“This is playing out exactly as we want it to”, the Greek government was probably saying to itself this time two weeks ago. Likewise, “this is playing out exactly as we want it to” is probably what they were saying to themselves elsewhere in the Eurozone. Little did either side realise, apparently, that their strategy of playing out the clock was also their opponent’s strategy. To everyone involved apart from the participants, it looked like a game of chicken. But, since neither side realised it was playing a game of chicken, neither side blinked. Late last week, the two sides crashed into one another. It’s quite ironic, given how often commentators cited game theory in their explanations of what was going on.
Faults on both sides
If Greece is to be faulted for announcing a referendum so late in the day, then the Eurozone is to be equally faulted for the short-sighted and ham-fisted manner in which it has subsequently responded. What should have happened in the wake of the referendum announcement was a further negotiation in which the remaining gap ($60m, allegedly) between the sides was split, and in which a commitment to re-jig Greece’s debts was secured in return for three months or so of reform work by the Greek government. This would have secured a Yes recommendation from the Greek government, and a Yes vote from the Greek people.
So let’s be clear: this is a negotiation that all sides bungled, and for which all sides are culpable. And that none of what should have happened since the referendum announcement did happen only goes to show that it’s the hardliners on both sides who have been calling the shots of late. In fact, listen to the hardliners, and the chances of a deal are fading, with Greece talking in increasingly strident terms about the need for debt relief, and its Eurozone partners about stricter conditionality.
Lessons from the Eurogroup
As I listened to Eurogroup President Jeroen Dijsselbloem one evening last week, I realised that he wasn’t really a ‘President’ in the ‘US President’ sense of the word, but merely in the ‘presiding’ sense of the word. Clearly, it wasn’t just Greece who kept him waiting for new position papers, but also ‘the institutions’. Like any bad rock band, of course, ‘the Institutions’ was the result of a name change: in their case, from the previous ‘troika’. Come to think of it, that name change is probably about the most substantive issue on which Greece and its creditors have been reconciled in the five months they’ve been talking. It isn’t saying much, obviously.
Here’s a thought, though: now that Yanis Varoufakis has said that he will resign his office if Sunday’s vote is a Yes vote (ie agree with the reform package previously presented by the Institutions), does that mean that Jeroen Dijsselbloem should resign if the Greeks vote No. Come to think of it, Mr. Dijsselbloem is facing re-election as Eurogroup President anyway: perhaps he will just stand aside from Spain’s Luis de Guindos.
In reality, the Institutions = the IMF
But who were these ‘Institutions’ (if you’re British, they might even remind you of Hale & Pace’s ‘the Management’)? On the face of it, they are the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF). But peel away a layer or two, and all that’s really left is the IMF. Why? Well, the ECB has to be particularly careful in carrying out its assigned tasks that it doesn’t exceed its mandate by encroaching on matters of ‘economic policy’ as opposed to ‘monetary policy’, where European Law regards it as ‘incompetent’ (that’s the relevant legal term, by the way: not my personal viewpoint!). The issue has already come up with respect to the ECB’s early efforts at Quantitative Easing, called OMT, which though they were cleared by the European Court of Justice earlier this year, did also come with a shot from the court across the ECB’s bows in terms of minding its ‘economic policy’ Ps & Qs, in future. For its part, of course, the Commission is really just pro-Europe: look no further than the preponderance of statements from Messrs. Juncker & Moscovici for proof of that.
So by a process of elimination, it’s clear that ‘the Institutions’ is really just code for the IMF. And that gels with about the only definitive thing that did come out of the recent ‘informal Euro Summit’ on Monday last week, when Eurogroup President Jeroen Dijsselbloem said the following in his press conference:
On the prior actions, I think it’s very important that in the end prior actions tell us what exactly needs to be done very concretely very precisely. And it also gives the list for the Greek government of all the measures that they have to implement and take through parliament. So you are jumping ahead that the fact we talk about prior actions mean there is already an agreement: that is not the case. You’re going a little too fast.
It wasn’t the European Commission stopping a deal with Greece. Nor could it have been the European Central Bank. It had to have been the IMF.
Germany & the IMF
Actually, I’ve been wondering for a while now if one casualty of the ongoing Greek drama might not be the IMF itself. After all, it wasn’t just being tough on Greece with respect to the Prior Actions it was demanding, but also on the creditors (at times) in terms of the re-scheduling of the Greek debts. Who, I wondered, was actually on its side, and couldn’t Europe potentially move forward without its involvement?
It was only a throwaway comment, but it spoke volumes to me. According to the Deputy-Chairman of Germany’s ruling CDU/CSU party, the IMF’s involvement in any new deal with Greece was a ‘red-line’ issue for Germany. It showed a remarkable lack of faith in Germany’s Euro zone partners, I thought. But, then again, these were the same partners that out-voted Germany on Quantitative Easing earlier this year: just three days before Syriza’s election victory, actually.
Yesterday, the IMF released some new evidence on the sustainability of Greece’s debts. The long and short of it, according to most peoples’ interpretations of what the IMF wrote, is that its conviction that Greece needs debt relief has strengthened. As its biggest creditor, you’d think that would be unpopular in German government circles. But Germany’s response has been muted, at least so far. In fact, have a careful read of what Finance Minister Wolfgang Schäuble said to the Bundestag earlier this week and you might realise that he was preparing them for an eventual rescheduling of the Greek debts, saying it was “not unusual”, and that the impact on Germany’s budget would be minor.
Far from causing consternation in Berlin, publication of the IMF’s Debt Sustainability Analysis may even have been prompted by it.
By the way, is it just me wondering about the timing of the recent WikiLeaks story about Angela Merkel and Greece, and the German Chancellor’s 2011 musings that Greece’s debts might not be so sustainable after all. Maybe it was a coincidence. But whether it was or not, we do now know that there is at least some sympathy for a Greek rescheduling not only in Washington, but also in Berlin.
Is the referendum academic now?
For all the chatter and confusion of the past week, the Greek government has merely asked its people to opine on an agreement with its creditors that Mr. Tsipras regards as beyond his electoral mandate. If a Yes vote is indeed a step towards Grexit, it’s one step of fifty. And not the first step. Meanwhile, does anyone in Greece seriously believe that its negotiating hand would be strengthened by voting Yes? And does anyone elsewhere in Europe seriously believe that it can resist further negotiation in the event of a No vote? In the end, the answer is No, in both cases.
In fact, about the most concrete thing we know about the Greek referendum result at present is that a Yes vote will result in the resignation of Yanis Varoufakis.
For what it’s worth, I think the Greeks will vote No on Sunday, and that the baton of Eurogroup President will shortly thereafter be handed to Spain’s Finance Minister Luis de Guindos. Greece’s ELA needs will be satisfied, and the banks will reopen. Another Euro Summit will follow, where an Extend (the debts) & Execute (the Prior Actions) deal will be done, leaving all sides equally agnostic.
By September, even Mr. Varoufakis will be working on his memoirs.
I’ll certainly buy them.