Greece – The Rocky Road Ahead

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flag_gk_euIt’s been a week now since the guns fell silent between Greece and its creditors and a 4 month armistice was agreed – so what are we to make of the outcome? Yes it’s true that Tsipiris, Varoufakis and Co. were not able to deliver on one of their two main election pillars – debt forgiveness – but does that necessarily make it the complete capitulation that some have said? Would an honourable defeat be a more accurate appraisal? Or could it be that the agreement was simply a crucial exercise in buying time and space?

These are certainly valid questions but unfortunately valid questions don’t always elicit easy answers. For the position we take on this temporary agreement is in many ways determined by how we viewed the bargaining power of Syriza relative to the European establishment from the outset. In other words; hows we perceived that power differential helps determine what range of outcomes we would have considered possible.

So for example if you thought that in the negotiations Syriza held the trump card and all that was required was calling the Eurogroup’s bluff and threatening the nuclear option (Grexit) then you would see the agreement as a relative failure largely attributable to a leadership that lost its nerve. Thus all that was required was different players made of tougher stuff.

If on the other hand you believed that Syriza was negotiating from a much weaker position given that they were seemingly less prepared (and more scared) of Grexit than their interlocutors, then you could rationalise the agreement as best that could have been bargained for whilst providing the necessary breathing room to prepare a potential Grexit strategy.

(Mis)Judging Syriza

Much has been written about the positives and negatives of the agreement Syriza signed up. It is not my intention to rehash the debate here. Rather I want to draw attention to two factors which were not given enough consideration during the commentariat’s rush to judgement. These are (1) the objective conditions under which the agreement was made because context is king, and (2) the incredibly short life span of this arrangement.

Syriza’s election victory celebration hadn’t even begun before money began flying out of the Greek banks. The usual tactic of undermining left governments – capital flight – saw Greek banks lose somewhere in the region of €29 billion. It was an open secret that the banks were just days away from closing down.  The potential chaos this would have entailed severely undermined Syriza’s negotiating position, which makes the concessions they did win all the more remarkable.

Furthermore Syriza – even if they were prepared to – did not have a mandate to pull out of the Euro. Quite the opposite in fact; as keeping Syriza in the Euro was one of the pillars of their election platform. Some critics have said that whilst they did not have a mandate to pull out of the Euro nor did not have a mandate to continue with austerity, which the agreement in some ways does. It thus became a lesser of two evils scenario as the leadership faced a trade-off between remaining in the Euro with less austerity (for at least four months anyway) or defaulting immediately and sending the kind of shock to the Greek economy that would surely have resulted in even greater immiseration for the masses (at least in the short term).

So what does the Greek populace think? After all this is the group we should be paying the closest attention to. Well its clearly supportive of their government’s actions. A recent poll showed an approval rating for the government of almost 80%. If an election was to be held tomorrow Syriza would actually increase their representation by as much as 11 percentage points. So clearly those who are directly affected by their government’s decision don’t see it as the disaster many have made.

Back to the Future

Many critics seem to have lost sight of the fact that in June we’ll be right back where we started. With two bond repayments due in July and August totalling 6.7 billion you can bet that as the June deadline approaches Syriza will again come under extreme pressure both from above-  as the EU elite try to get Syriza to sign up to a whole new programme of austerity – and from below as money will likely start to fly out of the Greek banks.

So when Syriza and its creditors sit down around the table they will need to show that this time they are determined to end the condition of debt slavery within the Eurozone or without. They will only be able to win the kind of debt restructuring that Varoufakis has spoken of if they have a viable Grexit strategy which the European establishment believes they are prepared to use. Even mainstream figures like Paul Krugman have posed the pertinent question ‘What freedom of movement does a Greek government have if it is not prepared to leave the Eurozone?

There are huge risks involved in this, something that the Syriza leadership will be well aware of. But if they cannot convince or coerce their creditors into some kind of debt forgiveness then they may figure that the risk of Grexit is worth the reward if the alternative is decades of debt and deflation.

So whilst Syriza may never have had a mandate for Grexit, their attention must now turn towards winning one.

