Many
analysts justified the recent change of heart of the Greek government to
Eurogroup’s ultimatum and the hard stance of the German finance minister and
the rest of the 17 finance ministers. This they say was the catalyst that
forced the Greek volte-face. There is however, another possibility that has to
do with events in Ukraine.
The
strategy that the Syriza party followed the past few months in order to gain
power and international acceptance was as follows. Their communication lieutenants
advised them to drop the radical left ideology-philology and instead to fit the
message within the European context of austerity and anti-austerity. This is
the big battle in Europe. The fight between Mr. Draghi and the German central
bank. The battle between the economists who see the only way out of the crisis
through quantitative easing and printing and those mainly from northern Europe who
want see more structural changes and reforms.
Thus
Syriza jumped on the anti-austerity train having as an ally the American
administration and many famous economists like Prof. Krugman and Prof. Stiglitz
and others. Piketti’s book also did help. Syriza was also hoping on the help of
other European countries that see the end of the austerity as their panacea. I
should perhaps add here that although Syriza may have picked the correct side
in this war, its timing was not correct nor is austerity the biggest problem in
the Greek economy which is badly in need of structural reforms. Syriza is
pretending to be solving the European problem not the Greek one. The Greek
FinMin sometimes sounds more like a Global FinMin, interested in solving the
global financial crisis rather than the home grown one.
For many,
Europe’s rather cold reception, if not dismay, was due to Syriza’s government tactics
or even the rather unusual dressing code of the Greek FinMin. Many also point
out that the government seemed to be concentrating on the semantics and the
etymology of words rather than the maths and accounting. Witness how the word “Troika”
was expelled from the European vocabulary and the fight over the meaning of the
word “extend”.
Thus the word
Grexit or the threat of a Greek exit from the Europe came back in fashion. We should
point out however, that keeping Greece in the eurozone has been the standard German
position despite the occasional spats. The same cannot be said for some of
supposedly Greek “friends” who resemble relatives waiting for their cousin’s
death in order to inherit the uncle’s money.
However,
the real reason for the hardening of the German and other European position
towards Greece may have occurred for geopolitical reasons rather than economic
ones. In parallel to the Greek tragedy another play is unfolding in Ukraine.
And this is not just the war between the Russian backed autonomists and the
Ukrainians. It is a battle for the future of the security in Europe. On one
side we have the increasing influence and aggression of Russia and on the other
the EU, NATO and America.
Needless
to say that Germany and chancellor Merkel has emerged as the de-facto protagonist
and leader in Europe. President Holland is just an extra in this play. America
and president Obama has seen and realised this. Only Germany can be counted.
They have the power and the leadership for this game.
America
on the other hand sees the real long term economic and geopolitical threat in
south East Asia and China not in Russia. They estimate that Russia can be
managed in the short term using economic sanctions and the oil price. In
addition, it seems likely that a new war would be initiated against ISIS and
the jihadi with perhaps boots on the ground. The recent American decision did
not specify geography since there are ISIS copy cats in Libya, Egypt and other
places.
Thus, it
seems that America decided to “leave” Europe to the German initiative for the
time being, placing only red lines. This means not forcing Greece out of
Europe. But it does not preclude placing a straightjacket on Greece like
capital controls. The policy is that of political immunization or isolation of
Greece. The economic immunization happened in 2012 with the PSI.
The
realization of the Greek government of this change in the geopolitical habitat
was probably the real catalyst for their U-turn. The telephone call of Jack Lew,
the American secretary of Treasury, urging a compromise probably sealed the
decision. Now the Greek government has asked for an “extension” of the
financing agreement (not the Memorandum). Thus, they overcame the meaning of
the word “extension”. From now on, it is wrapping problem. They might christen
the compromise a “New Deal”, or dressed it up with phrases like “humanitarian
problem” but a compromise is in sight.
What has
been achieved by the Greek government with all the lion-roaring? This is
difficult to estimate at this point in time. For sure they have expelled the
word Troika and possibly the word “Memorandum”. Now they call it a new
contract. In the process, they also dropped demands for a debt haircut
(nominal). And if we are to read their
proposal they also believe that the debt is serviceable. On pages 23-24 they stress that the Net Present
Value of the Greek debt is lower and thus a lower primary surplus is justified.
A simple
reading of the Greek proposal points to a rejection and a failure. But this
does not mean that there would be no compromise in the days ahead. Time and
more importantly money is running out for Greece.
