozone-programme-countries-worry-about-a-reduced-greek-primary-surplus-target/">a much greater fiscal squeeze than any other member state</a>.</p>
<p>The destruction of democratic decision-making in Greece may indeed be the result of the country’s own past mistakes, but even so, it takes the European Union to an entirely new scenario, in which economic policy is now the exclusive preserve of EU officials who have no direct interest in the success of the Greek economy. </p>
<p>Indeed, the emphasis on how “tough” the required measures are hints that the unpleasantness of the medicine is rather more important than the efficacy of the cure. The Schäuble method means that to remain in the euro is to subscribe to policies decided by the most powerful creditor nation. Financial assistance must be met with gratitude and accepted without any discussion of its terms.</p>
<p>The designers of the institutions of European Monetary Union and the key decision-makers within those institutions have presided over the worst period of economic management on the continent since World War II. Is a further stripping away of democratic controls over these decisions really the best way to return to growth?</p>
<p>Democracy was ultimately successful across the European continent because it proved an effective way of securing the social order necessary for capitalism to function. It now appears to be the view among European elites that capitalism can manage better without democracy. The next few years will show whether the electorates of struggling nations are prepared to acquiesce.</p><img src="https://counter.theconversation.com/content/44624/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Hopkin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>One thing is clear: if you need bailing out, your voters no longer matter.Jonathan Hopkin, Associate Professor of Comparative Politics, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/447452015-07-15T18:27:16Z2015-07-15T18:27:16ZGreece’s ‘aGreekment’ isn’t Versailles: why the bailout won’t lead to sudden rise of Golden Dawn<figure><img src="https://images.theconversation.com/files/88524/original/image-20150715-26319-1xb0mxy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Grecians have made it clear how they feel about Golden Dawn: get out. </span> <span class="attribution"><span class="source">Greece protest via www.shutterstock.com</span></span></figcaption></figure><p>It is not uncommon that a compromise is made that leaves practically everyone disappointed, but the aGreekment, as the recent agreement between the EU and the Greek government has been so coyly dubbed, takes it to a whole new level. </p>
<p>An avalanche of (<a href="http://www.theguardian.com/business/2015/jul/13/greek-supporters-social-media-backlash-germany">orchestrated</a>) tweets tells us that #ThisIsACoup and <a href="http://www.euractiv.com/sections/euro-finance/12-july-agreement-puts-greece-slippery-slope-towards-right-wing-extremism">pundits</a> warn that “the 12 July agreement puts Greece on a slippery slope towards right-wing extremism.” </p>
<p>The hero of continuous resistance, former Greek Minister of Finance <a href="http://www.abc.net.au/radionational/programs/latenightlive/greek-bailout-deal-a-new-versailles-treaty-yanis-varoufakis/6616532">Yanis Varoufakis</a>, also weighed in on this, comparing the aGreekment with the Treaty of Versailles – putting contemporary Greece on par with Weimar Germany – and proclaimed with his usual level of certainty that the neo-Nazi party Golden Dawn will be strengthened by more austerity.</p>
<p>I am not going to focus on the irony that the <a href="https://www.opendemocracy.net/cas-mudde/european-elites-politics-of-fear">European Union elite</a> has used the same cynical and misguided fear-mongering tactic again and again against both the far right and the far left, including Varoufakis’s Syriza Party itself. </p>
<p>I am also not going to dwell on the fact that Weimar Germany was literally destroyed by a (real) war, while contemporary Greece has seen no armed conflict since its own civil war, more than 50 years ago. </p>
