While the election results in Greece have sent shockwaves through European technocratic elites and have rattled investors, it is not clear how successful Syriza will be in getting big enough changes implemented in Eurozone policies and its own bailout terms to end the humanitarian crisis, rather than just create the sort of bounce off the bottom growth that analysts like to depict as progress. Indeed, once you walk though the likely bargaining positions of the various parties, there is little reason to be optimistic on Syriza’s behalf.
Bear in mind that Syriza has yet to make any official statement as to what its negotiating position with the Troika will be. Both presumed prime minister Alex Tsipras and one of his finance minister candidates, Yanis Varoufakis, articulated bolder positions a year ago, when they were further from power. In the runup to to the election, Syriza has tried to depict itself as an anti-austerity, yet pro Eurozone party. As Jamie Galbraith described it, via Mark Thoma:
The Syriza program is a pro-European program. It is, and I think Europe and Europeans, people are committed to the European project, can consider it a great stroke of luck that there has arisen in Greece, and consequently, partly consequently and subsequently, in Spain, as well as in the present government of Italy, a pro-European set of parties, whose objective is change, constructive change, to make the European project viable.
The nut of that problem, as we will see, is that while may be a very estimable-sounding position, it may not be as pragmatic as it appears. Greece likely has better odds of winning concessions if it is less reasonable, since the Germans and the even more implacable Finns are convinced that the periphery countries are immoral beggars who deserve to be ground into the dust if they cannot or will not pay their debts. Greece is unlikely to be able to shake the perception in the North that they have the upper hand and can force Greece to heel, giving at most only fairly minor concessions.
Greece’s best hope is if it there is an upsurge in popularity of other anti-austerity and anti-Eurozone parties in the rest of Europe. And they are more likely to rally support in the rest of the Eurozone if they take bold positions rather than careful, studied ones. And even then, that may not be enough for them to resolve the deep-seated problems they face. It isn’t simply that they face a very difficult challenge politically vis-a-vis the Troika, but that even if they get most of what they want, their policies do not look likely to generate enough demand to pull Greece out of its ditch.
Negotiating Boundary Conditions
Once you look at the likely boundary conditions, things don’t look good at all for Syriza. The current Greek bailout expires at the end of February. Greece has €10 billion of debt repayments due over the summer and has €7 billion of aid that is on hold unless and until it negotiates a new bailout deal. And the Finns are being implacable. From the Financial Times earlier this month:
Finland has emerged as the biggest stumbling block to negotiating a new bailout deal with an incoming Greek government, telling its eurozone partners that it will not support debt forgiveness and is reluctant to back another extension of the €172bn rescue.
In an interview, Finland’s prime minister said he would give a “resounding no” to any move to forgive Greece’s debts and warned that a new government in Athens would have to stick to the terms of the existing bailout…
If the Greek bailout is allowed to expire at the end of next month, Athens would be left without a financial backstop from the EU at a time of mounting market jitters about the eurozone. Although Greece would still have access to an International Monetary Fund programme, tensions between Athens and the fund have also grown.
Asked whether he could back an extension of the EU bailout, which is due to expire next month, Mr Stubb said he could not “exclude the possibility”. But eurozone officials said Helsinki has taken an even harder line in closed-door talks, telling counterparts that a longer extension of the Greek programme could inflame anti-euro populists in Finland’s upcoming parliamentary elections…
According to officials involved in those discussions, most eurozone countries advocated a six-month extension of the programme to give the political drama in Athens time to play out, but Helsinki wanted only a one-month delay. A compromise of two months was ultimately agreed.
Withholding the bailout funds, if the Finns refuse to extend the bailouts, is likely to grind the Greeks down even further, which is the plan. Even though Jamie Galbraith contends that Greece is in a sustainable position because it is now running a trade surplus, I would argue he’s letting his economics perspective trump social and political realities. The reason trade is in a surplus is that imports have fallen considerably. Some of the exports are things like pharmaceuticals. The Greek hospitals are in near collapse, and one of the big reasons is that they cannot afford many drugs. Many Greek citizens are similarly unable to get important or essential medications. To pretend that Greece can continue at this level of import starvation seems illusory.
The Germans are more accommodating on negotiation timelines, and have always been willing to give Greece more funds if it agrees to yet more austerity, even though anyone with an operating brain cell can see that Greece ultimately cannot pay all this debt if its economy continues to stagnate. But even if Merkel and Schauble were to have a Damascene conversion and come around to the idea that radically different policies were the only way to save the periphery, and ultimately the Eurozone itself, they are boxed in by their own propaganda having whipped already strong German prejudice against borrowers and Latins to a fever pitch. Their domestic politics severely limit how generous they could be to the Greeks even if they wanted to be. A German reader told me that the reactions in the press to the Syria win were “foaming at the mouth”. This Google translate of an article in Faz will give you an idea. Key sections:
The special prize for the most original answer to the question of how Greece can reduce its debt, goes to Rachel Makri. The deputy candidate for the “Coalition of the Radical Left”, short SYRIZA, which will win according to all forecasts, the Greek general election on Sunday, and its proposal for the removal of 315 thousand euros high Athenians debt mountain is really a hit: If SYRIZA was in power the Greek central bank will simply print out 100 billion euros – then the country was ever a good deal further, the politician said a few days ago at a campaign appearance in Kozani, a small town in northern Greece. Greek Finance will be pretty angry that he did not come up with the idea itself.
