By Frances Coppola · 25 Feb 2015
The Greek deal on Friday achieved two things.
Firstly, it confused everybody. Not much seemed to have changed since the angry meetings of the beginning of the week, and yet all the protagonists seemed to emerge happy.
Secondly, it allowed everyone to preserve their previous opinions. People who thought that Germany should win, thought it had; people who thought that Greece should win, thought it had. People who wanted Greece to stay in the Euro, thought it would; while people who wanted Greece to leave judged that the odds of a Grexit had increased.
It was, in short, a masterly piece of what the ever-eloquent Greek finance minister Yanis Varoufakis calls ‘creative ambiguity’ and ordinary mortals call fudge and obfuscation.
With few exceptions (notably, the BBC’s Robert Peston), opinion immediately after the meeting was generally that Germany had won and Greece lost. But as the deal was digested, analysed and mulled over, people started to change their views. This piece dissected the Eurogroup press release in detail and concluded that on balance, Germany got nothing that they did not already have a week before, and the real winners were Greece. The primary surplus target for the current year is now conditional on economic performance, and the entire programme from June onwards is up for renegotiation subject to good behaviour by Greece. Although this is far less than Greece initially wanted, the prospect of renegotiation holds out the possibility of Greece achieving more of its aims in future. Full compliance with the existing programme, as Germany demanded, seems unlikely to be enforced.
Yet Greece’s feet are being held very close to the fire. There is little chance that the initial list of reforms to be proposed by Greece will be accepted by the supervising institutions. Reports are already emerging that the list is ‘vague’: the EU’s propaganda machine is in full spin mode, preparing the ground for a battle royale over the terms under which the bailout will be extended.
That it will be extended is unquestionable. But it won’t be easy, and there will be a lot of chewed fingernails. The EU institutions are very practised at this game: other Eurozone countries want Greece given a hard time, so a hard time it shall have. Spain, Portugal and Finland all seem willing to force Greece into default and exit for national political reasons. The American economist James Galbraith, observing the negotiations from the Greek side, observed that ‘[t]heir leaders are all facing elections with rising opposition. They’re terrified that their opponents will take heart from the Greek position’. Surviving in office means more to them than saving the Eurozone.
Germany seems to have convinced itself that even a disorderly Greek exit would have little impact. The European banking system is both better capitalised and less exposed to Greek debt than it was, so the chances of a systemic financial crisis due to Greece crashing out of the Eurozone are much reduced. But that does not mean that it would not be disastrous for other reasons. As Rebecca Harding of Delta Economics explains, Greece is a linchpin in the unstable Balkans and a hub for oil and gas trading with Russia and the Middle East. With raised geopolitical risk along the EU’s eastern border, forcing Greece out of the Eurozone seems an incredibly short-sighted policy.
Perhaps even more importantly, if a country is seen to be forced out by other countries ‘ganging up’ on it, however justifiably, what message does that send about the nature of the Eurozone? How long before investors decided that other highly-indebted economies on their final warnings would also be pushed out, and capital ran for the hills? Systemic crises can play out through trade and capital flows with disastrous economic consequences even if no banks fall by the wayside.
Greece knows this very well. It has no intention of opting to leave, and indeed the Syriza government has no mandate to do so. Nor is it prepared to take the risk of accidentally falling out of the Euro. Hence Greece’s apparent capitulation at the end of last week. Its banks were bleeding to death due to capital outflows as investors, fearing a Cyprus-style ‘long weekend’, removed their money. Without agreement, Greece’s banking system would probably have collapsed over the weekend. By removing their money, investors were bringing about the very situation that they feared.
The EU institutions know it too. A disorderly Greek exit is in no-one’s interests—not even Germany’s, despite the growing chorus of ‘Greece must go’ from German hardliners. And a run on the Greek banks that the ECB failed to stop because of political brinkmanship by Eurozone member states would be an abject institutional failure, destroying the ECB’s credibility and fatally undermining the Euro. No way can Germany—or any other country, for that matter (are you listening, Spain?)— be allowed to play fast and loose with the future of the Eurozone like that. It would be utterly irresponsible.
This talk of Greece being ‘forced out’ must end. If a member state can be forced out by the others against its will because it has failed to comply with their demands, what we have is not a cooperative union but the dysfunctional and ultimately murderous power structures of William Golding’s Lord of the Flies. It would be a mortal wound to the European project. For a while, the remaining countries might cling together out of, variously, triumph and fear—but no union built on fear can survive.
So it is not just Greece’s feet that are being toasted. This is a test of the cohesion of the Eurozone and the commitment of all its members to its future. There is no meaningful unity when national interests trump the welfare of the group as a whole.