The implications of the Greek crisis for the Arab world

Confrontations between the Greek government and Greece’s creditors have become a major topic in the international media only a few months after the election of the new left-wing government in Greece. While it appears that these confrontations erupted because the deadline for the renewal of Greece’s debt bailout programme was fast approaching on the

Mahmoud al-Khafif

Mahmoud al-Khafif is an Egyptian economist who works at the United Nations.

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nazar Yehya-Iraq

Confrontations between the Greek government and Greece’s creditors have become a major topic in the international media only a few months after the election of the new left-wing government in Greece.
While it appears that these confrontations erupted because the deadline for the renewal of Greece’s debt bailout programme was fast approaching on the last day of February 2015, the standoff was inevitable because of ideological differences between the left-wing Syriza Party and the troika responsible for negotiating the Greek debt.
The Syriza Party was voted into power last January based on its left-wing identity and socialist programme, its rejection of the neo-liberal agenda implemented by previous Greek governments, and its opposition to the policies of austerity that impoverish the poor.
However, Greece’s creditors, led by the government of Germany, the International Monetary Fund (IMF) and the European Central Bank (ECB), are strong believers in neo-liberalism and policies to unleash market forces without restrictions, including in the labour market and by privatising public assets and enterprises, and reducing the role of the state, including in its contribution to protect the poor.
The creditors argue that the debt crises of many countries, including that in Greece, have been caused by the implementation of less than optimal neo-liberal policy packages. Therefore, they have declared that in order for them to continue funding the Greek bailout programme the Greeks must abide by strict austerity measures.
Immediately after the formation of the new Greek government, the two sides announced their intentions and respective starting points in the impending negotiations. The creditors insisted that the bailout programme should represent a commitment by the state, not the government, of Greece. Therefore, any new government would be obligated to fulfill all the conditions of the programme and implement the already approved austerity measures.
However, the Syriza-led government was no less firm in its stance, even if it used less confrontational language to facilitate the commencement of the negotiations. In an article in the New York Times, Yanis Varoufakis, the newly appointed Greek finance minister, stressed that Greece did not seek to make gains through bluffs and tactical subterfuge.
“I am often asked: what if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: the lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff,” he wrote.
Regardless of the two parties’ starting points, they are both fully aware of what is at stake and the potential colossal consequences, which might not stop at the withdrawal of Greece from the Eurozone Monetary Union, but could even go farther towards the possible collapse of the euro as a single European currency or even potentially the disintegration of the European Union itself.
As a result, the two sides entered the negotiations with some degree of willingness to agree to meet some common point, even if each party tried to submit the least number of compromises possible and push the other party to give up the largest number of its demands.
For Greece, which has a 170 per cent debt-to-GDP ratio, one of the highest in the world, the fact that the country has no national currency and uses the euro instead significantly reduces the government’s ability to manage the economy and handle the debt crisis.
The country cannot print money to increase public spending or pay part of its domestic debt, nor can the economy be revived through a reduction in interest rates to encourage investment and growth and ultimately increase tax revenues.
Greece also cannot devalue the exchange rate to increase exports as it is impossible to change the interest or exchange rates of a national currency that does not exist. Furthermore, Greece cannot introduce any serious measures to control capital outflows to the rest of the world without an agreement with the other Eurozone members.
Yet, along with all these constraining parameters, one has to keep in mind that the current Greek government was elected based on its promises to implement a socialist programme, end austerity measures, and increase spending to meet the needs of the poor.
This means that the options available to the Greek government are limited. One option is to resort to a radical solution such as withdrawal from the Eurozone, but this would require wide popular support that might not be guaranteed.
Another more unpopular alternative would be to sell off a number of Greece’s islands in the Mediterranean to repay the country’s debts. This was proposed by Josef Schlarmann, a senior member of German Chancellor Angela Merkel’s Christian Democrats, after the emergence of the Greek debt crisis in March 2010, but this would obviously mean that Greece would have to relinquish parts of its sovereign territory.
