Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 6 July 2015

After Oxi, what next?

A lot of the commentary on Greece fails to see why the Greek No vote changes anything. This view tends to see the stance of the Eurozone group as simply expressing their own voters’ preferences which will not be changed by what happened yesterday. Here is an alternative reading.

It starts from a simple observation. The Troika will get far less of its money back (if any!) if Greece is forced out of the Eurozone. (I say forced out because Greece does not want to leave, so Greek exit is first and foremost an ECB decision: if you think otherwise read Karl Whelan and Matthew Klein and Paul De Grauwe. [1]) That is why creditors are generally weak in negotiations of this kind. Things are different in this case only because the creditors include the ECB, and Greece wants to stay in the Eurozone. The Troika has played this for all it is worth. They were relying (you could say gambling) on the Greek people, one way or another, deciding that they would agree to the Troika’s demands because they feared Greek exit more.

So far this strategy has failed. First they pushed Tsipras further than he could possibly go, hoping perhaps that Syriza would collapse in recriminations. Tsipras’s response was a unifying referendum. They then gambled that Greece would say no, and they lost that too. Tsipras continues to offer the Troika the chance to be more reasonable. He followed the referendum not with triumphalism but by removing his finance minister. This was both a signal - I really want a deal, even though it will in all probability inflict further (unnecessary) pain on Greece - and a lifeline, because the Troika can now say that an important obstacle to a deal has been removed. (An obstacle, because Varoufakis was too open - something politicians and much of the press hate - and too honest about the other side’s lack of economics.)

Now the Troika seem to face a simple choice. Agree a deal and get a little more heat from your political opponents at home for ‘giving in’, or force Greek exit with the risk that you will get a lot more heat when Greece defaults and people realise you have lost all their money. If they are really just interested in getting as much of their money back as possible, it would seem crazy to throw away their best card by forcing Greece out of the Eurozone.

Of course rationality may not prevail, or interests may be rather different. The IMF may continue to be an unhelpful nuisance. (If you think my criticism of their role was harsh, read this from Peter Doyle.) Some within the Troika will be happy to go for Greek exit because they think nationalist sentiment can overcome any kickback from the subsequent Greek default. Others may fear a deal may encourage anti-austerity sentiment in their own indebted countries.

Unfortunately there is a third possibility, which is probably the worst possible outcome. To prevent any loss of face, the Troika may continue to gamble, waiting for days or even weeks, and watch ECB pressure, together with reluctance by Tsipras to introduce a new currency, gradually bring chaos to the Greek economy. Only then will it negotiate, allowing any deal to be portrayed as the result of desperation by the Greek government. In which case, recent European politics will have reached a new all time low.    

[1] Postscript: Martin Sandbu provides a very clear account.

31 comments:

  1. Can anyone actually remember how Greece bankrupted herself?

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    1. They spent more than they earned.

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    2. other countries earned more than they spent, which is a good thing.

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    3. OK, but what did they spend it on?

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    4. "what did they spend it on?"

      Imports from the countries running trade surpluses (earning more than they spend). Running trade surpluses (earning more than you spend) is a good thing, but importing from trade surplus countries (spending more than you earn) is a bad thing.

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  2. There seems to be a belief among some European finance ministers that even if Greece stays within the Eurozone it will never be able to pay back any of its debts anyway. In other words, they believe Greece is a failed economy with no prospects of a turnaround.

    Therefore the least worst option for the Euro is to let Greece exit and send a strong message to other would be rebellious countries that they must adhere to the demands of creditors.

    It is a risky gamble but if the belief is that Greece is fundamentally flawed then perhaps that is what will drive the EU's stance.

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    1. You mean all that hard bargaining by the Troika was just a ruse to force (not let) Greek exit. I wish I could say I know you are wrong.

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    2. Dear Professor, do you think that there can actually be conditions under which Greece can at once stay in the Euro and find its way to prosperity? Even with debt relief, wouldn't the country still be subject to a severe balance of payment constraint?

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    3. Of course. It is currently in surplus, and improving its competitiveness all the time. If it is given breathing space by the Troika, I would be quite optimistic about its prospects.

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    4. Mainly Macro6 July 2015 at 07:46

      It's pretty obvious that you are wrong: You seem to believe a conspiracy theory possible. So much for your sense of reality. Read Nick Rowe with understanding.

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    5. Mainly Macro6 July 2015 at 08:07

      It is pretty obvious tjey are not in surplus any more. And that appears to be Syriza's work.

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    6. Prof., if Grexit happens what credibility will ECB have? Can the banks in smaller and weaker countries survive? Can their bonds will be deemed sufficiently risk-free? I don't think so.

