Melting fudge

The Greek government sent last night for approval by the ‘ex-Troikasent’ a list of measures, as with Mr Varoufakis’s first bid to the Eurogroup of finance ministers, sound long on pious intentions and short on costed detail. It is very possible, therefore, that this second bid will not be immediately accepted today but a new fudge is surely likely before the real deadline of February 28th, when a €7.2bn tranche of IMF loans is due to be handed over under the existing bailout programme. A deal will happen simply because Greece is desperately in need not only of the IMF money but also further significant support from the ECB in the coming days and weeks. The treasury is emptying rapidly as taxpayers have been taking advantage of the political uncertainty to delay paying their dues while the banks are similarly running out money due to the massive outflow of funds out of the country. Rumours are still swirling about capital controls becoming necessary whether or not the country stays in the EZ. This why the Syriza government had to surrender on Friday and faces further humiliations.

Here are two contrasting figures on Greece, which can be used by the Prosecution and the Defence. While they should not be taken too literally they do help to explain the prejudices of the various protagonists. Figure 2 shows Greece at the top of a list of miscreants since its independence in 1832. However, Figure 3 also shows Greece to be top, this time of the OECD pops since 2007 on reforms promoting economic growth. No wonder Greece tried to replace the evil Troika with those nice folks at the OECD!

Defaults and Rescheduling, 1800-2010


OECD reform ranking 2007-14


Probably too much has been written already on Friday’s deal but it is interesting to note how the verdict seems to have changed. At first it was widely held that the Greeks had done quite well, thanks to the brazen support of the EU Commission, the ECB, IMF and the French and Italian governments with Mrs Merkel stepping in to over-rule Mr Schäuble. This is certainly the view of all those who believe that the EMU is truly irreversible and think it time Germany stepped up to do its duty and open its wallet. For what it is worth, here is my alternative view:

  1. The Germans, including Mrs Merkel and even the SPD, are in no mood to take prisoners and if that means Grexit, so be it! It is still not sufficiently understood that they have the legal obstacle that any form of financial transfers are contrary to the Maastricht Treaty and would probably be challenged successfully at the Constitutional Court in Karlsruhe. The only flexibility is on timing, some detailed conditions and interest rates. Unless Greece agrees and observes the extension of the current bailout programme, the Germans seem prepared to accept Grexit and the losses that it would entail. It is all or nothing and not just to kick the can down the road. That, of course, does not mean that the usual EMU games will not be played of sticking the blame on the other side for any failures.
  2. A wider German purpose is to beat up Greece ‘pour encourager les autres’ in the EMU. To be fair, some of ‘les autres’ (Spain especially but also Portugal and Ireland) have for their own reasons elected to support Germany as have the Netherlands, Finland, Austria and Slovakia. The message is clear to France, Italy and their federalist supporters at the EU commission and ECB: stick to the rules and also that German money is not available in any circumstance. German resolve is being stiffened by the surge of popular support for the anti-austerity Podemos Party in Spain and the battles over even minor reforms that the French government is having with its deputies in parliament. Moreover, the Germans are still fuming over the preliminary European Court of Justice opinion on Mr Draghi’s sovereign debt support scheme and also over the proposed QE programme.
  3. Even wider German purposes, which is where Mrs Merkel comes into her own, seem to be to preserve the EU as a buttress against both EMU federalists (in Brussels and at the ECB) as well as Russian aggression. Both require the UK, Sweden, Denmark and the Czech Republic to stay onside.

Now, that’s what I call strategic thinking! It is up to the Greeks to choose between European money and national sovereignty. It was not what Syriza promised to voters and it is hard to believe that they will not try to buy time to wriggle, obfuscate and hoodwink. As Mr Schäuble cruelly observed: “The Greeks certainly will have a difficult time to explain the deal to their voters.

Any fudge this week will surely melt long before the end of the four months’ extension. After Grexit the next question will be whether France can put up with German intransigence or Germany with French recalcitrance.


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