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Home / Opinion / Greece and Germany play chicken

In the iconic 1955 film Rebel Without a Cause, a charismatic James Dean introduced young people of the world to the game of chicken, played by proxy against his overbearing parents. Life and death depended on who blinked first, as souped-up Ford V8s with teenage drivers sped toward one another down the middle of a two-lane highway.

A charismatic Alexis Tsipras is now playing the same game against Germany. Brussels and Berlin (B&B) are pressing panic buttons. The new Greek prime minister preaches a fiery rhetoric: reversal of austerity and repudiation of external debt. B&B have not blinked, claiming that austerity was starting to work, and that adherence to conditions attached to the European Union, European Central Bank and International Monetary Fund, or troika, bailouts is sacrosanct. Not least, they preach that full repayment of debt is sacrosanct.

This could not be further from the truth. Five years of austerity was the root cause of a 25% decline in gross domestic product (GDP), 20% malnutrition among children, and 50% youth unemployment. The turnaround amounts to recent gross domestic product (GDP) growth of 1.7%, and a small decline in youth unemployment.

Austerity for Europe is now in more disrepute than ever among most Spaniards, Italians and even the French, not to mention most recent recipients of the Nobel Prize in economics. And write-offs of sovereign debt for terminally troubled borrowers have long been deemed win-win for debtors and creditors alike by most experts: the Brady Plan of 1989-95 successfully jump-started growth in 25 Latin American, Eastern European and East Asian countries.

B&B are blind to this. Their disastrous strategy for Greece was wrongheaded from its outset in 2010, when they dithered on debt reduction, and imposed fiscal cuts that made repayment ever more difficult. Worse, their bailout strategy amounted to lending roughly another $200 billion to Greece, while GDP declined. As a result, Greece’s debt load, the ratio of debt to GDP, almost doubled, to 179%, the world’s highest after Japan. Japan can afford it; Greece can’t.

Is there a way out? B&B point out that interest payments on outstanding debt now amount to only 3% of GDP. But this ignores putative repayment of principal, which will hang like a damocletian sword over Greek heads for decades to come.

B&B also insist the conditions attached to bailouts are written in stone. But they may not speak for the IMF. Christine Lagarde now says off the record that had the troika written-off the bulk of Greek sovereign debt back in 2010, their meltdown, not to mention poisonous contagion to half a dozen other European countries, would likely have been avoided. Similarly, the ECB, under the enlightened leadership of Mario Draghi, is defying precedent and strong objections from the German Bundesbank by buying unprecedented quantities of euro zone sovereign bonds.

But Lagarde’s regret and Draghi’s courage will not be enough. How can B&B be persuaded to compromise? The answer is that Syriza must blink first by offering to back down on some of its most misguided proposals. First and foremost, Tsipras must re-think his plan to reverse privatization—already underway by his announcement that the gigantic ports system will be renationalized, along with the power companies and much more. This can only restart the bleeding of public revenues that caused previous Greek governments to become bankrupt in the first place.

A far wiser plan would be to offer debt-equity swaps—in effect offering holders of Greek debt a market-based, deeply discounted price, which would then be sold off to investors, domestic or foreign, and swapped for ownership of state assets. The Greek central bank would act as an intermediary between sellers and final buyers (investors). Such plans were successfully used by Mexico, Chile, Brazil and others at the height of their 1980s debt crises.

Besides nationalization, Syriza must back down on other misguided rhetoric if it hopes ever to soften up B&B. Opposing sanctions on Russia is an obvious one.

Re-hiring tens of thousands of laid-off workers is a nice idea in principle but it has to be done carefully. Certainly, massive and persistent youth unemployment is not only immoral and soul-destroying, it is dangerous. Greece has already endured rioters and vigilantes, and is lucky it got only a socialist government, not a bloody revolution. But perpetuating a bloated civil service, ferry system or train service is the opposite of the kind of reform Greece needs. In short, creating employment for the flower of its youth will be a huge challenge, but it is one that all ideologies can embrace. And Syriza cannot afford to eschew the private sector, including foreign investment. Otherwise the flower of its youth will move to Britain, the US, Canada or Australia.

Finally, Syriza should tackle tax collection. Unlike previous governments, it is not beholden to wealthy tax dodgers. It should also collect from the middle class, with whom it is manifestly popular, perhaps at a lower rate on a broader base.

In short, Syriza must edge right and B&B must edge left: otherwise, they are headed for collision. In a small signal from the former, Europe’s new left-leaning economics commissioner, Pierre Moscovici, recently said as much. And Tsipras has now telephoned Draghi, assuring him that a win-win solution is in the works. The deadline for repayment of a large tranche of bailout money is the end of February; if Syriza does not do that, or if B&B do not offer partial postponement, their game of chicken may kill the former and hospitalize the latter.

James W. Dean is professor of economics at Simon Fraser University, Canada.

Comments are welcome at theirview@livemint.com

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