Wednesday, July 15, 2015


C’est magnifique, mais ce n’est pas la guerre: c'est de la folie
(It is magnificent, but it is not war, it is madness.)
Pierre Bosquet on The Charge of the Light Brigade, 1854.
Syriza charged towards the EU's fortifications, only to be cut down mercilessly by the Troika's cannon. I have written in this way because I want to show Shuggy that I have a greater command of inappropriate historical analogies than the average journalist. Those analogies abound, Tsipras has been "waterboarded" and "crucified," whilst this has been typical of the genre:
This is war. This time the Trojan Horse is in Germany's arsenal. It is called Europe. The Germans have now parked it at the gates of Athens. But the siege and slaughter may erupt all over the continent.
This is not war. It is not torture. It is diplomacy and economics. Yes it was brutal. The concerted verbal battering Tsipras took from the political right in the European Parliament was unpleasant enough, but the reports from inside the Eurogroup point to it having been a nasty and vituperative meeting.

That doesn't make it a coup or an attack on democracy. For it to be the latter it would mean that a referendum result in Greece, by Greek people only, is binding on the other 18 states. The Greek government is in place, it hasn't been removed. Greece had a choice, not much of one, but a choice nonetheless. It could default and presumably leave the Euro, or it could seek financial support to stay in the Euro. It chose the latter. The terms by which a loan is offered is usually determined by the lender. They have the money, they have the power to lend or not. All the wittering about infringements of sovereignty are meaningless, because entry into EMU in the first place meant giving up sovereignty and seeking a bailout certainly does. So why the hostility?

The most important point is that we have a collective sense of equity and justice about the terms of any loans. Many villains in our literature are usurers. We are appalled by the rates of interest charged by payday loan companies and the way they exploit the vulnerabilities of the poor. We look at the suffering of ordinary people and our compassion turns to anger. We are aware that in bargaining all the power lies with the lender, the deal is not wholly voluntary. And this perception of right and wrong has been aroused. People look at the conditions and think; these are unjust, they are not creditors, they are extortionists.

And this is where the democracy angle does come in. Greek voters had elected an anti-austerity party and voted against austerity in a referendum, none of that could be binding on the other countries, but it should have been a consideration and allowed a pause for thought. Yet what we saw was that it was dismissed with irritation and seen as something to be deterred from happening elsewhere. There is a distinction to be made between power and influence. The Greek referendum had no power over any of the other states, but it should have influenced them. It was a clear sign of major discontent with the policies that have been imposed on them since 2010. If this is government by consent, it is of only the most grudging kind. What is more, it is absolutely clear that the terms of the bailout were not what were wanted by Greece.

The world looked on amazed as Tsipras went to the EU and surrendered completely only to be told to surrender some more. Even the most entrenched anti-Syriza elements swung round to support Tsipras. The final deal modified some of the maximalist demands (notably on the €50 billion monetization - not just selling - of assets fund; now to be based in Greece, 25% of proceeds for new investment in Greece, 50% to buy back Greek banks after the recapitalization, and 25% to pay debt instead of 100% as first reported). But the overall effect will be deflationary and cut living standards further. You have to wonder when the great Greek slump will finally end.

Take all this together, throw in incipient anti-German sentiment (whilst forgetting the Finns) and you have the perfect recipe for resurrecting World War II stereotypes. But what really happened? The best journalism I have read has come from Marcus Walker of the Wall Street Journal (great articles, but in the name of sanity don't read the comments). He knows both Germany and Greece well and called it right from the moment Syriza was elected. This piece, published just before agreement was reached, is pretty convincing:
Behind Europe’s show of force lie three main factors: Fury at Mr. Tsipras’s delay tactics, shock at the rising cost of any and all Greek scenarios, and a worsening clash between German-led Europe and the IMF.
Since his election in January, Mr. Tsipras has oscillated between his hard-line and pragmatic advisers, Greek officials say. The pragmatists urged him to sign a bailout deal early, even if it meant accepting politically hard-to-sell austerity measures, because the terms of any deal would get tougher as the months passed and Greece’s economy deteriorated.
Nonsense, argued others such as now-ousted finance minister Yanis Varoufakis: Greece would get the best bailout terms, including less austerity and more debt relief, if it waited until the last moment before debt default. Europe would get scared of the destabilizing fallout from a Greek euro exit, this camp argued.
Mr. Tsipras went with the second school of thought, figuring also that his left-wing Syriza party would only swallow a bailout deal involving austerity if the alternative were imminent economic meltdown.
For months, Mr. Tsipras saw to it that Europe’s normal channels for negotiating bailout terms—the Eurogroup, and teams of EU-IMF inspectors—were paralyzed. He instead bet on face-to-face talks with German Chancellor Angela Merkel, believing that she would make a fundamentally political decision to keep Europe united, even at the expense of German economic orthodoxy.
It proved an epic miscalculation. Backed into a corner by Mr. Tsipras’s referendum, in which Greeks overwhelmingly rejected their creditors’ austerity demands, Ms. Merkel hardened her line. A deal with Athens that let Greece off tough economic reforms would be worse for Europe than splintering the eurozone, she argued. 
 Even if the hand had been played better, it was a weak one. Aces always beat twos.

What next? There are still obstacles to overcome before the deal is sealed, but if it is, for Greece, there will be more austerity. An economy suffering from lack of demand, will have even more sucked out of it. This will cost livelihoods, businesses and lives. But there is hope. The banks will reopen, the opportunity is there for Syriza to fulfil the second half of their mandate - reform of the state and the elimination of corruption - and investment could start a slow recovery. But the perception of victimhood and the bruised national pride will not go away easily.

Yet this is not the end. Germany's reputation has been battered. The damage to the EU's prestige is immense. This spells further trouble, and from more formidable opponents than Greece. The main contradictions of EMU have not been faced. Orthodox economics may have come out of this skirmish victorious, but has lost supporters. Until the flaws in the construction of the Euro are dealt with, crises will keep arising. And that major flaw, the inability to correct imbalances by redistributing surpluses from the wealthy members to the poorer, whether through fiscal union or through financial instruments like Eurobonds, is the main challenge.  Redistribution, a social democratic concept, sits uneasily with orthodoxy. We might, just might, be at the start of a sea change in elite economic thinking. It is long overdue.

The IMF weighs in. This isn't over yet.

1 comment:

George S said...

Just got round to reading this, Peter. It's very good and gets it dead right on the balance between power and influence. It was probably Varoufakis's game theory that led here. But it is a hard moral game to play. It' not that simple. And who would ever vote for austerity if they had some assurance there was another way?