<p>Nor will I develop further the meaningless comparison of the aGreekment, which is essentially a loan of billions of euros to Greece in exchange for binding reforms, to the <a href="http://www.ushmm.org/wlc/en/article.php?ModuleId=10005425">Versailles Treaty</a>, which meant a payment of billions by Germany in the form of reparations.</p>
<p>I am even going to ignore the fact that the whole leadership of Golden Dawn is currently in jail or <a href="http://www.thenation.com/article/rejoice-caution-golden-dawn-under-arrest/">under house arrest</a> and the party can hardly organize in a normal fashion.</p>
<p>Instead, let’s just look at the empirical facts. Is Golden Dawn really on the rise? </p>
<p>There is little doubt that Golden Dawn did profit from the crisis, <a href="http://www.nytimes.com/2012/10/01/world/europe/amid-greeces-worries-the-rise-of-right-wing-extremists.html?_r=0">growing</a> from an irrelevant party of less than 1% before 2010 to a moderately successful party with roughly 7% in 2012. </p>
<p>Perhaps high, but hardly a threat to Greek democracy. While no polls have been held since Monday morning following the bailout, a <a href="http://www.electograph.com/2015/07/greece-july-2015-metron-analysis-poll.html">Metron Analysis</a> poll taken between the Greferendum and the aGreekment shows remarkable stability in Greek party preferences since the January 2015 elections. </p>
<p>Only one shift was outside of the margins of error of plus or minus 3.1%: New Democracy (one of Greece’s two major parties) lost almost 9%, which is undoubtedly in part a temporary response to the fresh news of the <a href="http://greece.greekreporter.com/2015/07/05/antonis-samaras-resigns-from-nd-party-leadership-after-no-win-in-greek-refrendum/">resignation</a> of party leader Antonis Samaras after the No vote in the Greferendum. Golden Dawn was down 2%, from 6.3% in January elections to 4.3%. Again, this is within the margin of error, but at the very least shows that there is absolutely no evidence for a rise.</p>
<p>If Varoufakis and others <a href="http://alphahistory.com/weimarrepublic/why-the-weimar-republic-failed/">really want</a> to learn lessons from Weimar Germany, they should remember that the rise of the Nazi Party was at least as much caused by the material economic effects of the Versailles Treaty and the Great Depression as by the psychological consequences of the framing of the two. </p>
<p>As <a href="http://www.huffingtonpost.com/cas-mudde/weimar-greece-and-the-future-of-europe_b_6876944.html">Weimar Germany</a> was largely a democracy without democrats, contemporary Greece is largely a liberal democracy without liberal democrats. Just like in Greece today, anti-Semitism was <a href="http://www.haaretz.com/jewish-world/jewish-world-features/1.591841">rampant</a> in Weimar Germany. However, while anti-Semitic conspiracies were highly popular in other countries in the 1930s too, including Austria and France, Weimar Germany had an even more toxic conspiracy theory.</p>
<p>The “<a href="http://www.bl.uk/world-war-one/articles/the-legacy-of-world-war-one-propaganda">Dolchstoβlegende</a>” (Stab-in-the-Back Myth) emerged already at the end of the First World War and was spoon-fed to ordinary Germans by a broad range of elites. The accusation was that the capitulation of Germany and the consequent Treaty of Versailles were the result of a stab in the back by a “fifth column” and a “traitorous elite” who did the bidding of hostile international forces. </p>
<p>Sound familiar?</p><img src="https://counter.theconversation.com/content/44745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cas Mudde has received funding from the Alexander von Humboldt Foundation, British Academy, Dutch Scientific Organization (NWO), Flemish Scientific Organization (FWO), Israeli Institute, and Volkswagen Foundation. He is affiliated with the Center for Right-Wing Studies at the University of California, Berkeley, and consults/ed for the Canadian Security Intelligence Service (CSIS), Institute for Jewish Policy Research (JPR), and European Policy Center (EPC).
