The Corner

Playing Tough

Reuters:

Greece’s new leftist government opened talks on its bailout with European partners on Friday by flatly refusing to extend the program or to cooperate with the international inspectors overseeing it. Prime Minister Alexis Tsipras’ government also sacked the heads of the state privatization agency after halting a series of state asset sales.

The politically unpopular policy of privatization to help cut debt is one of the conditions of Greece’s 240-billion-euro bailout that has imposed years of harsh austerity on Greece.

One of Greece’s many problems has been the way that the way that its state has been run as a patronage machine by its (until recently) dominant political parties. Privatization was designed not only to raise some cash (enthusiastic buyers have been oddly difficult to find), but to roll back an essentially clientelist regime. Syriza  may well have genuine ideological objections to privatization, but something tells me that it will appreciate the, uh, opportunities that preserving a large state sector will bring in its wake.

Back to Reuters:

Tsipras has repeatedly said he wants to keep Greece in the euro but he has also made clear he will not back away from election campaign pledges to roll back the terms of the bailout. His government, winner of last Sunday’s election, has raced ahead with a series of anti-bailout moves including reinstating thousands of public servants laid off by the previous government as well as cancelling privatizations.

Not only will Greece’s new government not cooperate with the Troika, it will not even seek an extension to the current deal, which expires on February 28.  And if that expires, Greece’s banks will (as Reuters notes) lose access to their funding from the European Central Bank.

Ekathimerini:

The standoff could see Greek banks effectively excluded from European Central Bank liquidity operations and the government with no source of funding, having rejected EU aid while still shut out of international markets. “These people are not bluffing,” Theodore Pelagidis, a senior fellow at the Brookings Institution, said by phone. “There is no way that Greece will make it through February. The situation will be get worse every day, and at the forefront of the drama will be the country’s banks.”

…A German official earlier on Friday said Tsipras is making unrealistic demands and will end up without a financial backstop unless he honors his country’s commitments to its official creditors. German Finance Ministry Spokesman Martin Jaeger said Greece’s demand for a writedown is “outside reality” and the financial lifeline that has kept the country afloat since 2010 will expire next month unless Tsipras shows a “clear willingness” to meet the country’s existing agreements.

There’s been a striking increase in outflows from Greek banks of late.  That’s not surprising. The real mystery is why there hasn’t been more.

At this point, it’s worth turning to The Economist for a brief reminder of why Germany might be feeling a touch under-appreciated:

Germans were told that sacrificing the deutschmark for the euro would involve safeguards, with an ECB based in Frankfurt, strict rules about which countries would join the euro and explicit bans on bailouts for struggling countries. But the rules were eased to let too many countries in, the ECB is now run by an Italian who is creating money and vast amounts has spent buying the bonds of struggling European governments and banks; the German taxpayer will probably end up paying the bill. The Greeks asked for debt forgiveness; they have already had it and their remaining official debt has a 16-year maturity and an average coupon of 2.4%. They would not get those terms anywhere else. Meanwhile, German voters, who went through a painful period of restructuring in the early 2000s to make their economies competitive, are told that such policies are inappropriate when applied elsewhere.

What The Economist (so often leery of giving unruly electorates too much of a say) fails to add is that German voters were never given a chance to reject this vampire currency. Their betters knew better, and that was it.

Over at the Daily Telegraph, Jeremy Warner fills in that gap:

Germans never wanted the single currency in the first place, for like Britain, they instinctively understood where it would lead – to a fiscal, or transfer, union which Germany, as Europe’s dominant economy, would be forced to bankroll. If given a referendum, they’d have said no.

Warner goes astray when he adds this:

But European monetary union was the price Germany had to pay for reunification; it was a way, other European nations naively believed, of containing the newly enlarged country and ensuring that it was properly integrated into the rest of Europe.

On the contrary, this was not a price that Germany had to pay. By the time that the Maastricht Treaty (which paved the way for the euro) was signed (1992) Germany was already reunited. It would have been perfectly easy to renege on any undertakings that had been given to, primarily, the French. No diplomatic effort would be complete without a little bad faith. What’s more the ‘final final’ decision to go ahead with the single currency was not taken until even more years had passed. What really happened was that German chancellor Helmut Kohl was obsessed with accelerating the EU’s “ever closer union” and he pushed the currency through, acting, he later said, “like a dictator” to do so.

Back to Warner:

From the start of the crisis it has been obvious to all dispassionate observers that it can only really end in two ways. Either the eurozone must move rapidly towards the sort of transfer union which Germany has spent the last 15 years resisting, or it must be reconstituted in more sustainable form – that is the monetary separation of Germany and its satellites from the less competitive south, arguably including France.

In other words, some variant of our old friend the ‘Northern’ euro.

Warner:

Now up pops little Syriza to speak truth to power. Whatever you might think about Syriza’s substantially unrealistic economic agenda, and its apparent love affair with the brutish Vladimir Putin, on monetary union at least, its leaders have told it as it is.

“The eurozone is going to be toast within a couple of years”, says Greece’s new finance minister, Yanis Varoufakis, unless it can create “shock absorbers and what I call surplus recycling mechanisms”. No monetary union that demands its debtor nations constantly shrink their economies in order to keep up with the repayments can last for long. The current situation is indeed a form of debtors prison, and a completely counter-productive one, for if you deny the debtor the ability to work off his debts, he’ll never repay them anyway.

That’s true enough, but let’s pay attention to Varoufakis’s sleazy euphemism: “shock absorbers and what I call surplus recycling mechanisms”. What that means is the looting of German (and Dutch, and Finnish and even Estonian taxpayers) in perpetuity.  And it would be perpetuity. 150 years or so after Italian unification, the north is still paying for the south. Naples is still not Milan. How long will it take to turn Athens into Berlin?

No-one should think for a moment that there are any attractive options, but a division of the euro into northern and southern halves remains, all things considered, the least bad way to go. Sadly, there are few signs that it’s on the agenda.

What will happen then? My guess continues to be that the Germans will eventually (it’ll be camouflaged, of course) fold, but against a background of brinkmanship like this, events can take on a dangerous momentum of their own.

Watch the banks. 

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