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June 19, 2015

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Looking at the situation from the outside, it seems From the perspective of the rest of the Eurozone that there is absolutely no confidence in the ability of Greece to be a rational actor or to be a trustworthy partner in any situation.

In that situation, is there any reason not to insist on a hard line as opposed to a softer, if neither is seen as likely to result in anything? At least the hard line loses you less credibility domestically.

The framing is wrong.

The Eurozone is asking Greece to do something crazy: run budget surpluses in a depressed economy. And that is after the Eurozone provided Greece with absolutely zero support.

But what, you say? Well, consider what would have happened without the European bailout. Greece would have defaulted in 2010. The IMF still would have provided its €42 billion in assistance, which would have covered Greece's primary deficits. Ironically enough, Greece's primary deficits (including its domestic bank bailouts) over 2010-13 came to about ... €40 billion.

In short, screw the Europeans! They did nothing for Greece. All they did was bail out French and German banks.

But for this they want a cookie and German voters have somehow convinced themselves that they're shoveling hard-earned tax dollars at those dusky southern reprobates.

Right now, Greece needs cash to pay back the IMF, which actually did help ... but in a world where the Europeans were being helpful, the IMF might be willing to reschedule, as it did for Argentina.

So of course Greece won't seem trustworthy from the European perspective! No sane government would.

The framing is also wrong from the perspective in the post. A hard line on Greece means that Greece defaults and you get nothing. You might even lose the Eurosystem balances owed by the Greek central bank. (That latter is economically meaningless, but once again the Germans have managed to work themselves up into a frenzy over it.) The trustworthiness of the other partner shouldn't come into play, unless you think it will default no matter what. But that is not the case here: the Greek government badly wants to avoid default.

Make sense now, sir?

And Doug Muir, seriously, I am calling on you to explain to us WTF is going in Germany. Because it makes zero sense over on this side of the Atlantic. Why is Schauble being crazy and why doesn't anyone explain to German voters what is actually happening?

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NOTES:

Primary deficit = money borrowed to cover spending rather than debt or interest payments.

Greek financial data from http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0701/PressReleases/A0701_SEL03_DT_AN_00_2014_02_P_EN.pdf

"But that is not the case here: the Greek government badly wants to avoid default."

Does it necessarily? Or is it believed to actually want to avoid default?

Between Varoufakis' being caught in unnecessary lies, parliamentarians trying to classify public debt as odious or making ridiculous linkages to Second World War reparations, any number of Greek politicians and Syriza functionaries speculating about the benefits of Grexit, and an inherited and popular lack of trust in Greece felt in the rest of the Eurozone, it seems entirely plausible that the protestations made aren't believed even if they are entirely sincere. At best, Syriza comes off as unserious, at worse it comes off as classless. Who wants to go on the record as demonstrating belief in it and its ability to govern?

Syriza has singularly failed to make allies in the rest of Europe. It hasn't been able to mobilize other southern European countries with their own debt issues; it hasn't connected with post-Communist Eurozone countries with their own issues; it hasn't resonated with France; it has left Greece isolated. Maybe this was inevitable, given political imperatives elsewhere in Europe, I don't know.

I'll defend the Greek strategy, although it's not what I would have done.

The Greeks are up against a wall of economic insanity coming from a group of countries that deliberately screwed them over in the name of helping them out. I.e., they bailed out their own banks and in return demanded that Greece engage in an utterly nonsensical macroeconomic policy. When Greece complied and saw its economy shrink, they refused to compromise. When a new government was elected with a mandate to stop being stupid, Europe still refused to compromise.

So Varoufakis thought three things. (1) I may as well tell the truth instead of pretending that the European demands make any sense. (2) I will make it clear that we would indeed prefer defaulting to conceding to stupid demands that will inflict worse pain on our constituents. (3) I will point out that we have a democratic mandate that the Europeans will force us to override at their own risk.

When that didn't work, the Greeks tried shock tactics. The Germans in particular seemed oblivious to the fact that Greece has already reformed an incredible amount and cannot afford to run primary surpluses until recovery is underway. So they yelled at the Germans. Why not? Nothing else was working.

Finally, they caved -- the last set of proposals was a giant walk-back. But the Europeans still won't accept victory.

So it doesn't seem to have worked, although it ain't over till it's over.