Grexit stage Left?

It takes months to create a currency – Syriza have just four. It’s clear that in the first round of negotiations the government was naturally unprepared for capital controls, printing money and rationing goods. They now need to make preparations for such a potentiality.

The creation of some kind of neo-drachma would by no means be an easy task. They would be entering uncharted waters in becoming the first nation in history to try to bring into existence a currency with the intention of devaluing it. But there are certain steps which could be taken that might strengthen their hand come negotiation time and mitigate some of the risks involved in going it alone. For example the government, through a public bank, could steer peoples’ savings into the UK and Scandinavia thereby converting their euros for sterling and krona to be held in those banks.

Thus when Greece made its exit these savings could not be seized. What’s more as these savings were brought back into the country and converted to a now seriously devalued drachma this would lead act as a mini stimulus, lead to greater levels of consumption and consequently increase the value of the drachma.

Perception will be everything when the next set of negotiations begins in June. Syriza do not need to convince their creditors of their intention of leaving the Euro – just their capability. In order to do this preparation must now begin in earnest. Muhammad Ali once described how the fight is won or lost long before the combatants enter the ring – its decided behind the lines, in the gym, and out there on the road. The Syriza leadership would do well to heed those words.

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Cillian Doyle

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One Response

  1. Niall

    March 7, 2015 10:27 pm

    The Varoufakis letter, detailing the supposed reforms shows that the current Greek Government lacks any credibility in facing up to the country’s internal problems, let alone dealing with the external issues.

    Proposed Reforms 1 & 2: Dealing with the creation of an independent Fiscal Council – rather than allow it to do its job and provide completely separate oversight of the Government’s Fiscal Policy, it is proposed to merge it with another Office and “connect” it with a third Government controlled agency. By connecting it to other bodies, it loses its main focus, to act as an independent watchdog,

    He will also give “serious consideration” to multi-annual budgeting, which is of course a basic for the planning for the provision of services in the long-term. Proposals to harmonise other parts of the budgeting process are clearly useless without putting in an overall plan multi-year plan.

    Reform No 3: This has drawn the loudest level of guffaws – his proposal to engage tourist and others as undercover temporary, untrained tax inspectors. I has to check the date to see that the letter wasn’t dated 1st. April. Taking the proposal at face value, who is going to investigate all these Good Citizen Reports as Irish tax inspectors used to call information from the public?

    Reform 4: The depth of the Greek problem is detailed here. There is a total €76,010M in declared taxes unpaid. This excludes of course the additional liabilities from undeclared income, but includes some €6,520M unpaid by State agencies. The intention is to have a form of “amnesty”, but they expect to get just €8,900M or 12% of the total. Assuming for a second that the State agencies pay up, they expect to get €2,380M or just 3.4% of the personal and commercial arrears.

    In or out of the Eurozone, or in reality in or out of the European Union, this is not how you run a State. Non payment of taxes has accelerated under Syriza and reading this submission you can clearly understand why.

    The Fifth proposal is to sell online gambling licences I am not sure how you can prevent a business opening up in Gibraltar or Ireland, but who knows?

    The Sixth proposal to reduce petty bureaucracy is straightforward.

    The final proposal is to spend money, a comparatively small amount to alleviate poverty.

    It is difficult to see any common ground between the current Greek Government and anyone else at either national Government or Commission level. It appears your suggestion that they are playing for time to prepare for their alternative currency is correct. However, whether Syrzia is still in power afterwards is a different question. I also cannot see why anyone would return money to such a chaotic State, leaving . It also appears that the Germans are prepared to face down the Greeks.

    Considering the level of Greek purchases in London already, suggested to make up 1.8% of all purchasers of London property, (Knight Frank 2014), I think it is fair to say very little will come back.

    Power within the European Union has departed from the Mediterranean region and is now securely held by those members bordering the Baltic, together of course with Netherlands. There is no sign that any of these States wish to make further concessions to Greece. All support the line enunciated by Dr. Schauble and show no sign of moving from it. This will end in tears.