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    7. Mainly Macro6 July 2015 at 07:46

      What a very odd conspiracy theory. Do you really think it was worth 230 Billion € to the Eurozone countries to get rid of Greece?

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  3. why doesn't the Greek government (seem) to have a plan B? They gambled everything on the troika giving in, with calling for a referendum after the previous bailout deal expired, loosing their bargaining position and now with their backs against the wall.
    A plan B could have been an orderly exit from the eurozone, that they could start executing now. But it seems they have nothing prepared and now face chaos.
    An orderly exit from the eurozone would be something that economists actually think could work for Greece, as the austerity failed, and any new deal would still have some kind of austerity, the only viable alternative to growth would be exiting the eurozone with a devaluated currency.
    In my opinion the Greek government can be blamed for trying to reconcile the impossible: freedom from the demands and rules of the eurozone partners while still wanting to remain in the eurozone. They should have told the Greek people this is not possible.

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    1. I think that what is happening now is still consistent with Syriza's "Plan A". There was no reason to think that calling a referendum was just a bluff.

      Because Syriza has forced the issue, even Schauble has had to admit that Greece is entitled to remain in the eurozone regardless of the referendum result, and even regardless of default. Ordinary Greeks, as well as much of the world, are more aware of the relevant facts than ever before. Claims by the Very Serious People that the referendum was about euro-versus-drachma have been exposed as fraudulent lies.

      If anyone bluffed, it was the creditors. They tried to go over the heads of the Greek government, and use euro-propaganda to trick the Greek people and civil society into pressuring Syriza. But it failed. The creditors now have to deal with Syriza directly.

      I imagine the Greeks are used to living in a cash-driven economy, and to living on less than 60 euros a day. If the banks closed fully, many Greeks wouldn't really notice. Threatening to close the banks just isn't a serious threat when the banking system has lost much relevance to the Greek economy.

      Even if Greece defaults on the majority of its debts, it is still entitled to full membership of the EU, the eurozone and the single market. And crucially, I think and hope, the referendum debate has helped the average Greek voter to understand this.

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    2. ok, but do you really think this approach is in the interest of the Greek people?
      Has the Greek government money to pay public workers?
      Why is Syriza not going for plan B (leaving eurozone)? Seems more sensible to me than trying to survive with a crippled economy.

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  4. If the main interests of the Troika--and of those allied with them (colleagues, supporters, etc.)--are recouping the money (financial) elites invested, then the hard-nosed scenario is a reasonable hypothesis. Either Greece buckles and pays it all back (win for the Troika and financial elites), or Greece is forced out but takes such a hit that other debtor nations won't resist austerity-and-plunder policies (another win for the Troika and financial elites). That this might have horrible long-term consequences for others is unimportant or off their radar (and elites everywhere--EU, USA, Russia, etc.--seem to be thinking in this short-sighted manner). Add to that the Reagan-Thatcher morality play of the last 35 years, and you have a recipe for some pretty awful, undemocratic, generally incompetent policies.

    As Karl Marx might have said, "It's the political economy, stupid!"

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    1. > Either Greece buckles and pays it all back

      Even if they wanted to, they couldn't. And the creditors knew this when they lent the money. Merkel doesn't want full repayment. She just wants the payments to keep coming *while she is in office*. The face value of the current debt is just a political joke.

      > or Greece is forced out but takes such a hit ...

      I recently discovered that the average central European doesn't actually know what's going on in Greece at the moment. They don't realise that the health service has been destroyed and is ticking along with volunteer support. That the banking system failed to be relevant to many people years ago. They have already taken the "hit".

      If you have zero income, not even social welfare, then you don't even notice if the banks shut down: http://www.theguardian.com/world/2015/jun/28/the-greeks-for-whom-all-the-talk-means-nothing-because-they-have-nothing

      If Greece fully defaults, it will still be entitled to full membership of the EU and the eurozone, and crucially the Single Market.

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  5. I think the most pressing issue is the frozen banks holiday. They must adress this first but I don't see Draghi taking a decision. Is he independent after all? Is ECB independent? Can they legally freeze Bank of Greece lines (one of their shareholders)?

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  6. "so Greek exit is first and foremost an ECB decision"

    I agree. See the behaviour of the ECB this afternoon (Monday 6th) if you want further proof.

    An extreme and clear example of why I am not at all as keen in 'independent' central banks as some are (including obviously S W-L).

    When do I (or indeed a Greek) get to cast my vote against the people making this decision? Democratic accountability matters.

