The Euro has many faults that have rightly given it the nicknames ‘machine from hell’ and ‘burning building with no exits.’ But one of its most pernicious is that, conceived as an irrevocable currency union, no legal pathway was foreseen for evicting one member if all the other members wanted it out but it still refused to leave, or even for it to leave of its own volition. And a debtor that had fallen on hard times could not pursue any kind of adjustment coupled with compensatory expansionary policies, since its hands would be tied without access to exchange and monetary policy, and a lender of last resort. Like in the old Gold Standard days (read 1930s), it would be nailed to a cross of Euro.
This seems to be the current situation with respect to Greece, and as I shall argue, it didn’t arise only after the Syriza anti-austerity coalition came into power in January. It seems that Greece was on a path to Grexit long before, and that Tsipras and Varoufakis had only become its unwitting agents (dupes?), much like Rosencrantz and Guildenstern* in Shakespeare’s Hamlet. This would make the negotiations a political farce, ‘full of sound and fury, signifying nothing’ (Shakespeare’s Macbeth this time), staged simply to intimidate the various Eurozone national electorates into accepting a foregone conclusion. But a foregone conclusion that has taken five years to play out, and has had every resemblance to a Konkursverschleppung (criminal concealment of insolvency) at the expense of the Greek people and Eurozone taxpayers, as Wolfgang Münchau pointed out back in 2013 and again this week.
Yet no sooner had I written the above paragraphs Thursday morning then a new deal seems to be in the offing, with Greece, astonishingly, capitulating to possibly stricter austerity requirements than it had just rejected in the referendum last Sunday, now sweetened with a vague new promise of debt relief (a promise, one should note, that was made before, in November 2012, but never fulfilled – see below for more).
So what gives? I think the only possible explanation is that both sides panicked in the overtime period when they got exactly what they seemed to want: the present Greek government by so resounding winning its own referendum, and the creditors, by forcing Greece into an economic meltdown, and inexorable ‘voluntary’ Grexit. Paradoxically, by unintentionally calling each other’s bluffs, they created a situation neither could ultimately live with. And just winning the blame game (game of turkey), at least in the eyes of their own constituencies, would not be sufficient compensation. Thus we seem to be repeating the pattern of 2012, when German Chancellor Angela Merkel pulled back from the brink of ‘amputating the festering Greek leg’ (as recommended by her finance minister Wolfgang Schäuble) and agreed to the second Greek bailout (for the spicy inside details, see Peter Spiegel’s blow-by-blow account in the Financial Times). But will this solution—Austerity 3.0+Debt Relief–prove any more durable than the last one?
First, a brief sketch of the two diametrically opposed brinkmanship scenarios, and the real powers of enforcement behind either—the ECB’s ‘Guns of Navarone’, on the program tonight.
Scenario 1: Abject Greek capitulation, ‘Austerity for our time’
Will a new Brussels Agreement be likely to last any longer than Chamberlain’s 1938 Munich Agreement? (Picture credit: Wikimedia Commons)
This seemed to be where we were headed when I wrote my June 24 post: Tsipras returns in triumph to Athens bearing a Brussels Agreement, declaring “austerity/prosperity (take your pick) for our time”. In reality he has capitulated across the board to the creditors’ demands, but tries to sell it as a Greek victory. But the creditors did not even do him this favor, instead, upping their demands the nearer they reached an agreement, forcing him to call the Sunday referendum to save face in a hopeless situation (at least by his own account), and implying that the creditors were never negotiating in good faith in the first place (something I suspected as long ago as April 1). Today, despite winning his snap referendum (or precisely because of it?), he is back in Brussels abjectly capitulating to those same demand, with some vague promise of talks about debt relief in the future. But it is not even certain at this hour that the Eurogroup, and especially German FM Schäuble, will even approve this last appeal, despite support from France, the IMF, and the former Polish PM and President of the European Council Donald Tusk.
