Today all roads in Europe lead to Greece, where its future lies in the balance.

Summary:  So many of the threads of history today run through Greece and the Middle East (not for the first time). The range of possible outcomes is wide, from wonderful to horrific. Yet we know too little to make accurate predictions (I suggest making free time by ignoring the confident guesses that overflow the news channels). Here we examine the key facts.

EU flag burning on the ground
Unnecessary death of a dream.

The Greek-Troika negotiations might have large effects on the future of Europe. Here’s my analysis (it’s similar to Tyler Cowen’s , but with more detail).

(1) The news tells us little.

Cowen nails this: “The further apart the various parties appear to be, the more the whip of concession gets cracking. The closer to an agreement they may seem, the greater the incentive to play hardball and demand further concessions.” Also, press releases seek to influence public opinion, not inform us.

(2)  Do both sides have a negotiating strategy? Does either side?

Cowen: “quite often leaders in critical positions simply do not know what they are doing. By no means is that always the case, but it is more often the case than narrative-imposing journalism encourages us to perceive.”

Both sides certainly have a clear understanding of what they want. Do they have a clear negotiating strategy? Or do they just stumble along, responding to events? History overflows with examples of the latter, with July 1914 at the top of the list.

Both sides quite sensibly keep their cards hidden, so we can only guess. Some of their public statements seem disturbing. Like the following from Helena Smith’s interview with Greece’s finance minister, Yanis Varoufakis (The Guardian, 13 Feb). Is he sincere or posturing as a tactic?

 

Yanis Varoufakis
Greek finance minister Yanis Varoufakis. Not someone to underestimate.

When I ask Varoufakis if he has a plan B, for all negotiators surely have a credible alternative, he looks at me wide-eyed. “We constantly hear, ‘if you don’t sign on the dotted line there is going to be Armageddon’. My answer is ‘let it happen!’ There is no fall-back plan. That is my plan B.”

(3)  The act of negotiating puts stress on Greece’s weak economy.

Sometimes foreign pressure increases a nation’s social cohesion. That’s so in Russia today, making the West’s sanctions ineffective. That’s not so in Greece, where each round of weakness produces capital flight and less domestic investment. Now their banks are cracking and many people have stopped paying taxes. This might result in a failed State (now more accurately called “fragile states“.) Greece has done well in a sense, managing a slow decline in their social metrics. It’s not clear how long they can continue this.

Geopolitics as chess

(4)  The Troika wages economic warfare.

“In other words, while we are seeing a relative reduction in military violence, at the same time we definitely are seeing an increase in political, economic, and technological violence. However, regardless of the form the violence takes, war is war …”

— “Unrestricted Warfare” by PLA Colonels Qiao Liang (乔良) and Wang Xiangsui (王湘穗), 1999.

The Troika see this weakness and are negotiating like “the Godfather”, making offers the Greek government cannot rationally refuse — using the cold hard politics of brute force. Ynes Smith provides a clear summary here. The reason is obvious. As Cowen explains, “the creditor eurozone countries see this as a nested game, where concessions to Greece would have to imply larger concessions elsewhere and embolden Podemos in Spain.”

Krugman states it more clearly: “Athenae Delenda Est” (Athens must be destroyed, echoing Cato the Elder’s advice to Rome about Carthage — which they did).

Alternatively, and I guess more likely, they’ve decided to push Greece over the edge. Rather than give any ground, they prefer to see Greece forced into default and probably out of the euro, with the presumed economic wreckage as an object lesson to anyone else thinking of asking for relief. That is, they’re setting out to impose the economic equivalent of the “Carthaginian peace” France sought to impose on Germany after World War I.

If continued this policy cannot end well for Europe. Astonishingly, Germany is repeating the mistake Britain and France made after WWI, inflicting crippling reparations on Germany. Keynes quickly saw the madness of this policy, correctly predicting the result in his brilliant “Economic Consequences of the Peace” (1919). Europe’s leaders didn’t listen to him, and so got a proof by demonstration in WWII. Krugman explains here. It would be ironic in fiction, but will be tragic in reality.

(5)  Domestic politics: elites band together against their peoples.

From “The scary state of play in Greece” by David Attwell (PhD candidate at Paris Institute of Political Studies):

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 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.

For More Information

See all posts about Europe’s crisis here. This crisis was predicted by economists at the state of the Euro in 2000; see Can the European Monetary Union survive the next recession? (July 2008).

5 thoughts on “Today all roads in Europe lead to Greece, where its future lies in the balance.

  1. Thanks for the article by Alpert about the reality of the theory that the US can economically go it alone. I’ve been looking for documentation like this for some time and haven’t been very satisfied with any source prior to this one.

  2. The Guardian link has a video link of Varoufakis free associating to a slightly hostile room full of Marxists. He begins with his assertion that values do not come out of any math model no matter how sophisticated and for this reason math models are largely useless. This of course is true. But values also never flow from the equations of math physics yet they are very useful. Anyway I thought this was very telling in regards to his approach to the coming negotiations. The mechanistic Germans are confronting a values driven humanist. Much of what Varoufakis says and does now makes sense in this light.

    1. Peter,

      Interesting observations! It’s a scary aspect of our world that so many key decisions are made by politicians selected for criteria quite unrelated to the decisions they make. So we get a US Congress with a significant fraction of conspiracy nuts and people ignorant (or disbelieving) in basics of the physical and social sciences. It works, I guess. Or has in the past.

  3. You have noted in the past that macroeconomic theory is not a morality play. I’m realizing that increasingly it is indeed a morality play. Moral hazard is a lynch pin of Austrian School and Libertarian political economics. In fact it is the main bludgeon used to promote austerity policies as one example. Tim Geithner relates his story about how angry and intemperate German bankers were when discussing Greece.
    A lot of trouble may be looming if this is true. Moral aphorisms, truisms, and platitudes form a poor basis for analysis. They often come in self extinguishing pairs. Look before you leap but he who hesitates is lost. A stitch in time saves nine but don’t fix it if it isn’t broken. Increasingly important policy debates are sounding like these platitudinous pairings. Claiming the moral high ground shouldn’t be the starting point for serious macroeconomic policy debates but it increasingly is nevertheless.

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