Would being firm but polite have worked? Somehow, I doubt it. I mean, even you Randy bought into the European framing! Add to that that there are a lot of Southern European governments that would love to see the Greeks fail, in order to scare their own voters away from alternative parties, and I really don't see why an alternate strategy would have worked.

Randy, we go back a long way. Check out the two above links in my response. Then tell me if the European stance seems remotely reasonable to you. If so, please tell me why! If I'm wrong, I'm wrong.

And I still want Doug to explain to me what's going on over in German-voter-land.

Randy, I'd also suggest you read this. Money quotes:

“The lenders have denied asking for specific pension cuts. But the Greek side said among their suggestions was slashing a top-up payment that supports some of the poorest pensioners. For Razi, that would mean losing 180 euros ($203) out of her 650-euro monthly pension.”

“The average Greek pension is 833 euros a month. That's down from 1,350 euros in 2009, according INE-GSEE, the institute of the country's largest labor union. Moreover, 45 percent of pensioners receive monthly payments below the poverty line of 665 euros, the government says. With more than a quarter of Greek workers jobless, many rely on parents and grandparents for financial support.”

“Pensions have been cut by an average of 27 percent between 2010-2014 and by 50 percent for the highest earners. The average retirement age was raised by two years in 2013 and Greece has said it is willing to curb early retirement benefits further.”

“On average Greek men now retire at 63 and women at 59, according to government data. In Germany, the average retirement age for those receiving an old age pension in 2014 was 64 years. But that figure goes down to 61.3 years once those taking early retirement on health grounds is taken into account, according to 2013 data.”

Dude, why would any government in Athens want to compromise with people who think that a 27% cut in pensions isn't enough? Well, only because they really don't want to be forced out of the euro, which means avoiding default if at all possible.

1) German banks have been steadily reducing their exposure to Greek debt. So, Germany's bargaining position has gotten noticeably stronger. (Whether it's using that strength wisely is a separate question, sure.)

2) Merkel -- like every other center-right politician in Europe -- is looking nervously over her shoulder. Germany can't have an overtly xenophobic ultra-right nationalist party in the style of UKIP or Le Pen. But it can most certainly have a Euroskeptic populist reaction. The current locus for that is Alternative fur Deutschland, which just barely missed the 5% cutoff for seats in Parliament last time, and will probably get in next time. But even if AfD is neutralized somehow (and you can bet Merkel is thinking hard about just how to do that), the sentiments will remain, and will be looking for an outlet.

3) There are some deep psychological issues here, sure. From a German POV, they're being lectured by a country that lied its way into the eurozone, refused to reform while it was rolling in cheap money courtesy of the common currency, that still can’t or won’t collect taxes properly, that has been bailed out repeatedly and that still doesn’t accept the rules.

On one hand, yes, there's an ugly racist / nationalist aspect to this, with the Greeks playing the role of lazy - dishonest - dissolute Mediterranean beggars harassing the hardworking honest German. And there's definitely an unwillingness on the part of the Germans to acknowledge Greek suffering, or the plain fact that you can't get blood from a stone.

On the other hand, Greece's constant invoking of the Nazi past, the war reparations claims, the threats to confiscate German property in Greece, etc., are not helping. Even a progressive liberal Green German of my acquaintance gets her hackles up over that stuff.

4) Note that Germany's relative political and economic stability, and its brilliant success in remaining an export powerhouse, have been bought at a price: German wages have been almost stagnant for a long time now. And inequality, while still very low by American standards, has increased. So an important point here is that /most Germans do not feel rich or privileged/. Quite the opposite; they feel nervous and pessimistic about the future. So there's a natural tendency towards a hunker down, fuck-you-Jack mentality.

Additional wrinkle: Germany is the world's oldest large country, with a median age of 46. The median voter is over 50, and the median CSU/CDU voter is probably closer to 60. So anything that could upset Germany's precious social safety net -- above all, medical care and pensions -- instantly has everyone on elevated-blood-pressure alert.

It's sort of like a nation of Fox watchers if there was no Fox. They aren't being riled up by demagogues, and they're still mostly committed to Europe. But they're disproportionately old, nervous, suspicious, and little-c conservative.


Doug M.

Thank you, Doug! This clears a lot up.

It would seem that Merkel could form a story that would appeal to frightened, older German voters who don't trust the Greeks. (1) Greece has reformed, which has the advantage of being true; (2) No new money is at stake, which is kind-of sort-of true; and (3) If we don't help the Greeks, we will get nothing.

