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Jürgen Matthes on bankingnews.gr Interview 9. Februar 2016

Syriza's failed gamble

About a year ago, leftist Syriza party took power in Greece. IW economist Jürgen Matthes speaks to bankingnews.gr about austerity measures, structural reforms and missed opportunities.

A few days ago Syriza celebrated one year in governance. Looking back to the last 12 months which was Greece's biggest mistake in bailout negotiations? Which was the fundamental change of Syriza in the last year?

The tectonic political shift which brought Syriza into power was indeed remarkable. Yet, there is not much to celebrate in terms of economic outcomes. Syriza took an all-or-nothing gamble in the first semester of 2015 and played it out until the very end - to the detriment of the Greek economy and the Greek people. At the end of 2014, before Syriza came into power, economic growth was projected to return to a solid pace in 2015. However, what followed from Syriza's gamble, was another recession - and a further increase in unemployment and poverty. The split up of Syriza and the new elections in the summer of 2015 have opened a new avenue for a more stable and reliable government, but new confidence in politics and economics take time to return.

Six years into the country's worst crisis in modern times, what is that we are not doing right and it seems impossible to see a light in the tunnel?

Even though things might feel differently in Greece, there are some positive stories to be told. Greece has enacted substantial reforms since 2008, it ranks highest in reform progress among OECD countries according to the OECD. Moreover, fiscal and current account deficits have been impressively reduced. Yet, many voices seriously doubt whether the reforms have the right direction. A look at the end of 2014 shows that Greece did right. At that time, the light at the end of the tunnel had become rather bright and near. Economic sentiment had risen nearly continuously since mid 2012 and had outpaced the figure for the euro area by far. As a result, investment had started to pick up dynamically - only to turn into the red again in the course of 2015. However, there is still a positive message: If things looked much brighter at the end of 2014, the can do so again – but only if Greece continues the course of structural reforms and if politics brings stability instead of ever new uncertainty.

Do you agree with the opinion that the euro was a big mistake, and Greece is paying the price? And if not, why, in your opinion, the common currency was not a mistake?

Not at all. As pointed out before, Greece was about to harvest the fruits of the reforms. An exit from the euro area would have brought financial and economic disaster. What is more, staying with the Euro and taking broad based reforms to correct former policy errors has proved quite successful in other formerly stressed countries of the euro area. Ireland and Spain show impressively that structural reforms bring back growth and jobs.

Greece's government believes that having taken up the austerity pills prescribed by the EU, it will be in a position to negotiate debt relief. Is this the case? Has the Greek government any reasons to expect a concrete agreement on debt relief?

To be sure, Syriza's economic impact did not only bring down the economy, but also significantly increased the hole in the Greek budget. Without Syriza's failed gamble and with a return of solid economic growth in 2015, new deep expenditure cuts and ever higher taxes would have been a thing of the past. Thus, the renewed need for austerity should not be blamed on the Troika. With regard to debt relief, some steps in this direction are likely, provided a positive outcome of the evaluation of the recent reform implementation, However I do not see a haircut in the nominal debt amount. A further extension of maturities and lower interest rates can keep Greek debts sustainable - as also my own calculations have shown in a moderately positive scenario. Such concessions are likely to be connected to solid and continuous implementation of the agreed reforms.

Germany, the euro area's biggest economy, seems to be benefiting like no other member of the 19-nation currency bloc from unprecedented stimulus by the European Central Bank. How does the German government retain a solid and consistent growth despite the crisis?

Germany's economy does so well mainly because the country still benefits from the labour market reforms about a decade ago, and much less from the ECB's stimulus. Some ten years ago, growth was nearly stagnant and unemployment stood at a record high. Due to this crisis, the former German government enacted fundamental labour market reforms – which still pay-off. Today, Germany's labour market is in a goldilocks state:employment has been growing steadily to a new record high and wages have been rising considerably in recent years. Therefore, private consumption is booming. However investment grows only rather moderately – which is a clear sign that the low interest rate environment does not boost the German economy to a large degree. Instead, the continuous uncertainty and several decisions of the German government in the last few years are a burden for business investment. This pertains mainly to significantly higher energy costs, higher pension burdens than possible, and restriction on labour market flexibiltly. The lack of investment dynamics could prove to become a burden for future growth in Germany.

How does the crisis in China affect the global economy?

There can be no doubt, China has become a huge global player - and one with significant problems at the moment. Moreover, the Chinese economy is intensively connected to international value chains, taking in inputs particularly from Asia (but also from other parts of the world) and exporting final products to the US and Europe. Therefore, China’s problems will be felt all over the world. However, there are at least two reasons to qualify current fears. First, China has large pockets to deal with the problems and is less dependent on short term capital inflows as the Asian countries were in 1997 before the Asian Crisis hit. Second, China’s weakness will be more severely felt in Asia than in Europe or the US. Take Germany, for example: A slowdown of exports to China is likely to be more than compensated by higher exports to the EU - the destination of nearly 60 percent of German exports.

Are we heading towards a financial crisis similar to 2008? And if not, which are the differences between the two periods?

There is one lesson we had to learn in recent years: as far as financial markets are concerned nobody knows for sure. However, judging from fundamentals, I do not think that another financial crisis like 2008 is in the making. Stock markets appear to exaggerate the situation. Yes, China and other emerging markets have some problems currently, but the industrialised world has stabilised and grows moderately. The fall in oil prices appears to be more of a reaction to higher oil supply than to weaker oil demand. On the financial side, some U.S. banks could suffer from possible bankruptcies in the U.S. fracking industry However, this exposure is unlikely to be as widespread and as internationally connected as structured securities (which were later known as toxic assets) were before 2008.

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