The remaining option for the Greek government would be to renege on its pledges to the electorate by implementing austerity measures and neo-liberal policies. This, however, would effectively represent a surrender to its creditors and thereby signal the start of Syriza’s ideological retreat.
Neo-liberalism fights back: With regard to Greece’s creditors, the current state of affairs represents a real threat to the philosophy of wild (not controlled by governments) neo-liberalism and a challenge to their ability to control global wealth and resources while preserving the dependency of developing countries on the West.
For the country’s creditors, the risk does not stop at Greece’s failure to repay its debt, but could reach other struggling Eurozone members such as Spain, Portugal and Ireland, and even the so-called Third World countries. The dilemma is that if the creditors show lenience towards Greece, this will buoy the Spanish, Irish and Portuguese in electing socialist governments of their own.
However, if they are inflexible with Greece, this might push the Greeks to issue their own national currency and withdraw from the Eurozone, emboldening other countries to follow suit. In either case the outcome would be considered a defeat for neo-liberalism.
This could lead to future losses for the creditors, as they might lose their status as creditors if there was a breakdown of the monetary union (the euro) and customs union (the EU), systems which usually result in the poor countries in the Union accumulating trade deficits and debts from richer countries (creditors).
This means that the options available to the creditors are also limited: either to let Greece withdraw from the Eurozone and issue its own currency, or to continue funding the Greek bailout programme with a degree of leniency, while discouraging other indebted countries from failing to meet their commitments.
Taking these mutual risks into account, it seems that the two sides have decided to buy more time. On 24 February, just four days before the deadline set for the extension of the Greek bailout programme, the creditors agreed to grant Greece a four-month extension. In exchange, Greece pledged to “voluntarily” implement a new set of fiscal reforms.
While this appears to be a small victory for the Greek government, in reality the standoff is far from over. During the four-month extension, each side will attempt to formulate a new negotiation strategy to secure an outcome with the minimum number of compromises. Will the compromises accepted by the left-wing Syriza Party ultimately turn it into just another tame European social democratic party?
Even if the negotiations do result in some sort of solution, the Eurozone’s problems may not be over. In the context of neo-liberal policies, it is very difficult to sustain the euro as a single currency for 19 countries.
Such policies tend to create sharp trade and financial imbalances within the monetary union and in turn cause the mushrooming of trade deficits and the debts of poorer countries in favour of richer countries. Consequently, the rich get richer and the poor get poorer, not only between countries but also within each individual country.
Implications for the Arab world: A persistent question is whether the Arabs, with all their on-going social upheavals, are at a distance from the events developing in the north of the Mediterranean.
While the Arab countries seem to differ from Greece in the fact that they have national currencies, the reality is that the policies recommended by the Washington Consensus (the IMF, World Bank and US Treasury) and implemented by the Arab governments reduce and at times neutralise the efficacy of national currencies as a policy instrument.
Furthermore, much like the previous Greek governments, the Arab governments follow neo-liberal policies that limit the state’s role, privatise public property and unleash the market to control people’s lives without governmental checks.
Many Arab nations also suffer from an onerous burden of debts that are rarely spent on the poor, much like the situation in Greece. Lebanon, for instance, would have to spend a year and a half of its gross domestic product (GDP) to repay its accumulated public debts. For Egypt and North Sudan to be able to repay their public debts, they would have to spend the GDP of a whole year, while Tunisia would need to spend six months of its GDP.
Even more importantly, in the Arab countries, like in Greece, there is a sharp polarisation between the rich and the poor. There is no doubt that this polarisation has been one of the main reasons for the eruption of the popular revolutions in the Arab world since the end of 2010.
All of these similarities with Greece should push Arab leaders to seriously reconsider the neo-liberal policies implemented in their countries and contemplate adopting policies capable of achieving development, social justice and growth.
Arab leaders should adopt a developmental vision for the future of their societies, stand firm when negotiating with their creditors and exert all possible efforts to break their dependency on the West.

Articles from Arab World