Giannis Varoufakis, professor of economics at the University of Athens and often referred to as “economic guru” of SYRIZA, has another idea. The French Internet newspaper “La Tribune” he said of those days: “Whatever Germany does or says it will pay anyway.” Meaning: Either, Germany and the other countries of the euro zone, in Greek discussion often forgotten or as a satellite Berlin are referred to waive repayment of most of the billions transfers, they have done since 2010 – they have lost a lot of money. Or do they insist on full repayment – then Greece will leave the euro zone, and Athens creditors can fold from worthless drachmas paper boat, to make them floating down the Lethe, the river of forgetfulness…
In terms of the economic performance Greece to Japan the most indebted country in the world. Do people seriously believe what Tsipras tell them? What drives them? Who are they? Why do more than two million Greeks follow a man who promises them completely unrealistic things?…
But as much as the article has open contempt for Syriza and Tsipras, it quotes promise he’s made that do seem well beyond what he can achieve, and provides anecdotes from various Greeks that Faz uses to suggest that the motives of voters that supported Syriza are often incompatible and thus that their support will fizzle as the truth sinks in. That point is actually true of virtually any elected leader, particularly a fresh face: their popularity is generally highest early in their term in office, and factions in a party, unless it has a very focused mandate, like the Greens, routinely are at odds with each other. So a lot of this article sound like an effort to turn politics as usual into some sort of fatal flaw. But Syriza having seriously oversold what it can deliver is a real risk.
I see three stumbling blocks for the Greek negotiating position. The first is that there seems to be no overlap between what they want and the northern bloc is likely to be willing to concede. This alone is normally fatal to negotiations. Christine Lagarde of the IMF has similarly signaled only limited willingness to make concessions: “Debt is a debt and it is a contract.” Um, contracts are negotiated all the time, including those made with creditors. So why is this one so sacrosanct? So the Troika believes the “moderate” members of Syriza will bring the rest to see reason, as in the Troika way. Even though Syriza has teamed up with a right wing, anti-austerity coalition partner, any arguable increased rigidity is unlikely to impress Greece’s paymasters.
Second is that the best idea that the Greeks have to square the circle of austerity v. the Greeks wanting a more pro-growth, more humanitarian solution, the so-called Modest Proposal, is not modest at all from the Eurozone perspective. While it is “modest” in that it works within the existing Eurozone institutional frameworks, it is such a radical departure from the negotiating terms that the Troika generally has on the table in these discussions that there is simply no way to get agreement by summer, when the next bond payment is due, even if the Troika had an unexpected change of heart and was willing to be far more innovative on the policy front, as opposed to the financial smoke and mirrors front.
For instance, the way the Modest Proposal seeks to finesse the hairshirt of the 3% deficit constraint in the Maastrict treaty rules is to transfers to the periphery countries to achieve more convergence in economic performance and boost overall demand. Those two provisions are a a big investment program (see Policy 3, An Investment-led Recovery and Convergence Programme), funded by bonds issued by the European Investment Bank and the European Investment Fund, and and more emergency social spending (see Policy 4, An Emergency Social Solidarity Programme), which would be funded from the European Commission from existing sources like “interest accumulated within the European system of central banks, from TARGET 2 imbalances, profits made from government bond transactions.”
Aside from the fact that this plan has too many moving parts to get done in an at best six month runway there is a third, deeper reason it won’t happen. The Germans do not want deeper integration and more cedeing of power to Eurozone/European level institutions. From their perspective, they are footing the bill of their neighbors, and they therefore want to maintain a position which gives them leverage. Of course, Germany is perversely in denial of the fact that it wants contradictory things, namely, to keep running large and sustained trade surpluses within the Eurozone, and not finance its trade partners. Nevertheless, the very assumption that Galbraith set forth on behalf of Syriza, that Syriza is pro the Eurozone project working, and to them that means deeper integration, is not what Germany wants since that would require it to give up its advantaged position.
How is This Impasse Likely to Play Out?
The Trokia has no plan to give any meaningful ground. From the Telegraph:
Eurozone officials are convinced that the EU holds all the trump cards in the coming clash with Greece’s leader-in-waiting, Alexis Tsipras, including the nuclear option of letting Greek banks collapse. They believe Mr Tsipras knows his weakness.
