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Europe’s Rendezvous with Reality

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During last Friday’s frantic negotiations between Greece and the Eurogroup, Greece blinked first. Despite all the vitriol thrown at Alexis Tsipras and Syriza for being “radicals”, “revolutionaries” and “populist demagogues”, the Greek government rejected all but the most orthodox of solutions to their financial problems. Europe’s “darlings of the extreme left” have turned out to plain old Keynesians, which is what I’ve been arguing all along.

Faced with German intractability and perhaps cowed a bit by the baleful glare of Wolfgang Schäuble, who does it better than anyone, the Greek government acceded to roughly the same terms that it had declared absurd and unacceptable only a few days prior. I should mention that nothing has actually been agreed to yet as the Greeks must first deliver a comprehensive reform proposal sometime today to the Eurogroup, which maintains the right of rejecting or revising it. Only once a final reform package has been signed off on can we say that an actual agreement exists. If the package is categorically rejected, we might still see a run on Greek banks tomorrow (Monday is a bank holiday in Greece).

schaeuble

Assuming that the Greek reforms are “good enough” after a few revisions, which I do assume will be the outcome, the general outlines of the agreement[1] are as follows:

1. Syriza gets a four month loan extension of the current bailout agreement. In the penal system, this is typically known as “parole.” It is the EU’s expression of complete distrust of Syriza and Greece in general. If at the end of the four month period the Greeks are not deemed to have groveled, excuse me, implemented the reforms with sufficient vigor, then we are back at crisis square one. It is significant that the extension is of the existing agreement, with all that this implies about the countervailing duties imposed upon the Greek state, rather than the 6-month bridge loan that went without strings attached. The latter was a means for Greece to fund itself while coming up with a comprehensive plan for government over the next four years. The former is a means for the Eurogroup to monitor the implementation of the existing reform program during Syriza’s first months in office. The two are polar opposites.

2. Primary fiscal surpluses remain unchanged after 2015. This provision is actually quite an important compromise for both sides. The Greeks wanted to relax the fiscal requirements permanently. The Germans wanted to leave them completely unchanged, including 2015. The fact that Greece will now have one year of fiscal maneuverability ought to allow Syriza to fulfill a number of campaign promises and to deliver a small push to the economy. Unfortunately, far too small a push given how far down the hill the economy has rolled during the past 5 years of depression and austerity. Yet it remains a critical point which Messrs. Tsipras and Varoufakis will undoubtedly point to as their clearest sign of victory during the negotiations.

3. No “swapping out” of bailout funds. The cash-strapped Greek government had hoped to use the remaining funds in the fifth EFSF and IMF bailout tranche, approximately 5 billion euros, for something other than bank recapitalization. It had hoped to use this as part of the “pump-priming”  intended to jump start the Greek economy. That hope has been quashed. Those funds will only be disbursed upon Greece fulfilling its current commitments over the next four months and then only for their intended purpose: bank recapitalization and financial sector stability.

4. Greece is now dealing with the “Institutions” rather than the Troika. The only other sop grudgingly conceded to the Greeks is purely semantic. At least future documents will no longer reference the hated Troika; but the line-up continues to contain all the usual suspects.

None of this is terribly surprising; there was never any real chance of either side pushing the other off a cliff. Greece has perhaps gotten a bit less than they hoped for, and than I had expected, but they have gotten something: a one year relaxation of the fiscal targets and “ownership” of the reforms that ought to allow a creative government to fulfill many of its campaign promises. Meanwhile, Angela Merkel can sell to the German electorate how she has been “tough on Greece” and obliged them to fulfill their promises while keeping them in the Euro.

The business is not ended there: in four months, we will likely have another mini-crisis. I don’t foresee the June round of negotiations being much worse than these have been. For one thing, Syriza will be firmly in power and electoral promises have a shorter lifespan than yogurt in the summer heat. Still, it is very possible that the Eurogroup will feel the need to publicly humiliate Syriza – and by extension Greece – a bit more; especially if Spain’s Partido Popular does poorly in the May municipal elections. The danger of a Syriza-like Podemos winning the Spanish general election at the end of the year might provoke just such a reaction from the always so subtle Spanish representatives.

