The failure of the Greek government to pay one of the June instalments to the IMF and the request to bundle payments for ‘later in the month’ appeared to be a milestone in the process of the five month long negotiations between Greece and its lenders.
Up to that point most of the negotiating took the by now familiar form of media leaks and press statements, deadlines and offers backed by threats designed to strike fear into the minds of the negotiators and scare Greek bank account holders with an impending bank collapse in order to force the Greek government to accept unconditionally the terms of the lenders.
After the missed payment however, the stakes got higher and the negotiating stance of the lenders hardened further. Athens was presented with another take-it-or-leave-it ‘final’ offer backed by the threat of complete financial strangulation and forced exit from the euro, something that the lenders believe Greeks want to avoid ‘at any cost’. An ultimatum which the Tsipras government, to their credit, have so far resisted.
IMF goes home – but only for a while
The Greek crisis took a new and unexpected turn last week when the IMF negotiating team packed up and left the negotiations, announcing that they had lost patience with the Greek government who are unwilling to discuss any further ‘reforms’ to pensions and labour relations.
This is strictly speaking not true, as the Greek government has repeatedly submitted proposals for a sustainable and fair pension system and labour legislation reforms that will bring Greece in line with other European countries. These proposals, like every proposal the Greek government has made so far, have been rejected as the lenders want something different, something that will preferably humiliate the Tsipras anti austerity government.
Furthermore the IMF seemed upset that the Tsipras government is trying to negotiate a political solution that will get the negotiations out of the present impasse. It was later revealed that IMF also wanted to signal its exasperation at European government’s refusal to discuss debt relief for Greece, without which IMF officials say the country’s finances simply won’t be sustainable. And the IMF, under its own rules, cannot lend to a country if the debt is not sustainable.
In 2012 Mrs Lagarde took a political decision to declare the Greek debt sustainable in order for the IMF to stay part of the bailout. The European institutions had at the time made a commitment to discuss debt relief when Greece achieved a primary surplus, but this the lenders still refuse to do, even though they politically supported the previous government’s claim that a primary surplus was achieved at the end of 2014.
The IMF decision to withdraw from the negotiations came just when Greece and the lenders were on the cusp of a breakthrough, when both Merkel and Hollande seemed to be softening their unbending attitude towards Greece.
For a few hours, there was hope in Greece, that after five years of catastrophic failure, the European leaders begun to see some economic sense and the only obstacle left to be overcome would be that of the formidable Dr Schaeuble.
Greece made compromises
During the five long months of negotiations the Syriza government has gradually retracted from its original red lines. It accepted tight fiscal targets, and to achieve them it is offering to raise VAT on several goods, while also increasing the tax burden on the better off, thus achieving some redistribution. It has also toned down several of its policies on privatisation, pensions and primary surplus. In return it is asking the troika for an injection of liquidity, as well as for a serious commitment to reduce Greek debt and to promote long-term investment. There is hardly anything particularly radical in these demands; the IMF has argued along the same lines since 2012.
The response of the lenders to all the Greek compromises has been ruthless. Leaked documents and interviews and mafia style negotiations where and offer not accepted is followed by an even worse one, did not succeeded in forcing the Greek government to a complete and humiliating abandonment of its remaining ‘red lines’ on pension and VAT increases. What is more Greece managed to somehow to scrape enough cash together to meet its debt obligations.
As the cash runs out however, the options for Greece are limited. Rumours of funding from another source have been circulating for a few weeks now, but rumours of this kind tend to be inaccurate. Russia is playing its own political game and will withdraw any offer of help as soon as a more politically profitable deal is offered to her. At the same time, BRICS, the new international institution to rival IMF that Greece was invited to join, is not going to be in the business of lending until the end of the year. And that might prove to be too late to avert a Greek default.
Syriza gets sympathy but nothing more
The main achievement of the Tsipras government so far, was to gain a lot of academic support from many eminent economists who all agree that a change of policy away from austerity and a write down of Greek debt will be necessary. During the five month-long negotiations there’s been no shortage of learned suggestions on how a long-term lasting solution can be found.
And a small but increasing number of analysts reporting on international financial media have started to question the wisdom of continuing to apply the same failed austerity prescription to Greece. Even in the Trinity of FT, Bloomberg and Reuters, a growing number of articles counter the austerity position supported by the volume of leaks, interviews and press statements launched from Berlin, Frankfurt, Brussels and Washington. Admittedly, as arguments they are barely one step up in sophistication from Bild’s cry of ‘a debt is a debt’, but they all put all the blame squarely on the alleged intransigence of Athens.
The wrong sort of economics?
In Europe the belief that an internal devaluation has to replace currency devaluation remains very strong, despite the mass of evidence which points to enormously wrong forecasts and the disastrous effects it had for the Greek economy.
Gaining cost competitiveness within the Eurozone seems to mean cutting labour costs and squeezing incomes as hard as if the country had its own currency, but without the debt write down which has been common in countries where the IMF was involved.
“By blaming the European crisis on wages and labour costs, orthodox economists are protecting financial markets by letting them off the hook and absolving them from any responsibility. Cutting wages shifts the huge losses of the banking sector onto the workers. The myth is based on a unilateral cause-effect-relationship whereas, in reality, many more and much more important factors than wages play the decisive role here” explained one recent analysis of the Greek crisis, making the case for a policy change.
Who is to blame?
Before the latest escalation caused by the IMF departure, tentative reports in the German and international press would have the German Chancellor making some concessions to ‘keep Greece in the euro.’