The hardline approach will be sugared with offers of flexibility on the detail of austerity measures, and a move to allow Greece more time to meet an end of February deadline for renewal of key EU loans that are keeping the country’s economy afloat.
Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of the Eurogroup, will set out a strategy aimed at playing for time by drawing Syriza into months of talks in the expectation that Mr Tsipras will back down.
In other words, the plan (if the Finns will play ball) is to let negotiations go on a bit to allow Tsipras to manage expectations down and throw him some concessions, say some emergency social programs, to allow him to save face.
Now we do not know if Syriza really has any spine. They appear to be very keen not to appear intransigent, but they could stake out some positions that really are sensible, like pointing out that the Greeks clearly are not good for the debt unless radical changes are made, and refuse to budge. Galbraith contends that the Eurozone isn’t likely to be willing to play nuclear option on Greece because they’d be caught in the fallout:
And the other point of leverage is the Emergency Liquidity Authority, which backstops the Greek banking system. To cut the ELA would be to pull the plug on the Greek banking system and effectively to force a crisis in the affairs of the Eurozone. If the attitude of the creditors is “my way or the highway”, that you can have an election, but you may not change your policies, well then the burden of historical responsibility will be on them. We shall see. However my basic view is that Germany, having been one of the central countries at the origin of the European Union and at the origin of the Eurozone, will wisely not take the step of blowing up the European Union and the Eurozone over an argument about the conditionalities attached to past financial bargains.
In other words, the Syriza position may be to hold its ground on some fundamental issues and if the Troika does not budge, to have them be the ones to lower the boom on Greece if it defaults at the debt rollover date this summer. They want to have clean hand if this were to occur.
But what happens when Syriza comes to realize that the Troika is deadly serious, which I believe it is? Whether the Eurocrats are right or not, it seems that at least the Finns and the Germans see Greece as disposable. Their leaders believe that throwing it out of the Eurozone or simply taking radical punitive measures if Greece does not do a deal by the summer rollover date will be at most disruptive but not fatal to the Eurozone; indeed, they may believe any short-term criss would be to the Eurozone’s long-term benefit, since making Greece a demonstration case of how costly it is to defy the Troika would serve to cow the rest of the periphery countries.
Even if Syriza Manages to Win at Its Negotiations, Will it Really Win?
Bill Mitchell doubts that Syriza’s ambitious-seeming goals are on the right track. From the overview of his post:
[The Greek election] has been hailed as a make or break-type of affair but from what I know from inside-type conversations with some of the players and from general reading it has the hallmark of a fizzer, even if Syriza wins the ballot. Essentially, none of the main players seem to be willing to actually solve the problem. The entrenched interests have helped create the problem and are impoverishing the Greek people (themselves excepted). So they are part of the problem. Syriza talks bit about freeing Greece from the Troika-yoke but has a set of proposals that are mutually inconsistent. They might help around the edge and redistribute income a bit but what is needed is a massive boost in national income and that can only come from a massive increase in spending. The non-government sector is not going to do provide the source of that spending boost to get things moving again. So, ladies and gentleman you know what the answer is – there is only one other sector left in town to do it. And, you also know what is stopping them – membership of the Eurozone and the requirement to obey fiscal rules that restrict necessary spending to stagnation-enduring levels. That is why Syriza’s strategy is mutually inconsistent. Even a debt jubilee – the current favourite of the progressives, which warms their hearts so they can convince themselves that they are different from the neo-liberals will not solve the problem. Repeat: a massive fiscal boost is required, which means deficits above 10 per cent of GDP for many years forward. Repeat: that can only be accomplished within the current political reality if Greece leaves the Eurozone. It should have done that in 2008. It should never have joined. It should do it next week.
Mitchell does not mention Yanis Varoufakis’ Modest Proposal, which as we indicated, does have a finesse for increasing demand via more Eurozone-level-funded spending. It appears Mitchell doesn’t see it as having a chance of getting done due to positions taken within Syriza, let alone the negotiating impediments I flagged. And Varoufakis himself clearly regards a Grexit as a disaster for Greece, even worse than its current dire state of affairs, for the damage it would do to the Eurozone, which would drag Greece even further down, so if he is in an influential position, the party will be steered away from brinksmanship, even of the passive-aggressive sort.
Lambert’s political radar went off when he saw the similarity between Syriza’s messaging and that of Obama’s 2008 campaign. And Syriza is promising even less, not “Hope” but “Hope is Coming”. So despite being mean-spritied, the Faz looks to be right in deeming the Syriza victory to be an “overdose of hope”. As we said, it’s only real chance is via a serious show of solidarity, as in a credible threat from the anti-austerity, anti-Eurozone forces in the rest of Europe. We’ll see whether they use Syriza as a successful rallying point in the coming weeks and months.