Janus is a Two-Faced God

After the announcement of Friday’s (kind-of) agreement, Wolfgang Schäuble said: “Being in government is a rendez vous with reality. Quite frequently it is not as nice as the dream.”[2] This is perfectly true of course, but the German Finance Minister’s comments are delivered in the wrong context. It is not Syriza’s entry into government which has proven to be a reality check, but rather their understanding of what it means to belong to the European Union. On Friday, Greece saw the other, darker side of Europe, which, like the Roman god Janus, has two faces: a happy face promising access to a huge market of people, capital, goods, services and a wrathful face demanding the surrender of sovereignty and democracy to unaccountable institutions.

janus

These negotiations have been a salutary lesson for the rest of Europe and one can only hope that Europe’s populations take heed of it, regardless of what they eventually decide to do about it. A few of my takeaways from the past two weeks:

  • Europe lives by the Golden Rule: he who has the Gold makes the Rules. True at all times and everywhere, it nonetheless seems that each generation must learn this lesson anew the hard way. Europe’s insistence on being repaid is perfectly understandable and correct; Europe’s insistence on interfering in Greek domestic affairs and potentially exercising a de facto veto over Greek legislation is also understandable, but more difficult to swallow. Europe has been misled by Greek governments in the past; however, there is a fundamental conflict of interest when foreign governments and institutions are insisting upon the privatization of Greek public assets which may then be bought up at fire sale prices by private companies that happen to reside in those same foreign countries. Is it coincidence that Deutsche Telekom holds a 40% stake in Greece’s OTE Telekom, and would like the Greek government to sell its blocking 10% stake?[3] Surely cases like these are not a factor in Germany’s insistence that privatizations must go forward as part of any bailout agreement. Why else would Greece want to sell its stake in a profitable enterprise?

 

  • Democracy? Sovereignty? Only for the big countries. Respect for democracy, popular mandates and sovereign rights are reserved for the big member states: Germany, France, the United Kingdom. The European Union has no qualms about browbeating a country senseless if it votea the wrong way, such as Ireland’s initial rejection of the Lisbon Treaty in 2008[4]. Nor have the EU and ECB been shy about issuing take-it-or-take-it diktats to member states, such as forcing the Irish government to assume the entire burden of its banking sector’s liabilities despite these being private debts without any public guarantee[5]. Portugal and Greece have been on the receiving end of this treatment; so have Hungary and Croatia. Even relatively large states have been reminded of their place. It was undoubtedly a humiliating experience for both Italy and Spain to be treated like the aforementioned smaller members. The only concessions achieved by their governments were a few cosmetic changes in wording and form to make their treatment seem less like an imposition than it was.

 

  • There is an enormous amount of bad faith tied up in these negotiations. The Eurogroup and Greece have not been very sincere with each other, which might not be expected in negotiations between states other than for the fact that they all supposedly have “what’s best for the people of Europe” at heart. That and 10 bucks will get you a haircut. The Greeks have been deliberately vague to the point of absurdity in an attempt to avoid being pinned down on any reforms; the Eurogroup has been brutally direct beyond the point of getting the Greeks to commit to a repayment and reform program. A critical part of the exercise has been to humiliate Greece, to stigmatize as with a scarlet letter voting for an anti-establishment party (hence all the opprobrium about the “radical” nature of Syriza). Europe may yet find it convenient to continue beating on the Greek whipping boy, depending on the evolution of the political situation in the different member states. On the other hand, Syriza will surely take any opportunity to seize upon the least technicality to improve its situation and to avoid executing those parts of the agreement that are least aligned with its ideology. Rather than entering in any sort of partnership, one that Tsipras’ government could be expected to faithfully execute, Greece’s relationship with Europe looks increasingly like that of a battered wife who is too financially dependent on her husband to escape. Which is precisely why the Eurogroup has demanded an unprecedented degree of intrusive control over the Greek government. Varoufakis said that Greece was not a “debt colony”, but I’m afraid he was wrong.

 

  • Europe’s harshness may backfire. Once again, a critical piece of the negotiations has been to humiliate Syriza and force them to admit the reality that they cannot fulfill their campaign promises. One of the reasons this was important is because it reinforces the morality tale that the German government has sold to its electorate to justify the bailout of the Euro and the “profligate south”. Another reason is that other member states are also facing challenges from the left; most immediately Spain, with the Syriza-like Podemos barking at the heels of the governing Partido Popular. Demonstrating that the left’s promises are so much hot air when confronted with the realities of Europe seemed like a good way to demonstrate the futility of voting for them. “Better to vote the establishment”, the argument goes, “at least we get along with the Eurogroup and can extract real concessions from time to time”. That argument is only likely to sway voters who were already determined to vote for the establishment. For one thing, the sight of little Greece beaten, humiliated, insulted, forced eventually to capitulate to the implacable malevolence of her “partners in Europe” is just as likely to provoke indignation as despair. Syriza is more popular today than when they won the election, as Greeks across the political spectrum are angered by the treatment their government has received and the characterization of themselves and their country as miscreants.

