It’s impossible to tell how the stand-off between Syriza, Germany, and the ECB will turn out, and events are shifting daily. But some of the thinking in a Futures Company Future Perspective I co-wrote with the journalist and analyst Matthew Lynn on The Future of the Eurozone helps make sense of the situation. It was published in 2012. It’s clear from re-reading our analysis from then that Syriza, and Greece, holds more cards than many people think it does.
The Future Perspective observed that financial crises are a routine feature of market economies, and followed familiar patterns. “This time” is never different. A diagram outlined the tensions that framed responses to a debt crisis.
The first observation is that in Greece it has taken quite a long time, and some astonishingly adverse social and economic outcomes, for the political dimension at the bottom of the diagram to push its way to the forefront. This is partly because Greece’s mainstream parties chose to align themselves with austerity programmes, as they did elsewhere in Europe. But perhaps we should be surprised instead by the speed at which an opposition party from way outside of the mainstream has come to power: historically, such shifts take a generation or more, not a decade. Podemos in Spain, and Sinn Fein in Ireland, could follow.
Partners in growth
The second is that bondholders always want to be repaid in full, but that’s not normally what happens in the wake of a financial crisis. As it happens, almost all of the Greek debt went on repaying risky loans the German banks made to Greece – and now it’s largely held by other European governments. But cleverly, the proposals constructed by Yanis Varoufakis focus on two things: (a) reducing the annual repayments (but not removing them) and (b) linking repayment to growth. As he said on the Today programme before he became Finance Minister, “We want the Germans to be partners in our recovery, not our misery.” Just to underline the point: there’s no proposal here for any debt write-off.
The third is that all financial crises are a systemic problem, not a national problem, and this is no exception. (Michael Pettis has a brilliant long essay about this). As Matthew Klein noted in the Financial Times:
[I]t makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded. … It’s logically impossible for excess borrowing to occur unless there is someone sufficiently reckless (or stupid) to provide the financing.
German public opinion seems to think that Greece should pay its debts or leave the Euro, but departure would not be orderly. Departure has short-run costs, but the pain might also be quite short-lived for Greece. While unemployment remains debilitating, at 27%, its economy is now growing, from a low base, and it has a budget surplus and a trade surplus. (Unlike the UK, for example). In other words, as well as political support, it has a bit of economic breathing space; it’s not come to power in a economic crisis. Returning to the drachma could work well, even if Syriza says it won’t take that step. One of our Eurozone scenarios also envisaged countries using the Euro as a trade currency and a local currency (or currencies) to give it a degree of internal flexibility.
Germany should also be concerned about the possibility of Greece leaving the Eurozone. The short-term reason is that if Greece goes, other countries could follow, quickly. Germany does very well out of the Eurozone, both economically and diplomatically, as John Aziz has observed. And even if Greece left on its own, in the medium term a Greek recovery outside of the Eurozone would send a strong signal to other economies in Europe suffering from the deflation that’s been imposed by the policies of the European Central Bank.
Alan Kohler, a business columnist on The Australian, argued that it would be good for Greece to leave the Euro – but he didn’t think the Germans would let them.
So, while it’s true that if Greece returned to the drachma it would be excluded from capital markets for a while, it really would only be for a while.
In the meantime, there would be long queues of tourists at Athens Airport and crowding onto ferries into the Aegean Sea. Tourism would soar, as would its shipping industry, along with the flowering of a thousand export industries. …
Of course, the question is whether Germany would actually let Greece exit the eurozone, and the answer is definitely “Nein!”
Germany needs Greece (and Italy and Spain) inside the euro to keep the currency down. In a way, the existence of the eurozone is a form of currency manipulation by Germany that’s every bit as direct and effective as China’s peg to the US dollar.
The failing Eurozone
But the obsession with Greece can also be read as part of a “look over there!” strategy designed to distract from the actual dynamics of the Eurozone crisis.
