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It's Greek PM Tsipras's duty to drive the hardest bargain he can

Ashok V Desai | Updated on: 13 February 2017, 3:16 IST

Double whammy

  • The debt crisis in Greece is actually two-fold.
  • One is the problem of repaying its enormous public debt, and the interest due on it.
  • The other is generating a surplus on its balance of payments to service the external debt.
  • Easy access to the European debt market is behind Greece\'s descent into bankruptcy.

The roadblocks

  • Corruption has been a persistent problem in Greece.
  • Income tax evasion is estimated to be to the tune of 30 billion euros.
  • Once the govt tried to raise taxes, revenue-generators like shipowners escaped abroad.

Exit strategy

  • If Greece offered lower taxes and less corruption, industries like tourism and shipping could come back.
  • It has to find a way to peacefully coexist with its creditors.
  • The country\'s politics is too volatile, so the onus is on PM Tsipras to give it stability.
  • Greece cannot repay its debt, and a haircut is inevitable. It is Tsipras\'s duty to drive a bargain.

There are too many channels and websites, and none of them wants to spend on the pursuit of news. There is a limit to the explosions ISIS can indulge in, and a shortage of refugees starving at sea.

So the Greek crisis has been a godsend; every channel worth the name has a soldier posted in Syntagma square (The name is no surprise - being the inventors of democracy, the Greeks enjoy demonstrating in a square called Constitution).

There are plenty of Greeks, old and young, hanging around the square. Pull aside one of them and bombard her with questions: "What do you think of IMF? Do you think Greece should repay its debt? What did you have for breakfast?" And there you have an endless flow of news, made in Greece.

Double-edged sword

Greece has two crises together. One is the problem of repaying its enormous public debt, and paying interest on it; the other is the problem of generating a large enough surplus on its balance of payments to service the external debt.

The second problem is not too difficult to tackle, for Greece is a large exporter of a number of services. The most important is tourism. Greece has an enviable Mediterranean climate; north Europeans, always starved of sunshine, have, for centuries, been descending on Spain, Italy and Greece.

Greece has two crises - repaying its debt and interest, and generating surplus to service the external debt

Greece also happens to have been the home of one of the world's oldest civilisations, whose remains are scattered all over, starting from the magnificent colonnade that looks down on Athens; it offers much to see in a small area.

And Greeks, who have sailed the seas for millennia, are still owners of one of the world's biggest merchant fleets.

So Greece can easily earn enough foreign exchange - provided domestic policies do not make it unwise to show profits. And they have made it extremely unwise - thanks to its debt problems, Greek tax rates are extremely off-putting.

Corruption and tax evasion

The demands of debt servicing have contributed to Greece's poor public finances only in recent years - a more persistent problem has been corruption. Its revenue has never exceeded 100 billion euros; at that level, evaded income tax, estimated to be 30 billion euros, makes a difference.

Greece's entry into the European Union in 2000 led to abolition of exchange control, and made diversion of income to other countries very easy. What membership of the EU did was to make taxes a voluntary contribution. Once the government got into trouble and tried to raise taxes, revenue escaped abroad.

This is particularly important in the case of the shipping industry. Shipowners are rich, and can easily migrate to, or show themselves to be resident in, tax havens.

These problems are not new. Corruption and tax evasion have been around for a long time.

Expanding the market for debt

What membership of the EU did was that it enormously expanded the market for government debt. Instead of just domestically, the government could borrow on the European market, which furnished much larger sums at much lower interest.

In my view, it is this easy access to the European debt market that is behind Greece's descent into bankruptcy. It is reminiscent of Iceland, which went bankrupt because its low taxes attracted bank deposits from rich Britons, who withdrew their money at the whiff of trouble and brought about a crisis.

The available path

Can Greece come out of its problems and resume servicing its debt? Greece's major export industries, namely shipping and tourism, are extremely footloose - they can and have migrated to other countries.

Footloose industries can run in either direction. If Greece offered lower taxes and less corruption, these industries would come back to Greece. But that would require a return of confidence, and that takes time.

In the meantime, Greece would have to find a modus vivendi with its creditors. The International Monetary Fund is their leader; it has repeatedly tried to work out a modus vivendi. But the Greek government has never been able to give confidence to creditors, since Greek politics is too volatile.

Role of the PM

This is where Prime Minister Alexis Tsipras comes in. He is young, he is handsome; no European leader can compete with him, except perhaps the UK's David Cameron.

Although Tsipras's actions look violent, he is a level-headed speaker. Above all, he is honest, and so is his party; it may stay in power for long, and give Greece political stability.

The question he asked the Greeks in the referendum was not: "Shall we leave the EU?" It was more or less: "Do you accept the policy analysis and demands of the IMF, the European Commission and the European Central Bank?"

Any reasonable Greek - especially one that had been through the travails of the last few years - would have said: "No, I want a better bargain." Those who thought that Greece cannot get a better bargain voted yes; the majority voted no.

So, Tsipras did not ask for, and did not get permission to, walk out of the EU. He got support for his hard bargaining tactics. They are realistic. Greece cannot repay its debt, and a haircut is inevitable - the more severe, the better. It is Tsipras's duty to drive the hardest bargain he can.

I wish he did not have to. I think India should bail out Greece, and turn it into a prime destination for Indian tourists, hoteliers, shipowners and industrialists. But I doubt if our government will have the courage or imagination to do so.

First published: 7 July 2015, 1:23 IST
Ashok V Desai @CatchNews

A senior economist and commentator on economic policy and a pioneer of economic liberalisation in India, Desai was also Chief Economic Adviser to the government. Known for his iconoclastic, bold and original views on the economy, he has taught, conducted research, and coordinated large research projects both in India and abroad.