The trouble with the dangled promise of debt relief is that such a promise has been made before, in fact in November 2012, a little-known fact:
Commitment, though, is a two-way street and Greece would be within its rights to accuse its eurozone partners of failing to live up to their commitments to Athens. On November 27 2012, the Eurogroup agreed to provide further debt relief to Greece once it achieved a primary surplus.
The relevant extract from the common statement on that day reads: “States will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme.”
Despite this commitment and even though Greece achieved a primary surplus in 2013, a year ahead of schedule, no measures on further debt relief were offered. The previous government was told at the end of 2013 to wait until the primary surplus was rubber stamped by Eurostat in March. Then, it was told to wait until after the European Parliament elections in May. Then, it was told to wait until after the completion of the troika review that began last September. Greece’s lenders attempted to cover their reluctance with the fig leaf of claims that Greek debt was on a sustainable path.
Ex-Prime Minister Antonis Samaras must be vexed at hearing his former counterparts talk about “commitments” because one of the main reasons he finds himself out of office today is that the Eurogroup did not live up to one of the key pledges it made to him. [Yiannis Mouzakis & Nick Malkoutzis at macropolis.gr, 20 Feb 2015]
For those inclined to doubt the veracity of a Greek blog post, I refer you to two Reuters reports about the promise and its limbo status. If the Troika and the German government were so dismayed by the Syriza electoral victory in 2015, then why did they do so little to help Samaras stay in power? Because Angela Merkel (who of course is available for business 24/7) found him ridiculous after he boasted to her that he was even available to his aides on weekends (as reported in last week’s Der Spiegel)?
Scenario 2: Grexit–Amputate the festering leg (the ‘Rosencrantz and Guildenstern are Dead’* scenario)
Will Varoufakis and Tsipras (left) share the fates of Greek PM Samaras (center) and Rosencrantz and Guildenstern (far right), despite refusing to wear ties? (Picture credits. Left: Cartoon from Belgian L’Echo explaining why the new Greek ministers do not wear ties ‘because’ their predecessor Samaras had been hung by his tie by German Chancellor Merkel; Right: Scene from stage production of Tom Stoppard’s spoof Rosencrantz & Guildenstern are Dead)
If the creditors were not negotiating in good faith, what did they want? Grexit/Graccident, but with the blame placed squarely on the recalcitrant, obstreperous, and immature Greeks `For this purpose the self-styled Marxists Tsipras and Varoufakis were made to order and more suitable than their malleable center-right predecessor Samaras. Let them pursue their revolutionary romantic quixotic tilting at austerity windmills until they fall off the fiscal cliff and have to face the music of financial collapse. This reality check would kill two birds with one stone: make a devastated Greece a deterrent to other populist parties contemplating upsetting the austerity order (think of Spain, Italy, Ireland, France), while getting the Greek people to turn on Syriza for maneuvering them into this disaster. And it would solve the legal conundrum of the Eurozone—how to expel a country by making it go ‘voluntarily’ under suitable but deniable duress, without leaving too much egg on the face of the creditors.
That this scenario might always have been German Finance Minister Wolfgang Schäuble’s intention (at least since 2012’s Greek crisis) finally seems to have dawned on recently resigned Greek Finance Minister Yanis Varoufakis (aka Rosencrantz or Guildenstern?), as he admits today in an otherwise highly intelligent op-ed in The Guardian and on his blog. As evidence he cites Nils Pratley’s May 11 Guardian piece which has Schäuble mouthing Arnold Schwarzenegger’s immortal line “Go ahead Greece, make my day” in the caption.
But that Schäuble led the “amputate the festering Greek leg” camp in the German government during the 2012 iteration of the Greek debt crisis has been well known since Peter Spiegel’s May 2014 How the Euro Was Saved pieces in the Financial Times, as well as former US Treasury Secretary Timothy Geithner’s 2014 memoir Stress Test, i.e., for almost a year before Rosencrantz and Guildenstern (sorry—Tsipras and Varoufakis) came to power. In case anyone had forgotten, Andrew Ross Sorkin reminded us of this again on June 29 in the New York Times. Geithner recalls in his memoir:
A few days later [i.e., late July 2012], I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.
