We need to distinguish the sovereign state from the people it governs, and the other political institutions between. 

Things are moving so fast in the financial negotiations between Greece and the Troika (European Central Bank, European Union, and the International Monetary Fund) that there is little point in my trying to comment on them. But there is a structural issue which most commentaries overlook. It applies not only to this negotiation but all international ones including those involving trade and foreign treaties; it certainly applies for New Zealand. Key to understanding is that the term Greece refers to (at least) four distinct groups of players

 

Right at the top is an institution which we call the sovereign state (New Zealand sometimes calls it ‘The Crown’.) That is an entity which borrows offshore and makes trade agreements. When commentators talk about the Greek debt and negotiations between Greece and the Troika they are talking about the Greek sovereign state. You can think of it as a fiction, but as far as the Troika (and any other counter-party) is concerned, it is the sovereign state with which they have contracts (in this case about servicing and repaying debt).

 

The sovereign state is advised by the government. In the Greek case the government is currently led by Prime Minister Alexi Tsipras whose party is Syriza. The reason we make the distinction is that while the sovereign state is in principle eternal (invasions and the like aside), the government which advises it changes. Tsipras became prime minister only six months ago.

 

What determines the government (at least in democracies) is parliament, which selects the prime minster and the government. Typically he or she leads a party which, with allies, has a majority of MPs. In fact Syriza has only 149 of the 300 in the Greek parliament so it has a coalition agreement with ANEL which has 13 seats. Any coalition agreement is under pressure (ask John Key or any prime minister before him going back to Jim Bolger) but additionally any political party contains factions and dissidents who may leave it (true in New Zealand going back to – at least – Muldoon).

 

Parliament is elected by the people. As it happens, Syriza got only 36 percent of the vote last January. Even with ANEL’s 5 percent the Greek government did not get the majority of the vote in the election. (It was a snap election because the previous parliament could not agree.)

 

The Troika-Greek (sovereign state) negotiations will impact on people. If things go badly  Syriza could lose its parliamentary majority or the country could be precipitated into another snap election. The sovereign state and its contractual obligations would continue but there could yet be another government.

 

Not long ago the Greek economy was overspending relative to its production, which gave an air of false prosperity. The excess spending was funded by the Greek sovereign state borrowing from (mainly) European banks (whose debt was largely taken over by the IMF and ECB in the 2010 bailout). It had been running a huge government deficit (up to 13.9 percent of GDP) which had been going to the Greek people in high government spending, generous welfare benefits and a lack of assiduity in enforcing the tax regime.

 

When the additional borrowing was turned off, GDP (i.e. production) contracted by about a quarter spending contracted even more and unemployment rose to a quarter of the labour force. Understandably the Greek people are  unsettled. Syriza was elected upon a program of no more austerity.

 

On this criterion the Greek economy is doing reasonably well. The ‘primary government surplus’, which is its revenue less its spending, would be around 5 percent of GDP if the economy was not so depressed, higher than any other country in the Eurozone. Despite the economy being depressed the surplus is still a healthy 3 or so percent of GDP. You could argue the Greek government is paying its way.

 

Except that the primary deficit does not include debt servicing, which is expensive because Greek debt is high (around 180 percent of GDP) and, because there is a possibility of default, the interest rates the sovereign state is paying are high. Its budget deficit including interest payments is large as a result. It is a terrible situation because the Greeks have taken aboard austerity and yet their debt is rising.

 

The Troika and the private lenders are saying that, nevertheless the Greek sovereign state entered into contractual commitments which it should meet and the Greek people (or most of them) benefited from these commitments in the past so they should take the downside. But the Greek people can say nobody told them how much was being borrowed (true), many can say they did not benefit from the over-borrowing as much as they are suffering from the austerity (often true).

 

I could go on in more detail; instead I’ll finish with three simple points.

 

The underlying purpose of the Greek referendum was to strengthen Syriza’s mandate. With at most 41 percent of the votes (on a 64 percent turnout), it cannot really claim to ‘represent’ the people, even if it is advising the sovereign state. Many commentators, impatient with democracy, have failed to draw attention to the insecurity of the Greek government.

 

Second, in 1919 following its defeat in the Great War and the November 1918 German Revolution, Germany established the ‘Weimar Republic’ with a social democratic government. The winning Allies (led by bankers who were not notable democrats) imposed onerous reparations on Germany which was oppressive on the German economy and people. The outcome was Hitler. It took another world war before social democracy was restored – to all our benefit. (In the course of immediate postwar adjustment the Allies wrote off a chunk of German debt.)

 

In the end I am not nearly as concerned by the damage being done to the European Union or to the eurozone, great as that could be, My priority is for Greek democracy. It is much more fragile than ours; Greece was ruled by a military junta from 1967 to 1974. I am not saying that Greece does not need more fiscal change, but I favour a phasing of it in as the economy grows – not as it contracts. And one way or another, the Troika needs to reduce the outstanding debt burden. (A grant by Germany in compensation for its Second World War invasion would help.)

 

Third, the complex, and in some ways tenuous, connection between the sovereign state and the people applies elsewhere, including New Zealand. The ongoing anxiety of our policy community over the national debt (some of us would also add its exposure to private debt) may seem odd to most New Zealanders, although more than once we have had difficulties. This is not to argue for austerity or even a balancing of the books. But we need to be constantly aware of the dangers of short-term borrowing with its danger to long-run national welfare.

The constitutional arrangements just described apply not only to international borrowing but to trade agreements and a host of other international deals with which the New Zealand sovereign state is involved. Can we practically improve the disconnect? A better understanding of the issues would be a first step.