We’ve said that Greece had a weak negotiating position in trying to get a better deal from its creditors. That is playing out before our eyes. Greek Finance Minister Yanis Varoufakis has stepped down some of his early proposals even before formal talks have begun. This is a sad but predictable situation, since the Germans and the other members of the northern bloc are not at all willing to cut Greece much if any slack, since that would lead bigger, more powerful countries to try to slip the yoke of austerity.
The tragic thing about this situation is that Varoufakis is simply describing economic reality and has a number of sound ideas for how to make conditions better for Greece, which in the end will also lead to better results for its lenders. Yet he has run into a massive, if predictable wall, with his willingness to make unvarnished descriptions of the obvious, abject failure of Eurozone economic policies regularly depicted as “confrontational”. One reason Varoufakis may be going this route is to use his newfound high profile to send a message to voters and anti-austerlity politicians throughout Europe, since as we have stressed, the more popular anti-austerity and anti-Eurozone parties become, the more even the Germans will have to fear.
The Germans have a short-sighted view of the stakes. With the ECB holding a sword of Damocles over the Greek banking system, in terms of its ability to cut off access to emergency liquidity facilities, and Syriza and Varoufakis personally having rejected a Grexit, they can dictate terms. In their eyes, the only reason to cut Greece any slack is that, as Varoufakis keeps stressing, Syriza is the sole party that is not loyal to Greek’s oligarchs. If they want corruption tamped down and the tax system cleaned up, Syriza is the only game in town.
Today in a Financial Times interview, Varoufakis walked back his negotiating ask for debt cancellation, instead proposing a series of “debt swaps” that would achieve more or less the same result. He was more obvious that might have been ideal in stating that he regarded this as a fix to placate Germany. From the Financial Times, which broke the story:
Greece’s radical new government revealed proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders…
Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds.
The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds.
He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss.
But there is still deep scepticism in many European capitals, in particular Berlin, about the new government’s brinkmanship and its calls for an end to austerity policies.
“What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda,” Mr Varoufakis, a leftwing academic economist and prolific blogger, said. “I’ll say, ‘Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece’.”
In a more sophisticated undercutting of Varoufakis than the disgraceful BBC interview of last week, a Financial Times video embedded in the article features a commentator discussing Varoufakis’ progress thus far. The segment depicts Varoufakis as being confrontational and as not having gotten on well with the UK chancellor of the exchequer, and also focuses on the flight of financial assets from Greece and its falling stock market. Does it not occur to anyone that a substantial portion of the money exodus is that of those very oligarchs that Syriza has threatened? The rest of the EU says they want the country cleaned up, yet they attack Syriza for the predictable results of their seriousness.
But while it may seem trivial for them to get their way with Greece, this victory is likely to be Pyrrhic. The more it becomes obvious that the northern countries will keep inflicting pain on Greece out of a desire to keep a bad status quo intact, the more the other victims in better bargaining positions (by virtue of having larger economies and even more fractious voters) are likely to escalate. Indeed, Varoufakis, by challenging the Troika on so many fronts, is conveying a powerful message that subservience is neither necessary nor desirable. No wonder the technocrats are out to discredit him personally.
Ambrose Evans-Pritchard argues that Greece holds the trump cards. Here I disagree. With de facto control over Greece’s banking system, the ECB can bring Greece to heel. We’ll see if the ECB imposes any conditions on its approval of the Greece’s request to use ELA funds on Wednesday. If they are anything other than cosmetic, that means the ECB is supporting the northern countries and is determined to box Syriza in. But I do agree that in a longer time frame, Germany is losing. The problem is it may not lose quickly enough for Greece to get the relief it desperately needs.
Varoufakis also stated that achieving a budget surplus of 1% to 1.5% would take precedence over Greece’s social program promises, another major concession. Again from the Financial Times:
Mr Varoufakis said the government would maintain a primary budget surplus — after interest payments — of 1 to 1.5 per cent of gross domestic product, even if this meant Syriza, the leftwing party that dominates the ruling coalition, would not fulfil all the public spending promises on which it was elected.
I’m troubled by the idea of Varoufakis pushing the idea that Greece will be a good pupil and run fiscal surpluses, which are contractionary, with no mention of other ideas that he has promoted in his Modest Proposal, like Eurozone-level funded infrastructure spending and emergency social programs. And those are essential if the Eurozone is to succeed. As Ilargi points out:
There’s an ideological battle happening between money and wellbeing, between people and banks. Western leaders have so far chosen to protect money and banks, instead of people and their wellbeing, and that’s why we find ourselves where we do. Choosing money before people can only end in the demise of the system that makes such a choice. That, however, is apparently terribly hard to comprehend.
And that got Greece where it is. That’s why Europe set up a ‘union’ that shares a currency but that has no provisions to transfer funds from – even temporarily – weak regions from stronger ones. Even the US has that, or it would have imploded long ago. It’s the kind of thing that makes you wonder if maybe the EU wasn’t set up from the start so Germany could exploit the Mediterranean.
But even that is not the core issue. It’s money over people that is. And Brussels should not just be ashamed for what they’ve done to Greece, they should be driven out of town with tar and feathers. That’s not how they see it, though. Brussels, in the voice of Eurogroup head Dijsselbloem, when he met with new Greek FinMin Varoufakis, had the audacity – and stupidity, his job is up for grabs – to point out that much progress had been made. As the troika demands have turned Greece into a third world nation. That’s known as progress.
Even Varoufakis’ concessions were brushed off by a key ECB official. From the Wall Street Journal:
Greece can quickly reduce its public debt ratio by boosting economic growth, European Central Bank policy maker Christian Noyer said Monday, casting aside the idea of writing off part of the country’s debt mountain.
Greece has the capacity to grow quickly, partly because it has an underutilized workforce, Mr. Noyer said. The country also pays little to service its debt-—which stands at around 175% of annual economic output—because European lenders have granted low interest rates and deferred repayment deadlines, said Mr. Noyer, who sits on the ECB’s governing council and is the governor of the Bank of France…
Mr. Noyer’s comments indicate little sympathy for calls to lighten Greece’s debt burden after the Syriza party won snap Greek elections last week on a platform of securing debt relief from its €240 billion bailout and changes to the terms of the deal with eurozone countries.
Readers have argued that Greece should seek support from Russia. Greece has in fact already retreated from its early gesture of objecting to not being included in a vote on extending sanctions against Russia. Varoufakis clarified that Greece supported the sanctions but objected to Greece not having been consulted. Similarly, Varoufakis is firmly opposed to Greece exiting the Eurozone, so that is not something that Greece would pursue. In the highly unlikely event that Tsipras were to decide to go that route, I am highly confident that Varoufakis would resign.
Greece simply has too short a negotiating runway to make the sort of headway in the political realm to offset its very weak position. But Varoufakis’ efforts to break the frame are not a failed effort. They are making media waves and will give other countries new ideas as to what is possible. Varoufakis is has good odds of prevailing the battle of ideas. But he is not likely to win in time for Greece.