We’ve cautioned readers that Greece is in a very weak bargaining position relative to its financial overlords in the Troika. As much as Finance Minister Yanis Varoufakis is making sound, logical arguments and presenting proposals that if anything are too accommodating, despite initial cool reactions, many of Greece’s soi disant partners are diehard neoliberals and/or are politically constrained. Varoufakis is approaching them as if they can deal in good faith, when their idea of “good faith” comes from a punitive parallel universe.
While Varoufakis and presumably Tsipras are unwilling to deploy the one realpolitik tool at their disposal, a threat of Grexit, other parties who have influence on the recalcitrant actors are more sensitive to the fact that much more is at issue than just the fate of Greece. The ongoing game of extend and pretend has managed to forestall what amounts to an existential crisis for the Eurozone. Its founders knew its structure was incomplete and imperfect, but they believed the logic of preventing future wars was so compelling that the inevitable future crises would be resolved by further integration.
Unfortunately, as we’ve been chronicling off and on since 2010, the northern bloc, and most important, Germany, have not wanted to give up its catbird seat. It has influence in excess of its population, continues to run trade surpluses with the rest of the Eurozone, which is tantamount to stealing demand, yet it is unwilling to accept the inevitable consequence of running sustained trade surpluses, which is that you must finance your trade partners (or to put it in the terms of petrostates, recycle your surpluses). Moving toward integration, particularly more powerful governance at the Eurozone level, and having more fiscal transfers to allow countries like Greece to have enough demand to have manageable levels of production and employment, means that Germany will have to cede power. And Europe still has strong nationalistic impulses, another obstacle to cementing the alliance.
But it has also been clear, with the rise of ultra-right, anti-Eurozone parties, and to a lesser degree, anti-austerity parties like Syriza and Spain’s Podemos, that this unsustainable status quo is if anything past its sell-by date. Thus for the more forward-thinking technocrats and politicians, Greece’s efforts to free itself from failed austerity policies serve as a focus point for their own agendas to move away from anti-growth, anti-democratic policies.
The problem for Varoufakis and Syriza generally is that the magnitude of the task before them, of negotiating what they hope is a deal with significant new components, is already difficult to accomplish by June, the longest time frame they are likely to have, even if their interlocutors were more receptive. With limited knowledge of the power structures in the key governments with which they are dealing, it’s well nigh impossible for them to find, let alone work with, mid level and senior level figures who are their natural allies.
Thus Varoufakis (at least for now) is forced to broadcast his messages when narrowcasting would be better. Broadcasting means he will almost inevitably offend some key audience, given if nothing else how far apart Syriza’s voters and German officials are in their expectations for the negotiations. But the broadcasting is critical to communicating and rallying both insider allies as well as voters in periphery countries, since shifts in poll results increase pressure on the Eurozone reactionaries. Perversely, the best thing for Syriza’s chances were the Hebdo murders, since the boost it gave to anti-Eurozone Front National leader Marine Le Pen is a big wake-up call for the Eurozone elites.
As Business Insider points out, three big events today may provide some clues as to whether the more moderate and liberal forces are making any headway in checking the punitive, negative responses to Greece’s call for a new deal. As we indicated, the ECB still holds the trump card in dealing with Greece, in that it holds life or death power over its banking system through its control of the Emergency Liquidity Authority, or ELA. Draghi has made clear he is not at all keen about supporting Greece’s banks, particularly since the bank run since they are likely to be insolvent, as opposed to merely illiquid. But Draghi is also sensitive to the ECB appearing to trump democratic processes, so to the extent the central bank decides to muscle Greece, the preferred route would be through mechanisms and procedures that are not obvious to most commentators.