</span></em></p>Some, including Greece’s ex-Finance Minister Varoufakis, have warned that the bailout’s austerity will strengthen extremist parties like Golden Dawn. They’re wrong.Cas Mudde, Associate Professor in the School of Public and International Affairs, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/446402015-07-14T13:45:11Z2015-07-14T13:45:11ZGreece bailout includes a €50 billion asset fund. Here’s how to avoid wasting it<figure><img src="https://images.theconversation.com/files/88270/original/image-20150713-11795-13kdgri.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will Greece's asset fund turn into an investing piggy bank or another lost opportunity?</span> <span class="attribution"><span class="source">Piggie bank via www.shutterstock.com</span></span></figcaption></figure><p>Yesterday’s agreement between the Greek government and its creditors includes a condition that requires Greece to sell €50 billion worth of public assets and <a href="http://www.marketwatch.com/story/heres-what-greece-agreed-to-do-to-secure-bailout-funds-2015-07-13">establish</a> a fund to oversee the proceeds. </p>
<p>Half will be used to recapitalize banks, while €12.5 billion will be used to repay part of Greece’s debt and €12.5 billion will be invested internally to generate growth. </p>
<p>While the privatization of inefficiently managed government assets could well serve the interests of the Greek people, it could well go very wrong. </p>
<p>Here’s how and what Greece could do to prevent that from happening.</p>
<h2>Setting the right incentives</h2>
<p>The fund is already off to a bad start by setting a target sales number (the €50 billion). Doing so from the outset can distort incentives. </p>
<p>By that I mean the easiest way to hit that target is to sell assets at whatever price you can get, thus well below their true worth, resulting in a lot of bad deals. Greece could easily end up selling €60 billion to €80 billion of quality assets just to hit the €50 billion target.</p>
<p>I wrote a <a href="http://www.hbs.edu/faculty/Pages/item.aspx?num=49049">Harvard case</a> a while ago of a hotel company that had a target of selling €300 million of hotels per year. But they never specified how many hotels they would sell. Not surprisingly, they ended up selling way too many hotels for way too low a price. They reached their sales target, but at the cost of selling far more of their assets than they needed to. </p>
<p>My point is the following: Greece should carefully design a performance measurement system that makes sure that assets are sold at the maximum price that could be obtained in the marketplace. That should help get around the pitfalls of setting a target up front.</p>
<h2>Timing of sales and use of proceeds</h2>
<p>The Greek economy is in <a href="http://money.cnn.com/2015/07/02/news/economy/greece-crisis-prime-minister-economy/">ruins</a> and the government has a liquidity problem – that is, it’s short on ready cash. These are exactly the wrong conditions in which to sell assets. Fire sales result in deep discounts. </p>
<p>Moreover, they lead to the sale of the easiest-to-sell assets. The easiest assets to sell are the ones that have the most potential buyers. The reason that there are many buyers is that their economics are attractive; these are high-quality assets. </p>
<p>It is very important that the proceeds from disposing of these high-quality assets are invested in the economy rather being used to repay loans that were made to recapitalize banks or previous loans. These loans have below-market interest rates and very long maturities (perhaps even 60 years), so their repayment can wait. Indeed the present value of Greece’s debt is just a <a href="http://www.nytimes.com/2015/02/21/business/dealbook/greek-debt-is-vastly-overstated-an-investor-tells-the-world.html?_r=0">small fraction</a> of its nominal value. </p>
<p>Investing the proceeds in the economy could create the conditions for economic growth, raising the prices of the rest of the government assets that are still in the portfolio.</p>
<p>Lesson: no need to rush the asset sales, and just make sure to use proceeds for something productive. That means there should be an effort to renegotiate so that more of the fund goes toward investment.</p>
<h2>Governance and transparency</h2>
<p>The privatization fund should follow world-class standards in terms of governance and transparency in the bidding process. </p>
<p>The members of the fund’s board of directors should be carefully chosen to protect the interests of the Greek people. Directors should be chosen on the basis of merit and be experts in matters of accounting, finance and valuation so they can effectively oversee the sales of assets. </p>
<p>Greece can follow best-practice governance processes such as those <a href="http://www.imf.org/external/pubs/ft/survey/so/2008/pol070908a.htm">adopted</a> by the Norwegian pension fund that manages the wealth of the Norwegian people from the extraction of oil.</p>
