Monday, 26 January 2015

Decision time in Athens, Berlin and Brussels

Greeks' election of a radical anti-austerity government, led by the leftist party Syriza (above), was in many ways inevitable. It's the clear-cut outcome of a ridiculous economic policy, which seemed designed only to drive more and more Greeks into poverty, and which has inflicted the worst recession in modern history on a small state that the rest of Europe could have just bailed out directly with some small change.

What was the point of it all? We wonder, we really do. Does the German government really intend for other Europeans to be driven into penury, just to appease anti-bailout voters? Who will buy all those German machine tools, cars and dishwashers? Regular readers will know that Public Policy and the Past has long believed (and, er, wrongly predicted) that Greece should and will leave the Euro, at least temporarily. There seems no other way to get the country's house in order. Does anyone really think that the economic nuclear winter of the last few years was a propitious time for truly structural reform, either of politics or Greece's ailing private sector? Surely not.

Far better to devalue, default and deflate - to start again from a fair and clear position of national bankruptcy, like Argentina and Brazil before their twenty-first century growth spurts.

But Syriza's likely appointment of the Krugmanesque (and well-connected) Yanis Varoufakis as Finance Minister, and its new alliance with the right-wing anti-austerity party Independent Greeks, signals a wish to take a rather easier, and rather less apocalyptic line: to renegotiate Greece's debts on the basis that Greece now has the whip hand. If it threatens to bring down the whole monetary structure, it can: German and French banks (whose reckless lending, not Greek labour productivity, lie at the heart of the crisis) are just as exposed as the Greek people. So the Greeks' new government really does have a strong hand to try and insist on a 'soft default': to get most of their debts written off, and to mount a less aggressive budgetary consolidation. Maybe public sector workers will be paid properly. Maybe modern medicines will flow again. Perhaps something resembling normal life can return. You never know. Why not shoot the moon, eh?

Given these signals, the rest of Europe has a choice - and in some ways an invidious one. Athens has signalled its intention to do a deal, albeit only on rather more generous terms than have been available before. This represents a not-inconsiderable risk for Syriza, which if it goes down this path will inevitably see much of its support on the far Left fall away. Will Berlin and Brussels reciprocate?

In many ways, they would be crazy not to. A head-on confrontation would risk putting the future of the Euro itself on the bargaining table - not to mention the democratic legitimacy of the European Union, founded to foster freedom (and higher living standards) but with a record that's poor indeed in Greece in recent years. Sometimes, over the last few years, Greece has looked more like a failed state than a thriving, wealthy European democracy - a state of affairs for which its less-than-transparent governing oligarchies, and other EU states, must take their fair share of blame.

But go too far the other way and German and EU decision-makers will know that they might fan the flames of populist resistance. The Spanish and Irish economies are both growing, for instance, and in the latter case, pretty strongly: the election of populist anti-austerians such as Podemos and Sinn Fein to government in those states would be deeply unwelcome in Berlin, for it would show that Angela Merkel's entire diplomatic and financial strategy had failed.

The likely upshot? There'll probably be a deal, on fairly but not extraordinarily generous terms. The feelers are already out, and the informal discussions well underway. The markets seem to sense this. The revolt of the European peoples, voting for various nationalist, populist, anti-austerity, anti-immigration and anti-everything parties, will rumble on, pitching and rolling the mad, bad and dangerous drive to shrink the state, but never quite overturning it.

The people of Greece have spoken. But it remains to be seen what the new cry means.

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