Greece — still playing chicken games?
The Eurogroup is having a mini-summit on Greece today, which has been described piquantly by Jeroen Dijsselbloem as being intended “to take stock of the progress being made, which seems to be small”. I think it might be a little bit more purposeful than that — although nobody is going to say this publicly for obvious reasons, this looks like a summit that has been called to read the riot act to the Greek side, and to inform them that they are in the process of choosing a path which could definitely lead to exit.
Whether or not Finance Minister Yaroufakis literally extended a middle finger toward Germany, the Greek government has been metaphorically doing so ever since the curious document which they sent to the Eurogroup as their considered response to the question of what concrete reforms they planned on making. In particular, the passage of the bill on “humanitarian measures” looks like an extraordinarily tone deaf thing to have done.
The actual bill itself was not bad; the food stamp reforms and electricity provisions are genuinely necessary to reduce hardship among the population, and however one costs it, it doesn’t look like a fiscal cost of more than a few hundred million — small beer in the context of the overall negotiations. But passing it without any consultation and presenting it to the Eurogroup partners as a fait accompli is the most politically toxic thing that the Syriza administration could have done.
If there is one thing which Germany (and the other creditor countries) really can’t tolerate, it is the idea that the Euro might provide a mechanism whereby other countries can ignore their fiscal constraints, and effectively run up Germany’s tab. They can’t tolerate this for the same reason that you don’t go around signing blank cheques, or enabling in-app purchases on your children’s iPhone — nobody wants an unlimited liability to cover the spending of another party over whom they have no effective control.
This has been one of the key issues in the Eurogroup negotiations, and it was explicitly set out in the February agreement — that Greece would not pass measures which affected the overall fiscal balance without the approval of the institutions. Not only do they appear to have gone back on this agreement within a month of signing it, but Prime Minister Tsipras has made sure to make it clear that it wasn’t an accident, by calling the Eurogroup’s request for a pause “intimidation” and saying that Greece wouldn’t submit to it. Perhaps this was for domestic political consumption, but Germany has domestic politics too.
I’ve said from the start that the Greek debt is a political issue, not an economic one. Similarly, the passage of the humanitarian bill is a political challenge to the basis of the Euro, not really an econmic issue. And that’s why I think Greece might be miscalculating quite badly.
While Greece is at least slightly co-operative, it is always going to be less trouble to keep it in the Euro than let it exit. Greece is a small economy, and the sums of money involved, while very large compared to nearly every IMF program ever, are manageable for the Eurogroup as a whole. But it’s pretty fundamental to the Euro that it’s not (at this point in history) a transfer union. Even if, and when, the Euro develops features of a transfer union, it is never going to be the kind of “Money for nothing and your chicks for free” arrangement whereby debtor states can set their budget how they like with no involvement from net creditors — the USA certainly doesn’t operate in that way, for example. If Greece is going to make this kind of attack on the fundamental political basis of EMU, then the amount of trouble that its continued membership of the Euro raises is very much larger than just the money it costs.
I suspect that what’s going on here is that the Greek side are still working on the basis of an estimate of the costs of Greek exit to the rest of the Euro area which is much too high. Although Varoufakis was, in academic life, a critic of game theory, the strategy that they’re playing looks very much like a classic chicken-game. They’re presenting faits accomplis and ultimatums, and relying on the unwillingness of the Eurogroup to take the risks associated with doing something.
In that context, the natural next move on the part of the Eurogroup is to let them see a little bit of the edge of precipice. That means that the requests to extend the T-Bill issuance are likely to fall on stony ground. Any idea of a relaxation of the ECB’s liquidity provision for the domestic banking system also has to be likely to be postponed for the time being. And one would guess that deposit flight from the banking system is unlikely to slow down either. Time is not on the Greek side at present, as delay makes things worse for them at a quicker rate than it does for the Eurogroup.
It also seems to me that this is a situation in which the Syriza side might be underestimating the downside risks for themselves, while overestimating them for the other side. Although political support for the government is high at the moment, we would have to see whether it stayed high if it became necessary to impose capital controls. A week is a long time in politics, but it’s a very long time indeed if you’re trying to get your money out of the bank. Any situation in which Greece lost access to euro-denominated funding would also most likely involve fuel rationing — as an anti-austerity strategy, Euro exit involves quite a lot of austerity.
So, we’re heading for another bumpy period, after the false dawn of the original agreement. With a bit of luck, Syriza will realise that they’re stretching the goodwill of the Eurozone too far, and with a bit more luck, this wasn’t their plan in the first place. But other outcomes are possible, and none of them look great.