The major events of the day are:
1. The ECB meets to approve the extension of the ELA. The approval is certain but is only for two weeks. But Draghi has hinted he might impose conditions, and that would take a 2/3 vote of the governing board. One faux-friendly tradeoff would be, for instance, to push out the renewal beyond two weeks but require that Greece come to an agreement on certain issues
2. Varoufakis meets with Draghi to try to get his consent on getting waivers to current bailout arrangements, particularly restrictions on bond issuance and access to interest held at the ECB. This is important and likely necessary for Varoufakis to live up to his “no bailout funds” plan and enable Greece to meet its obligations thorough June, when it has debt maturing and needs to have a bigger deal secured. The Financial Times reported that the ECB is negative on giving these waivers. In theory, Greece is flying without support if it goes beyond February 28 without those waivers. And even with very careful cash management, it is not clear it can last until June. As Business Insider notes:
There’s a big gap between the official end of the bailout (if it isn’t extended) at the end of February, and a full deal on debt, which likely wouldn’t come for months (if it comes at all), so it’s crucial for the new Greek government that the ECB still acts as a backstop for the country’s banks, Varoufakis will likely need Draghi’s tentative agreement for that.
The Financial Times reported on the ECB’s negative stance yesterday and the updated version of its account has not modified that reading. Key sections:
Yanis Varoufakis, Greek finance minister, had proposed to European officials that Athens raise €10bn by issuing short-term Treasury bills as “bridge financing” to tide the country over for the next three months while a new bailout is agreed with its eurozone partners.
But the ECB is unwilling to approve the debt sale. It will not raise a €15bn ceiling on t-bill issuance to $25bn as requested by Athens, according two officials involved in the deliberations. “The Greek plan relies fully on the ECB,” said another eurozone official briefed on the talks. “The ECB will play hardball.”…
The ECB’s stance raises the stakes in the stand-off between the anti-austerity government in Athens and its international creditors, which if unresolved, could end with Greece running out of cash within weeks.
It is also likely to puncture a sense of optimism among investors over Greece’s alternative rescue plan and a softening of its insistence on debt cancellation, which lifted the Athens stock market 11.3 per cent on Tuesday and pared 10-year borrowing costs by nearly a full percentage point.
Yields on Greece’s 10-year bonds rose 42 basis points on Wednesday to 10.22 per cent while Athens stocks shed 2.1 per cent.
The Greek government has said it could survive without additional cash until June, when a €3.5bn bond comes due. But many EU officials fear allowing the programme to lapse could restart market panic and spur a bank run.
Recall also that it is in the reactionaries’ interest to force Greece to reach a deal sooner. The more pressure the Greeks are under, the less opportunity they have for supporters among insiders to press their case, and for Greece’s ongoing negotiations and official statements to galvanize voters in the periphery. Moreover, it would force them to negotiate largely within the framework of current bailout parameters rather than explore new arrangements.
This lever is powerful enough to give the ECB considerable advantage and yet argue that they are being completely reasonable, since no other country has been cut this sort of slack. That may also obviate the need to deploy the more brutal and obvious weapon of a not-so-veilled threat to cut off Greece from the ELA, which would also rattle markets. Thus what happens here is likely to be the most revealing “tell” of whether national governments, particularly France, are trying to moderate their central bankers behind the scenes (note my check of Le Monde does not give much cause for hope, since the Greece stories, while pretty evenhanded, were neither prominent nor among the “most read,” but things are moving so quickly it may be behind the state of play. However, the BBC quoted Italian prime minister Renzi as failing to endorse the Syriza efforts specifically but voicing support for growth over austerity).
3. Tsipras meets with EU Commission president Jean Claude Juncker
The other thing to bear in mind is that even if behind-the-scene struggles help Greece get a better deal, the technocrats idea of what is sufficient for Greece is sorely blinkered. For instance, even Le Monde in an explainer provides a surprising amount of support for Varoufakis’ creative debt structure proposals, some of which have the considerable advantage of making the success or failure of the revamped program tied to the payment on the bonds. That provides a mechanism for reopening negotiations if as with pretty much all IMF bailout plans, GDP growth falls short of projections. But the reaction among a large number of commentators, as well as economists, is that Greece can get the relief it needs simply via a further extension of debt maturities and interest rate reductions.
Similarly, Varoufakis has called for a reduction in the primary surplus requirement from 4.5% to 1% to 1.5%. Martin Wolf, the Financial Times’ highly respected lead economics commentator, deems that to be reasonable; other observers call for a “split the difference” approach. But either way, this is just not enough of a break to get Greece back on a growth path. Any fiscal surplus is contractionary. Bill Mitchell has estimated that Greece needs a fiscal deficit of 10% to pull its depression-mired economy out of the ditch. Varoufakis had solved that conundrum in his Modest Proposal via calling for what amounted to fiscal transfers, through Eurozone-level funded infrastructure spending and emergency social programs. Maybe he’ll put those on the table with his formal plan, but by not foreshadowing that they are coming, they will be perceived as an additional negotiating demand and would not be likely to be well received.