<h2>Choosing the right partners</h2>
<p>Buyers have reputations – good or bad – and the directors should take them into account, along with bid price, when choosing to whom they will sell an asset. </p>
<p>Companies, investment funds or sovereign investment partners who have developed a reputation for responsible business practices and the creation of value for all stakeholders can create more value for the Greek people. Businesses that promote the development of skills, safe working conditions, protection of the natural environment, and product safety and quality will create competitive advantages for the country over time.</p>
<h2>The right framework</h2>
<p>The Greek government uses cash accounting, and therefore does not prepare a balance sheet and does not take inventory of its assets and liabilities. </p>
<p>“You manage what you measure,” and it is obvious in the case of Greece that not measuring assets and liabilities using internationally accepted accounting standards leads to mismanagement of both assets and liabilities.</p>
<p>We need a fresh start and the right framework under which to start creating value for the Greek people. This framework is to <em>measure</em>, <em>analyze</em>, <em>create</em> and <em>communicate</em> value. </p>
<p>Measure the value of the assets and liabilities and the net worth so the measures can be analyzed. Analyze performance over time and relative to other countries in the eurozone so the analysis can be used as an input on what needs to change to create value. Create value by adopting policies that will increase the value of the the assets. Communicate the value creation story to build trust and confidence in the economy and attract investments.</p>
<p>Following some of these guidelines will help ensure that the Greek people get the most out of this fund, and that in turn could bring their economy and livelihoods back to life more quickly.</p><img src="https://counter.theconversation.com/content/44640/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Serafeim does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Greece must sell €50 billion worth of government assets as part of its latest bailout. It could very well go wrong.George Serafeim, Jakurski Family Associate Professor of Business Administration, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/446322015-07-14T10:25:05Z2015-07-14T10:25:05ZAfter Greek deal, Germany is once again seen as Europe’s villain<p>The German chancellor, Angela Merkel, and her team of negotiators seem to have pulled it off once again. Or so it seems. A deal on Greece has been done at a time when many thought it would no longer be possible. Official German announcements regarded it as Europe coming together in a time of crisis and Greece staying “<a href="http://www.theguardian.com/commentisfree/2015/jul/13/euro-family-angela-merkel-greek-bailout?CMP=share_btn_tw">in the euro family</a>”. The outlines of the deal look very tough indeed, tougher than what Greece proposed and tougher than the deal Tsipras had rejected earlier in the year. </p>
<p>Comments from insiders suggest that Tsipras was exposed to “<a href="http://www.theguardian.com/business/2015/jul/12/greek-crisis-surrender-fiscal-sovereignty-in-return-for-bailout-merkel-tells-tsipras">mental waterboarding</a>” and “<a href="http://www.zeit.de/wirtschaft/2015-07/griechenland-aktuell-alexis-tsipras-live-150713?utm_content=zeitde_redpost+_link_sf&utm_campaign=ref&utm_source=twitter_zonaudev_int&utm_medium=sm&wt_zmc=sm.int.zonaudev.twitter.ref.zeitde.redpost.link.sf">crucified</a>”. Tsipras was made to cave in. He was made to agree to demands that he – and <a href="https://theconversation.com/victory-for-politics-of-defiance-in-greece-means-the-real-crisis-starts-now-44317">60% of the Greek electorate</a> – had regarded as unacceptable only a few days earlier. If anything is power, this is.</p>
<p>But Germany is now perceived to have won by humiliating its opponent. There have been calls to boycott the country’s goods, and Nobel prize-winning economist <a href="http://krugman.blogs.nytimes.com/2015/07/12/killing-the-european-project/?_r=1">Paul Krugman agreed</a> with the take of #ThisIsACoup. Talk of a “Fourth Reich” is back as well in full force. Germany has come out as the winner in only the most basic sense.</p>
<p>This is at best a pyrrhic victory. At worst, it is a diplomatic disaster – and it is not even certain yet that the deal will have public support in Germany. The German electorate’s preference would probably have been not to do a deal, although there now seems to be a <a href="http://www.zeit.de/wirtschaft/2015-07/griechenland-aktuell-alexis-tsipras-live-150713">small majority in favour of what has been achieved</a>. </p>
<h2>A failure of diplomacy</h2>
