In a single week, we witnessed these events:
- Mario Draghi announces that the European Central Bank, over which he presides, will begin a $1.23 trillion bond-buying program.
- Greeks vote Syriza, the left party led by the charismatic Alexis Tsipras, into power by large margin. Let’s take these together and call them a campaign of resistance—rebellion in the case of Syriza’s huge victory in the Greek elections Sunday.
Nothing sudden here. The war between advocates of neoliberal austerity and those favoring one or another variety of Keynesian stimulus has raged for several years, causing all manner of collateral damage. Draghi, Mr. Whatever It Takes, has just advanced on the monetary front. Tsipras arrives with heavy artillery barrages on the fiscal front. This war now takes a new turn.
It will be won or lost according to results, and the outstanding questions at this moment are these:
• Will Draghi’s quantitative easing prove sufficient to reinvigorate the eurozone, or will it simply weaken the euro but leave European economies growing sluggishly or not at all?
• Can Tsipras persuade Greece’s private creditors and its troika of lenders—the ECB, the European Commission, and the International Monetary Fund—to renegotiate the nation’s debt? Can he thus buy time to deploy stimulus policies to get growth going and Greeks back to work? Can he get this done without sending his budget deficit half the distance to hell?
• A third question is neither local not limited to the Continent. Everyone has to ask whether the past week marks a decisive victory in what amounts to a global war of economic philosophies and ideologies. Will the austerians, in other words, now begin a dignified retreat—defeat with honor? (My view: They should, and we’d all be better off if they did.)
Draghi’s QE plan calls for the ECB and the eurozone’s 19 central banks to expand purchases of asset-backed securities and covered bonds (which the ECB began buying last year) to include sovereign bonds—gilts, as the English call them. It is a very big step.
But reviews of the new ECB policy, unveiled after months of anticipation, were weirdly mixed last week. On one hand, Draghi’s numbers—$1.2 trillion on bond purchases ($66.7 billion monthly) until September 2016—were twice what the markets had expected.
On the other hand, some investors, analysts, and pundits—not all in any category—immediately set to with the too-little-too-late theme. True, the euro went to an 11-year low at the close last Friday, ending the week a mere 11 cents above par against the dollar. But the not-enough argument is wrong for several reasons.
One criticism is that Draghi is simply buying time. Well, exactly—it is just what Europe needs. Another is that Draghi now risks asset bubbles. Bubbles in a zone-wide economy that just tipped into technical deflation, with unemployment in the crisis countries at 25 percent or higher? Inflation paranoids alone can entertain the thought.
On the positive side, Mr. Whatever It Takes, while sometimes the subject of doubt, can keep on ‘keeping on’ more or less indefinitely. As John Authers, a Financial Times commentator, put it the other day, “The language [of Draghi’s policy statement] has left the ECB enough room to justify continuing with the asset purchases almost as long as it wants.”
Good enough for Draghi. After a long and bloody campaign, notably against the Bundesbank and the ECB’s inflation hawks, the battle-scarred Italian has policy just where it needs to be.
As to Greece, there should be no misunderstanding: Syriza has from the first put social reconstruction at the heart of its project. Read any ground-level coverage of Greece lately? Anyone who has can hardly call this a dream out of left field.
In a nation whose economy has shrunk 25 percent and whose middle class wanders nightly in search of supper, rebuilding the polity and reweaving the social fabric are essential conditions for recovery. Line workers and middle managers suffering from malnutrition are not conducive to growth—true whether you are one of them or you hold Greek debt.
The governing New Democracy party, which backs E.U.-imposed austerity policies, rested its campaign on incessant fear mongering, and it was doomed from the first. Behind Syriza is a left political culture that extends back at least as far as the partisans who fought the Nazis and, after the German defeat, a civil war against a fascistic monarchy.
Fear simply isn’t in the Greeks’ political DNA. As Elias Nikolakopoulos, a political scientist at Athens University said to The New York Times before the elections, “Fear does not work unless you begin with a positive message and then use fear in the last few days. New Democracy just did fear. Fear the whole time.”
Even the middle and upper-middle classes, which were decisive in Syriza’s 10-point victory, are now willing to say they’re done with austerity and reject the dictum Thatcher made famous, “There is no alternative.” Tsipras read the national mood more or less perfectly.
It’ll be clear Monday if Syriza has won an outright majority or if it will have to accept coalition partners. The debt situation will take longer to resolve, but well-connected sources in Europe tell me the Tsipras government won’t get the 50 percent debt write-down it wants.
Instead, Tsipras’s people are likely to negotiate a deal to extend maturities and reduce interest rates. These objectives are easily achieved, providing Germany and other members cut out the talk of a Greek exit from the eurozone unless Athens abides by the terms as originally set. Greece, don’t forget, now pays interest far above what troika-backed paper costs.
This kind of restructuring would rewrite the calculus. If 10-year maturities were extended to, say, 30 years and an 8 percent rate were cut to 2 percent, it would be fundamentally different debt. “If something like this happens,” a source in Europe advised over the weekend, “then you will have the mother of all bond market rallies for Greek government debt—and Greek bank shares would surge.”
On the domestic side, Syriza proposes to launch a social-spending program, to include food stamps, subsidized power and transport, and free health care for the jobless that it expects to cost $12.8 billion in the medium term. By the reckoning of Syriza’s economic brains, improved tax collection, stronger demand, and less burdensome debt terms will obviate the need for new borrowing.
Success is an outstanding question. Greeks deserve a chance at it.
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