The same reports contained denials that there was any kind of rift between Merkel and Schaeuble. One Der Spiegel report even has Schaeuble himself joking with his staff that ‘she’ (Merkel) will probably dispense with his services.
If we are to believe that Mrs Merkel actually wants Greece to stay in the euro, then it is then easy to believe that there is a rift developing between her and her powerful finance minister.
Wolfgang Schaeuble has made his views very clear all along; he wants to humiliate the left in Greece and send a message to the rest of the European anti austerity rebels knocking at the door of government in Spain and other European countries. He would rather had to deal with the previous government of Mr Samaras. He wants Greece out of the euro and has taken every possible opportunity to make public his not so flattering opinion of Greece.
Schaeuble has been the leading advocate of austerity in Europe during the eurozone crisis. His view that Europe’s problem are ‘certain national governments that cannot resist the temptation to make the EU and Europe the scapegoat for their own national problems’ is well known.
His unconventional way of making his point has upset other European partners that needed a bailout during the crisis. Schaeuble was accused of, for example, placing ”negative news in the media’ about Portugal prior to the Portuguese bailout, and vetoing the direct recapitalisation of the Bank of Ireland and the AIB from the euro zone’s European Stability Mechanism.
Merkel on the other hand, unlike Mr Schaeuble who at 73 is approaching his political retirement, is mindful of a long career ahead of her and does not want to be credited with the consequences of a eurozone break up. And while Syriza is not her preferred government for Greece, she would accept a face-saving compromise that will make her look like the saviour of the euro.
As any reasonable forward thinking shrewd politician, she would rather reach an agreement with Greece that is a billion or two off target, than risk the break up of the eurozone and huge losses for the ECB and Germany’s taxpayers.
At the same time, the German government’s friend and ally in the Commission, Jean Claude Juncker’ who until recently played ‘good guy’ to Schaeuble’s intransigence, has also an interest in keeping the eurozone intact. As one of the architects of the Maastricht treaty, he too has a long political career ahead of him and he would not like to be left picking up the pieces after a eurozone country is forced to default.
Mario Draghi, at the head of ECB, also had his own differences with Schaeuble over what Europe needs to do to get out of the crisis. And he did get the better of the German minister on the issue of QE which Schaeuble opposed. The trade-off however was to exclude Greece from the programme.
From their point of view however , the German government saw the Greek finance minister as the problem, with his ‘intransigent, arrogant and rude’ attitude as standing in the way of a ‘positive outcome’ in the negotiations.
To defuse the situation the Greek government obliged by withdrawing Mr Varoufakis from the Greek negotiating team.
So maybe now is the time for Mrs Merkel, who wants to bolster her reputation as the ‘iron lady of Europe’, to reciprocate by removing Schaeuble from the negotiations to help things along. And he could even retire, with his honour intact on personal or health reasons to enjoy his retirement and write his memoirs.
The last stretch of the road to an agreement
As we approaching the end of the programme extension period on 30 June, all sides have hardened their position, threatening default and a mutually assured destruction. The IMF refuses to accept a lower surplus for Greece, but are ok with debt relief. Europe refuses to discuss debt relief but are willing to accept lower fiscal targets. Athens refuses to prolong the misery of austerity without the hope of some growth in the foreseeable future. While Herr Schcaeuble does not accept anything proposed from the Greek side at all, short of Mr Tsipras’s political head on a platter.
As the lenders seem unwilling to offer any sort of compromise at eurogroup level on the grounds that it may upset their figures and their voters, the only alternative that could resolve the stalemate is for a decision to be taken at a head of state level, a decision that would declare the Greek figures and proposals acceptable thus overriding personality differences in the eurogroup. In other words consider the wider picture, to avert the risk of another world recession for the sake of a couple of billion euro of flexibility on the Greek budget. Europe is no stranger to political solutions for missed budget targets in the eurozone. ant it was after all a political decision that allowed Greece in the EU in the first place, and another one that made it a member of the Eurozone.
Unfortunately the players in today’s European establishment are not renown for their vision or their ability to act decisively. Mrs Merkel and her usually vocal minister remain unusually quiet as the crisis reaches a crescendo and as the rest of the world is hoping that the effects of a Greek default can be contained, while they urge Europe and Greece to come to an agreement.
Greece’s voters were right to demand a change in course, and their government is right to refuse to agree to continue on a deeply flawed program.
But I fear that unless Mr Tsipras is prepared to go all the way to a default or has something else up his sleeve, he may well be forced to accept a quick last-minute European style fudged compromise that will only prolong the suffering of a whole country.
Already, the rumour-and-denial mill has the Athens government given a six to nine month extension of the current programme in exchange for unspecified public finance targets that are likely to be unpleasant for many low-income tax payers of this country.
But ten days remain to the end of the programme extension, and ten days is a long time in politics. Greece’s lenders might come to agree that more austerity will not help Greece and that debt relief needs to be discussed. A decision that may require Mr Schaeuble’s timely retirement from active politics and a lot of arm twisting by Merkel in her own party. Because no one can benefit from the Greek default the lenders work so hard to engineer – apart that is from Spain’s Mariano Rajoy, whose party is rocked by corruption scandals, and our own Mr Samaras who is anxiously waiting in the wings for the opportunity to say ‘I’ve told you so’ and be reinstated as a care taker prime minister who will take the country to a general election set as far away in the future as possible.
Whatever happens however, Greece and its people will survive. The euro on the other hand, might not.