David Attewell: The Scary State of Play in Greece
By (I’d like to introduce you to my brother, David Attewell, who’s just completed his MA in European Affairs at Sciences Po and will be starting as a PhD student in the fall, who I turn to for all things foreign policy)
Is this the showdown we’ve been waiting for between Greece and its creditors?
First, a quick recap of the current landscape. A month ago, Syriza swept into victory on a program including demanding a haircut on Greek debt by EU creditors, restoring electricity to poor families, reversing minimum wage and pension cuts, and instituting a large public employment plan. Unsurprisingly, the Eurogroup has in broad strokes insisted that the Greek government pretend the election didn’t happen, and continue with the austerity terms of the previous bailout.
Syriza’s strategy thus far has been twofold. Firstly, new finance minister Yanis Varoufakis has appealed to economic common sense and European ideals to suggest that ‘extend and pretend’[1] is a waste of money, and that the status quo is detrimental to everyone. Secondly, Syriza has tried to highlight common ground with creditors on structural measures to crack down on corruption and tax evasion (which would hit the rich and well connected) on the one hand, while reversing measures which hurt the poor (like cuts in the minimum wage and pensions). Unfortunately, current European strategy is for peripheral economies to regain competitiveness against Northern Europe exclusively through wage and income cuts (also known as internal devaluation); from this perspective European leaders tend not to consider plans ‘serious’ unless they hit poor and middle class incomes.
Where are we now? Greece’s current bailout plan will expire on February 28th, at which point it will likely be unable to service its debt to creditors by the deadline of March 1st. To try and reach a deal, Greece has been engaged in constant talks with the Eurogroup (all finance ministers from Eurozone countries), the most recent of which broke down in acrimony. Syriza has been looking for a 4-6 month bridge program, during which they would agree to heavily limit implementation of their electoral program and agree to implement the majority of structural reform measures demanded by creditors in advance of a more comprehensive deal to end austerity. While it is unclear exactly what part of the bailout terms would change, the broad outline seems to be that the Greek government would refrain from reversing privatizations or putting its public employment plan into place during the bridge period, in exchange for holding its debt payments steady while enacting measures to counter poverty. This would represent a major climb-down, and new PM Alexis Tsipras would already have a seriously difficult task selling the substantial left flank of his party on such a deal.
Germany and the Eurogroup’s answer has been an emphatic no. The EU institutions insist that Greece meet the commitments of the previous government in full, including running a substantially larger primary surplus than it already has, completing privatizations, and maintaining minimum wage and pension cuts. The head of the Eurogroup wasn’t even willing to offer Syriza a face-saving compromise, beyond vaguely pointing out ‘existing flexibility’ in the current program.
There are two basic lines for interpreting what is going to happen when Syriza’s red lines collide with Germany’s. One possibility is that in the grand tradition of EU crisis-management, a seemingly catastrophic deadlock will lead to repeatedly postponed deadlines, and finally to a mutually-distasteful fudge which allows the can to be kicked further down the road. The second, deeply scary scenario is that Germany has already decided that a Greek and likely Cypriot exit from the Eurozone is containable. Merkel may well feel that she would much rather risk a Greek exit from the Eurozone (Grexit) than grant the country concessions which would then be demanded across the European periphery, at a stroke undoing the core ‘successes’ of Germany’s economic diplomacy during the crisis.
The behavior of all of the players involved can seem a bit bizarre: a default on Greek debt would be much more expensive and destabilizing for Germany and for the Eurozone than many of the compromises already mooted by Greece and others. And regardless of the immediate economic circumstances, the exit of multiple member states from the Eurozone violates a cardinal assumption of EU integration: the irrevocability of the European project. Grexit would be a legal, political, and financial mine-field. So why does it seem to be happening in slow motion before our eyes?
The key trend which underlies these tensions is the gradual disintegration of European party systems (for more on this, I highly suggest you read the late, great Peter Mair’s Ruling the Void: the Hollowing-out of Western Democracy). Mainstream parties are under severe pressure in most EU member states from populist challengers, and the political and economic perspectives of their elites have a lot more in common with their establishment competitors across the aisle than they do with their own electorates. The threat that democratic elections can credibly provide an alternative to the current EU agenda of austerity & labour market deregulation (or ‘structural reforms’) is a severe threat to governing parties.
So far, mainstream parties have reacted to the rise of populist challengers by forming grand coalitions with just enough critical mass to stave them off. In Greece, this model has already broken down, and I personally think that those dominoes will continue to fall, first in Spain and then in Ireland, and so on. But centrist parties seem to feel that they can ride out the storm, as long as the principle of TINA (There Is No Alternative) holds. So Spain is as hawkish on Greek debt forgiveness as Finland, not because Spain wouldn’t benefit, but because Podemos is a real threat to the monopoly on power held by Spanish conservatives and social democrats.
If all politics is domestic, then, we have reason to be worried that Grexit is imminent. Spain and Portugal’s unpopular conservative ruling parties seem likely to block any substantial weakening of Greece’s austerity, to say nothing of Germany and assorted Baltic fiscal-hawks. Even worse, to my deep disgust, Social Democrat-controlled countries like France and (to a lesser extent Italy) don’t seem to be interested in breaking their common front with the Right, embodied by their Grand Coalition in the European Parliament. In a recent diplomatic tour, Greece received absolutely no social democratic support for a debt haircut, and the French in particular have been more hawkish than I expected.
I don’t want to give the impression that the European establishment is motivated simply by rational electoral strategy; ideology is clearly playing an important role. Germany really does believe that all of Europe can become net exporters if southern people will just suck it up and accept wage stagnation like they did under Schroeder, as becomes depressingly obvious every time you open the pages of Der Spiegel. Both European Centre-left and Centre-right parties have proven more than willing to take serious hits to their popular support to stay in the ‘responsible club’, from PASOK in Greece and the French Parti Socialiste to Ireland’s Fianna Fàil. Fear of majoritarian democracy as populist is inscribed into the very institutions of the EU, and it’s difficult not to see in the current showdown a desire to very publically destroy the idea that elections can lead to a change in the EU’s anti-crisis policy.
All that said, I’d argue there’s a decent chance that Grexit’s geopolitical consequences could shake up the situation. A few weeks ago, President Obama made a remarkable intervention on behalf of Greece that could potentially put pressure on EU leaders, as the US has no interest in seeing Europe continue down this road, for two reasons. First, if the EU cuts off Greece, then Russia will be very happy to trade loans to Greece for Mediterranean military bases (and/or a veto on further EU sanctions in response to the Ukraine crisis). And second, the current EU competitiveness strategy is basically one gigantic free-ride on American (and Chinese) demand… it can’t and won’t work, but the attempt certainly won’t be viewed kindly by the US.
[1] Whereby Greece accepts more loans to repay its existing debts, and everyone pretends that the overall debt load is serviceable.