Friday 20 February 2015

Did events in Ukraine force the change of Greek tactics?

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.