<p>Of course, the crisis and negotiations are far more complex to be attributed to Merkel and the German government alone. But it is worth asking what her leadership has achieved – and what it hasn’t. German finance minister, Wolfgang Schäuble, proposed, at the 11th hour on Saturday, the possibility of Greece <a href="http://www.ft.com/cms/s/0/f908e534-2942-11e5-8db8-c033edba8a6e.html#axzz3flTmlcs5">temporarily leaving the euro</a>. Whether or not this was a serious proposal or merely a negotiating tactic, it was a disastrous move in terms of public diplomacy. </p>
<p>It has exposed Schäuble, and thus Germany, as chief scapegoat in the European public realm. That may work to rally the troops in domestic politics, but it does not play out so well from a foreign policy perspective. </p>
<p>The French president, François Hollande, and his Italian colleague Matteo Renzi will not have been amused: they had just made it clear that they wanted to keep Greece in the euro. As a result, Hollande has emerged as the mediator, within Europe and across the Atlantic. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"620578579978539009"}"></div></p>
<p>Germany, meanwhile, has once again become the embodiment of what is wrong with Europe; it is seen as a callous operator that shows little interest in the suffering of the Greek population. These perceptions will matter in the coming months and years as the European Union grapples with the political fallout from this crisis. </p>
<h2>New order</h2>
<p>But the German government’s tactics in Brussels last weekend gave away even more. Merkel and Schäuble’s open display of power may have cost Germany the key foundation on which that power was built: trust – and the belief that it was Germany that would come to Europe’s rescue and heal the wounds of division. </p>
<p>Ultimately, German domestic politics triumphed over German foreign policy. That is not a good outcome. Good leadership would have meant balancing the two. It would have also meant communicating Germany’s aims and interests effectively. </p>
<p>To be sure, the politics behind these negotiations are the results of broader shifts in the landscape of European politics since 1989/90. We are witnessing the <a href="https://theconversation.com/greece-a-europe-forged-in-one-crisis-may-have-laid-the-foundations-for-the-next-44607">unravelling of the late 20th-century European order</a>. In that order, the balance between national sovereignty and European bureaucracy was hidden behind lofty values. </p>
<p>“Europe” was attractive then as a project of civilisation and anti-Communist social and political liberalism, and as a way to avoid war. This is why Greece applied to join the European project in 1975 – and this is why it was admitted in 1981. But this is also why any problems were overlooked along the way. The Cold War froze this consensus. But when the Cold War was over and when the memory of the World War II was beginning to fade away, only a few academics and commentators thought about what would happen to the European project and the values on which it was built.</p>
<h2>The problem with Merkel</h2>
<p>This is where another problem with <a href="https://theconversation.com/what-angela-merkel-does-next-will-define-the-future-of-europe-44328">Merkel’s leadership style</a> comes in: she delays decisions in order to build pressure on the opponent. She works within structures rather than using a crisis as opportunity for positive change. </p>
<p>None of the issues that emerged during the recent incarnation of the Greek crisis was new: the threat of populism, the lack of capacity of the Greek state, the serious wounds that austerity has wrought on Greek society. The lack of social solidarity between EU members was already in evidence before the crisis.</p>
<p>Merkel and her government are not the only ones to have sidestepped these issues. The failure of German foreign policy is a symptom of this larger problem with the European Union. But Merkel and her government do not even appear to have tried to tackle the underlying issues. </p>
<p>By the time she had a last chance this weekend, it might have been already too late. But Merkel’s leadership style and the fallout of the crisis have made a serious problem even worse. The Greek crisis is a textbook example of how not to handle public diplomacy. Germany has emerged as the scapegoat, and the European Union (not just the eurozone) has been left exposed to national sentiment and populist politicking. And amid all this, the Greek people are still hurting.</p><img src="https://counter.theconversation.com/content/44632/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Holger Nehring does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Angela Merkel chose domestic politics over foreign policy, and the results could be disastrous.Holger Nehring, Professor in Contemporary European History, University of StirlingLicensed as Creative Commons – attribution, no derivatives.