I found the argument terrifying. Letting Greece go could create a spectacular crisis of confidence, regardless of what Europeans committed to do afterward. It wasn’t clear why a German electorate that hated the Greek bailouts would feel much better about rescuing Spain or Portugal or anyone else. And the flight from Europe, once it got momentum, might be impossible to reverse.
[Stress Test, Kindle edition position 7238—can you believe Kindle for PC does not show you page numbers?]
* Rosencrantz and Guildenstern, sycophantic childhood friends of Hamlet, are sent by Danish King Claudius to accompany Hamlet on a ship to England. They bear a sealed letter to the King of England requesting Hamlet’s execution (unbeknownst to themselves). Distrusting them, Hamlet secretly substitutes a letter of his own calling instead for their execution, and escapes back to Denmark. Clueless, they deliver this letter to the King of England and, we are later told, are indeed duly executed. Substitute ‘anti-austerity campaign’ for King Claudius, Wolfgang Schäuble for Hamlet, and the troika for the King of England, and you have a nice little contemporary parable (with of course Tsipras and Varoufakis interchangeably as Rosencrantz and Guildenstern). Tom Stoppard spins the Hamlet tale further in his spoof Rosencrantz & Guildenstern are Dead, which is often compared with Beckett’s Waiting for Godot. And Waiting for Godot, in turn, has also been invoked as a relevant literary metaphor for Germany’s role in the Euro crisis.
3. The Guns of Navarone
Film still from the 1961 Hollywood epic The Guns of Navarone. This fictional account of a successful British commando raid on German superguns hidden deep within a made-up Greek island controlling the Aegean sea-lanes is based on the 1943 Battle of Leros, which was in reality the last hapless debacle of the British and their new-found Italian allies against a still triumphant Wehrmacht. It took Hollywood to snatch victory from the jaws of defeat. Today the superguns are being wielded by an Italian at the helm of the ECB in Frankfurt.
Whichever way the Greek scenario goes this weekend, one lesson has been unequivocally learned: the ECB has the superguns (access to ELA funding, QE–aka “Querency Easing”, OMT “whatever it takes”), and it is prepared to use them, for good or evil. Whether the ECB is an independent central bank of unelected official or not, it is ultimately calling the shots because only it has its finger on the triggers of the financial weapons of mass destruction. And woe betide anyone in the Eurozone who dances out of line, as the present Greek government has discovered to its dismay.
Charles Wyplosz has a very trenchant 29 June piece on why the ECB’s decision, against the assessment of the IMF, not to write down Greece’s debt in 2010 and instead become one of the country’s creditors, compromised its position and has now led to this pass. He writes:
No other central bank in the world tells its government what reforms it should conduct, nor how sharp should fiscal consolidating be. As a member of the Troika, the ECB was instructing Greece to carry out deeply redistributive policies, for which only elected politicians have a democratic mandate. In the end, it must accept the blame for poorly designed policies that have provoked a deep depression and its political consequences.
The decision to freeze ELA is taking this politicization process to a new height. In effect, the ECB is pushing Greece out of the Eurozone. Politicians may debate about the wisdom of making Greece leave. As non-elected officials, the people who sit on the Governing Board of the Eurosystem have no such mandate. A charitable interpretation is that they felt that many governments would harshly criticize keeping the flow of liquidity to Greek banks open after the Greek government in effect closed the negotiations by calling a referendum. This is true, but central bank independence is designed to prevent this kind of pressure.
So, dear audience, I hope you are satisfied with the diverse range of programming of the very highest cultural quality being brought to you tonight on your Eurotelly. Rest assured that your television taxes are being well spent!