But I take it that's not possible because Merkel has lost control of the narrative, in part due to bad framing at home and in part due to Greek misreading of German politics.

There's a second way out, of course, which is to just let the Greeks default but stay in the euro. The connection between public debt and the currency isn't immediately clear even to professionals, so I don't know if that story is salable.

Is Schauble going off the reservation? Taking into account your information, it seems that he relishes backing the government into a corner.

Reasonable? I think it tragic, the consequence of a breakdown in trust that will have sad consequences.

"So Varoufakis thought three things. (1) I may as well tell the truth instead of pretending that the European demands make any sense. (2) I will make it clear that we would indeed prefer defaulting to conceding to stupid demands that will inflict worse pain on our constituents. (3) I will point out that we have a democratic mandate that the Europeans will force us to override at their own risk."

Putting on my drama critic's hat, I agree with you that the story is compelling. The presentation was entirely wrong, alas, and the actors unbelievable. Not even the best story can recover from a terrible presentation.

Germany's motivations seem straightforward enough to me:

1) The European banks and Greek governments of the pre-crises period both made mistakes, in extending loans to the Greeks and in accepting them while leaving the economy weak and unreformed underneath a veneer of prosperity respectively.

2) Come the crises, the governments of Germany and France faced the possibility of systemic risk from bad loans in multiple places, not least Greece. They _did_ bail out their own banks by lending to Greece, and that's exactly what you would have expected them to have been worried about.

3) We now find ourselves several years on, and while the Greek state and economy are still structurally weak, the Germans feel like the systemic issues that could reverberate outside of Greece have been mitigated or fire-walled. Even the other Med economies are more stable, if not healthy.

4) At the same time, longer-term advancement for the EU and the Eurozone will probably require a system with more in the way of fiscal transfers than what currently obtains, and that means that weaknesses in the remaining states (not limited to Greece) might become much more serious and difficult to fire-wall in the future.

5) So Greece gets made an example of. If you think you can let them sink at the cost of repayment on loans that you don't really expect to get paid off anyway, and you get to hit the Med party that has been most vocal about overturning the existing order, opening up the taps and doing away with austerity, etc, it might be worth it as a signal (as you note at the tail end of your post) to the Spaniards, Portuguese, maybe even the Italians.

As you mentioned, terrifying voters in Spain was also my conclusion as to German motivation.

The only problem with that logic is that it makes no sense.

First, it punishes Greeks at a rather considerable cost to the Germans. That is odd.

Second, it does little to threaten the Spanish in concrete terms. Spain is not quite running a primary surplus, so outright default is unlikely regardless. The country is also out of its bailout program. Even if Podemos wins, they won't have the leverage that Syriza did, or at least thought that it did. There is no short-term message to send.

Third, the long-term message makes equally-little sense. When the events of 2010 eventually replay themselves in another country, the lesson will be that they should refuse to agree to an onerous bailout package. Rather, they should take full advantage of the leverage that they'll have. "Hey, if we go down, you go down. So let's work this out."

Finally, it is damnably dangerous thing to try to send messages to voters via threats, even credible ones. History shows many a case of people standing on their dignity and yelling, "Fuck you, bring it on!" Berlin doesn't seem to generally run those sorts of risks.

In other words, we're probably right that scaring Spanish voters is the reason, but that reason still makes no sense.

I run with Doug's implicit argument: this is domestic politics, driven by fear and revenge. Revenge because those damned Greeks lied their way into the euro --- that's an unforgiveable sin, doubled by (as Randy put it) Syriza's idiot presentation. Consider Varoufakis's sartorial decisions. They said, loudly, "I not only disagree with you, I disrespect you." Fear because there is a populist movement out there ready to capitalize on the perception that the E.U. has become a transfer union.

Related reasons? I like the "fear and loathing in Berlin" story, but I don't see it as being in opposition to sending a more general message to the rest of the Eurozone. Greece is, in itself, small potatoes. So I figure the fears are much more generalized feelings about the Med EU members, some of which are big enough to do real damage in a similar scenario.

Maybe ... but that would be stupid.

I don't discount stupidity, of course. This whole thing is stupid. Not least Greek theatrics. But using Greece to send a message to Spanish voters seems utterly stupid, for the reasons set out above.

Which may be wrong, of course.

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