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Greek bailout: if you want ‘adults in the room’, don’t treat them like children

Written by Mark Miller


This weekend, the Greek people will vote on whether to accept the conditions of the IMF-EU bailout deal – which many are suggesting is effectively a referendum on whether to remain in the Eurozone at all.

The negotiations held in the full glare of the media have been acrimonious: Christine Lagarde, the Managing Director of the IMF, at one point suggested that dialogue could only resume with ‘adults in the room’. And yet as details of the negotiations have emerged, it is clear that dialogue with adults is not what is being looked for, but rather obedient children.

While much of the media focus on Greece has questioned the wisdom of achieving a primary budget surplus when the economy is contracting, targeted primary surpluses have not been the source of current breakdown in negotiations. Rather the current impasse is based on strong disagreements over how those targets should be achieved.

The Greek government has shown a clear preference to raise taxes rather than cut spending on pensions.

For the IMF, there is a need to square impossible numbers: to demonstrate debt is ‘sustainable’, the burden of fiscal adjustment needs fall on the expenditure side to make the numbers add up.

Other Eurozone countries, which have their own political and economic interests to consider – are inclined to favour cuts to pensions which are much more generous than their own entitlements.  

Indeed, the red lines of the creditors were demonstrated vividly by the liberally used red ink on the leaked Greek government’s proposal so reminiscent of a teacher’s correction of an errant child’s essay.

Lessons from development: encouraging ownership, not imposing rules

There are relevant lessons here from development policy, which emphasises the importance of governments, not creditors, taking ownership of reform programmes. We talk about strengthening government functions rather than imposing specific forms and rules. More and more, the policy debate between donors and developing countries focuses on setting broad targets, letting governments themselves figure out a way to get there.

While Greece may not be a developing country, the same principles apply. It should be left to define its own reform agenda, as long as it hits the agreed targets. Creditors, by pushing too far on issues of national sovereignty, could fatally undermine ideas of ‘partnership’ or ‘union’.

Donors and creditors should also be more explicit about their preferences, which are often implicit in the policy conditions they impose but not openly acknowledged and discussed.

The Greek case is a good example. The rejection of Greece’s proposals was based on a debt sustainability model using assumptions that the IMF has now publicly questioned, with its announcement that a further €50 billion bailout is required.  Now Greece is faced by the prospect of voting on a credit restructuring plan and a debt sustainability model, rather than on a decision as to whether to stay in or out of the Eurozone based on a clear presentation of the political and economic realities.

Managing policy negotiations will never be easy, as they reflect fundamentally uneven relationships between donor and recipient, or creditor and borrower. But being less intrusive on details – and more open about differences in opinions – might lead to more ‘adult conversations’ about fiscal reform.