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    1. I agree...the ECB and various finance ministers of the Troika have not only behaved undemocratically for years in respect of Greece, but appear to be on another planet when bearing in mind the astonishing damage done by the measures they have imposed upon Greece:
      "Jeroen Dijsselbloem, head of the Eurogroup of finance ministers, said the result of Sunday's referendum was "very regrettable for the future of Greece...For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities," he said. (BBC News today).
      Yes, he did actually say "For recovery of the Greek economy".

      But it is far worse than simply being undemocratic; they literally have blood on their hands:
      http://www.keeptalkinggreece.com/2015/06/25/study-austerity-in-greece-led-to-tragic-increase-of-35-in-suicides-in-just-two-years/

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    2. Surely the problem with the ECB's current behaviour is precisely that it is not acting independently. It appears to be refusing liquidity to Greek banks - which it has itself declared solvent - in violation of its mandate under political pressure.

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  7. It may be said to the contrary, that Greeks seem to have run out of ammunition.
    Thus the very heading of your article and the interest of its conclusion, which serves to alternative interpretation according to the reader's position

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  8. In the interview Yanis Varoufakis gave to Channel 4 he divulged that he had been offered more than one new deal from certain people at Brussels once the referendum had been called. But he could not act on them as they had to have the referendum first. But he said that they were deals he would consider signable and very strange that they had only been offered after the referendum had been called. I think a lot more is going on behind closed doors down paths that are being cleared as we ponder what will happen. Now that Yanis is gone, we will not be privy to these political whispers, in fact that is exactly why he has gone, as you very clearly identify in this post

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  10. But do you really think it is in Greece's best interest to stay on the Euro?

    Leaving is very costly. But if they stay, they stay in a disparate currency zone that's enormous compared to them, with little or no fiscal union, and a central bank dominated by inflationaphobes and VSPs. It seems like this may not change much for generations, meaning perhaps regular and very long lasting depressions. You don't think that cost is greater than the cost of leaving, especially for your children and grandchildren?

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    1. The greek people want to stay in the euro. I think maybe unconsciously they are hoping that the currency union will lead to a closer political union, indeed to a fiscal union. This does not seem like a completely crazy hope to me. Looking at the last hundred years in Europe as opposed to the US, being Europe's Mississippi may be better than being Europe's Greece.

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  11. Krugman has a good piece about US bailouts of states like Texas in the Savings and Loan crisis under Reagan. They were automatic! You couldn't have a political fight about it. I remember seeing all those empty office buildings in Houston and being angry. But no one could imagine we would kick a state out , we fought a bloody war over this. I would like Texas out but gonna happen.

    Also we have automatic transfers to poor states like unemployment insurance and other forms of relief.

    At this point the question for EU is political. The Greece economy is in ruins. EU. Union. That word is poignant for Americans, from the war and the race problems and the flag fights.

    So Union means sacrifice and solidarity. Or it means nothing.

    A way back a man with a funny hat and beard said a house divided cannot stand. Another, further back, said we must all hang together, or we will hang separately.

    Forming a more perfect union is not an easy road to hoe, but might be wort it.

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  12. Was Varoufakis "too open", or is it simply too unpredictable and self-promoting to deal with?

    Outside-in it's clearly hard to tell; I claim no special knowledge.

    But there are plenty of reports suggesting Varoufakis was self-aggrandising and as concerned with burnishing his own image (the motorbike, leather jacket, lifestyle magazine interviews, intellectual showing off) than the nitty gritty of negotiations. Hence his provocative statements and lack of predictability.

    Is it a surprise that the rest of the Eurozone didn't trust him? I'd say no.

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    1. This article in the Guardian made me think Varoufakis was simply an awful negotiator / egotist:

      http://www.theguardian.com/world/2015/jul/06/yanis-varoufakis-why-greek-finance-minister-had-to-go

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  13. The obvious domino theory process is not the only one that could be at work.

    We know the great weakness of the EU is weak fiscal/political union. And we know unless they are idiots that economics cannot be their objective. Left with politics, and the weakness, it may be that their objective is instead to achieve that elusive political union.

    Thus "financial warfare" as a metaphor may have more truth to it than meets the eye. By establishing a compliant government in Greece, so as per Lincoln, to establish a more perfect Union, the plan could be an alternate domino process, to roll up the rest of the countries similarly and get a real Federation. It seems the character of that Federation would be authoritarian.

    What do we see to falsify this idea? Please, I hope there is something.

    Action that may support this, should Greece seek to leave, aggressive creditor action to seize assets to settle the debts, which if undertaken by the full capabilities of the several states, could be quite ugly, for which there is unfortunate historical precedence. I recall both Greece and Turkey are in NATO, yet Greece feels compelled to overinvest in military capability.

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