But Wolf, whose column urges Eurozone leaders to hear the Greeks, unwittingly reveals how deeply the economic elite has internalized failed neoliberal thinking. After pumping for cutting Greece a break on the primary surplus, he continues:
The second issue is structural reform. The IMF notes that the past government failed to deliver on 13 of the 14 reforms to which it was supposedly committed. Yet the need for radical reform of the state and private sector no doubt exists.
One indication of the abiding economic inefficiency is the failure of exports to grow in real terms, despite the depression.
Indeed, Greece faces far more than a challenge to reform. It has to achieve law-governed modernity. It is on these issues that negotiations must focus.
So this must be the deal: deep and radical reform in return for an escape from debt-bondage.
This new deal does not need to be reached this month. The Greeks are right to ask for time. But, in the end, they need to convince their partners they are serious about reforms.
What if it becomes obvious that they cannot or will not do so? The currency union is a partnership of states, not a federal union. Such a partnership can only work if it is a community of values. If Greece wants to be something quite different, that is its right. But it should leave. Yes, the damage would be considerable and the result undesirable. But an open sore would be worse.
What Greece and the Troika have in mind for structural reforms are significantly at odds. The big factor in Syriza’s favor among the Eurocrats is its independence from the Greek oligarchs, and its willingness to take them on and reform Greece’s tax system, which fails to cover huge swathes of income earners. That is the one set of reforms where both are on the same page. But otherwise they are at odds, which is the reason for Varoufakis saying the Troika bailout monitors are no longer welcome. Varoufakis is correctly unwilling to sell off Greek assets at distressed prices, which is part of the reforms. “Structural” market reforms are to a significant degree an exercise in reducing labor bargaining power and lowering wages. By contrast, Syriza has proposed increasing the minimum wage and a direct employment program targeting the long-term jobless. This sort of thing is anathema to the IMF “structural reform” party line.
Look at the assumption in Wolf’s argument: that Greece, and presumably the rest of the periphery, needs to export more. The world cannot be comprised of net exporters.
Moreover, notice that he explicitly rejects the notion of further Eurozone integration, seeing it as viable as a mere collection of states. The crisis has show the current structure to be unworkable. Having a common currency means a common interest rate. Without more fiscal transfers, growth rates in individual countries are too disparate for a single rate to work. The result was monster borrowing binges and real estate bubbles in countries where the rates were too low, most notably Spain and Ireland. And the members of those countries are blamed for profligacy when the cause was a fundamental design defect in the Eurzone that remains uncorrected.
Finally, see Wolf’s casual suggestion that Greece should leave the Eurozone if it won’t swallow misguided structural reforms. As much as financially-oriented commentators discount contagion risk, the real threat to the Eurozone has move from the economic realm to the political. Greece showing a departure can be made and forcing the Eurozone to sort out the yet-not-specified mechanisms plays into the hands of the anti-Eurzone right wing, which only becomes more powerful as austerity creates more misery and more eagerness for the seeming certainty of strong men (and in the case of Le Pen, women).
As none other than Joschka Fischer, former German Foreign Minister and Vice Chancellor, wrote at Project Syndicate:
Simultaneous debt reduction and structural reforms, we now know, will overextend any democratically elected government because they overtax its voters. And, without growth, there will be no structural reforms, either, however necessary they may be.
Since a supposed friend of Greece like Martin Wolf seems unable to grasp how much it will take to achieve growth in a now-prostrated Greece, his proposals are not that much of an improvement over what its enemies are likely to serve up.
Lambert reacted negatively to Syriza’s campaign slogan of “Hope is coming” as being an eerie parallel of the Obama hope and change headfake. Syriza appears to have vastly better intentions, but faces formidable, and likely insurmountable obstacles. Most of the traditional readings of the Pandora’s box myth has the appearance of Hope, after Pandora has unleashed all the world’s evils, as a sort of consolation prize for her horrible mistake. But classicists warn that ancient Greeks saw Hope as a dark force because it winds up prolonging torment.