Greece is a tiny economy (around 1% of the size of the Eurozone), and its problems are a hill of beans compared to the problems of a stagnating Eurozone which has already teetered into deflation. President Obama and the Bank of England Governor Mark Carney are not urging a change in Eurozone policy because they have suddenly become radicalised, but because they are concerned about weak demand in the Eurozone, and the consequences of that for the global economy, which is currently flying on only one engine.
Beyond that, the whole European project could be jeopardised if it doesn’t create a better economic deal for its citizens – just as the austerity policies of Weimar-era Chancellor Brüning paved the way for the surge in support for Hitler. (And hence the reference to Golden Dawn by Greece’s new Finance Minister Yanis Varoufakis in his news conference with his German counterpart Wolfgang Schäuble.) Certainly the financial markets seem less concerned about Greece and more concerned about the “Japanisation” of Germany – the long-term low-growth/deflationary combination that financial intervention such as the ECB’s quantitative easing programme is unlikely to shift.
Protecting the finance sector
In his excellent essay on the Eurozone crisis, Michael Pettis has this to say:
[I]f you separate those who benefitted the most from European policies before the crisis from those who benefitted the least, … it might be far more accurate to posit a conflict between the business and financial elite on one side (along with EU officials) and workers and middle class savers on the other. This is a conflict among economic groups, in other words, and not a national conflict.
In short, then, Germany has since the financial crisis protected the interests of Europe’s financial sector (and the German financial sector), at the expense of the interests of the European economy (and the Germany economy). To a significant extent the election of Syriza has brought this political and economic problem into sharp relief.
One way of understanding this aspect of the issue is by looking at Germany’s labour productivity growth since 1998, data from the OECD via the Financial Times. It’s at the bottom end of the OECD class: even behind Greece.
So Germany needs to find a way to re-start the European economy, and it will continue to get political and diplomatic pressure from its allies until it does so. That’s one of the reasons why Syriza’s election was fairly warmly received in many parts of Europe. But it wants to do it in a way that doesn’t encourage anti-austerity parties in other parts of the Eurozone’s periphery. And whatever it does, Germany has to make sure that it doesn’t lose face.
In other words, the game doesn’t stack up. But just to make it more complex, there seems to be no straightforward way to get a country to leave the Eurozone – even if they don’t comply with the terms of membership. When you look at this complexity, you can see why Yanis Varoufakis wrote, at the time of Greece’s 2012 elections, that
starting the ball rolling in the right direction [on debt] requires a government in Athens that is capable of looking our German partners in the eye and not blinking for a few minutes.
In other words, this might be just the right moment for Greece to have a finance minister who understands both economics and game theory.
And it’s worth spelling this out a bit. On my reading, “not blinking” is why Greece didn’t respond when the ECB announced (probably unconstitutionally) that it wan’t going to extend Greek bank financing. It’s why Varoufakis turned up in Berlin to listen, good-humouredly, to Wolfgang Schäuble “talking nonsense“, as the FT put it.It’s why the Euro-talks tonight [11th February] won’t be conclusive. And it’s why Syriza staged the theatre of a “confidence vote” a fortnight after being elected.
But: if Greece is going to get forced out of the Euro by Germany and the Troika, Syriza’s leadership is going to make absolutely certain that Germany pays a high price in terms of its political and diplomatic credibilty, and that the self-interested nature of its management of the Eurozone – and the interests for whom the Eurozone is managed – is made absolutely explicit.
In other words, their version of the “game” is to make the politics of the Eurozone crisis visible to the naked eye, to move it out of the world of legal and financial discourse about “commitments” and contracts.”
When Matthew Lynn and I wrote the Future Perspective on the Eurozone in 2012 – which, it turns out, is still a good guide – we weren’t sure if the Eurozone would hold. A few months later, the ECB’s Mario Draghi said the central bank would do “whatever it takes” to preserve the Euro. We’re at another crisis moment. But this time we’ve moved from the financial crisis to the political crisis. Political crises are always more dangerous.