    Furthermore, the Eurogroup has actually done Syriza a favor (of sorts). Now, any failure to turn the economy around, to implement the promised social programs, to alleviate the suffering of the Greek people can be blamed on “the Institutions”. If Tsipras and Co. were really such a radical bunch, and their economic policies just pipe dreams, then the best thing that Europe could have done would have been to given them ample rope to hang themselves on. By keeping the rope short, the EU has handed the Tsipras government a perpetual “get out of jail free” card.The establishment also fails to understand that austerity is not the only plank upon which the insurgent parties are building their platforms. In some countries, immigration plays a major role. In Spain, it is the grotesque corruption, cronyism and inhuman obduracy of the “political caste” – la casta política which is at least as important if not more so. Spaniards are simply tired of the Populares and Socialists treating the country like their own personal bank account while shitting on the people and laughing at their futility with the benefit of legal immunity. I seriously doubt that Podemos will be seriously undermined by events in Greece so long as the Populares continue to ooze sordid corruption scandals out of every pore.

spain

  • Greece nevertheless has an opportunity to implement the “right” reforms by the left. All my previous discourse notwithstanding, of course I agree that Greece has a need for massive political and social reforms; and there is no one better placed to implement them than an opposition party like Syriza. They should implement them because they are the right thing for the Greeks, not because they will win more concessions from Europe…but they might succeed at that as well. High up on that list of reforms is the complete overhaul of Greece’s fiscal collection system, which has traditionally been a sieve (like in many other European states) as a well as ending the de facto impunity of Greek political and business elites. Introducing a truly independent fiscal authority along with a tax amnesty for wealthy émigrés would be a good start. Visibly reducing corruption and ending many of the legal and extralegal perquisites of the Greek oligarchy, such as tax loopholes and extraordinary pensions for high-ranking officials and property tax exemptions for the Orthodox Church, will go a long way to shoring up support for Syriza among Greek voters, as well as improving the efficiency of the tax system.

    Another priority should be using the tranche five recapitalization funds to set up a “bad bank” to unclog the Greek financial sector. Any hope of economic recovery must include an increase in consumer and small business loans; these are unlikely so long as Greek banks have substantial NPL’s on their books. The creation of a bad bank need not be a white washing of the sins of former bank directors or their shareholders, as it was in Spain; it can be managed in cooperation with the banks to provide relief to some of their small business and mortgage debtors.

bankloans

Some privatizations will undoubtedly be necessary and called for; but that doesn’t imply that Greece should give away its assets nor that it should throw the employees of those state-owned companies to the proverbial wolves. There are many models of privatization that have been successful: Brazil has been far more successful than Argentina, for example. Increasing access to markets, improving competition and removing harmful obstacles which benefit the state-owned corporations to the detriment of the private sector are good things; privatizing everything for its own sake is not[6].

In his announcement to the public, Alexis Tsipras put the best face on things he could, which was not much. However one of his statements was particularly prescient: “We won a battle, not the war.” It is dubious whether Syriza has won even a battle, but the sentiment that the fight is not over is completely correct. Good luck negotiating with Golden Dawn if the Syriza government falls. Germany and the Eurogroup may find that it has won a Pyrrhic victory.


 

Sources and Notes

[1] Frederick Ducrozet, “Greece: four more months of hope and risks,” Credit Agricole Group Economic Research Analysis, 23 February 2015

[2] Agence France Presse, “Greece in Tough Climbdown on Radical Debt Promises,” Hurriyet Daily News, 21 February 2015

[3] Dimitris Kontogiannis, Kerin Hope and Joshua Chaffin, “Greece to sell stakes in state-owned groups,” Financial Times, 24 May 2011

[4] The Irish government was obliged to hold a second referendum when the EU “suggested” that they vote as many times as necessary until the “right” outcome was achieved.

[5] Stephen Donnelly, “’Perfect gentleman’ Trichet dictated terms to Ireland,” The Independent,09 November 2014

[6] Privatization is a tricky business to get right; too often, the newly privatized company delivers worse service to fewer people while at the same time shedding thousands of Jobs, which leaves the government worse off than before, since unemployment increases as do state expenditures on unemployment support. The disastrous example of Aerolineas Argentinas, after being sold to Iberia, is a case in point.

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