10/4/2015
By Philippe Legrain *
Berlin has been pushing Athens around for long enough. Alexis Tsipras has more leverage than he's using -- he just needs a strategy.
The newly elected Greek government’s demands for debt relief and policy freedom from its eurozone creditors are both just and necessary. But Syriza doesn’t seem to have thought through how to achieve its objectives. Athens has tactics, policies, positions, poses, postures, arguments, claims, hopes, fears, and words aplenty — but seemingly no well-considered plan. With perhaps only weeks until it runs out of cash, Alexis Tsipras’s administration needs to get a grip and focus on how to get what it wants.
Athens has scraped together the 460 million euros due to the IMF on April 9. But with other big bond payments due over the next three months, as well as wages, pensions, and other expenses to cover, the prospect of default will soon return. A chorus of commentators argue that Greece has no choice but to comply with its creditors’ demands and count on eurozone authorities’ (supposed) wisdom and goodwill to pull it through. But that isn’t true. Athens can obtain debt relief while remaining in the euro — but only if it plays its cards right.
While eurozone authorities’ position is weaker than it seems, they certainly have a coherent strategy. This consists of conceding as little ground as possible, making clear that their commitment to keep Greece in the euro is conditional on it complying with their demands, and curbing Greece’s access to cash — thereby forcing Athens to capitulate. Thus eurozone authorities insist that Greece must pay its debts in full, while hinting that the terms of those debts may be eased a little if Athens implements a list of reforms. Berlin and Brussels have allowed the new government to draft its own list, while insisting that the effects of those reforms must be equivalent to those of the ones imposed on its predecessor.
While Athens kicks, screams, and struggles to comply, eurozone authorities tighten the noose. Since the formation of a Syriza-led government in January, the European Central Bank (ECB) in Frankfurt has cut off Greek banks’ access to the unlimited cheap liquidity that other eurozone banks enjoy and instead drip-feeds them pricier exceptional liquidity. Eurogroup president Jeroen Dijsselbloem has suggested that Greece may need to impose capital controls, encouraging withdrawals from Greek banks and hence deepening those banks’ dependence on the ECB. Frankfurt has also refused to allow Greek banks to buy more Greek Treasury bills, limiting the government’s funding options.
Eurozone authorities calculate that their bullying will force Athens to its knees to obtain the remaining 7.2 billion euros in its bailout agreement. Their gamble is that Greece will neither deliberately nor accidentally default, because this would threaten an exit from the euro, which most Greek voters don’t support.
These dirty tricks confirm that Athens is right not to trust the good faith of eurozone authorities. Remember that they are largely responsible for the suffering Greeks have endured over the past five years: piling more debt on their shoulders in 2010 to bail out the French and German banks that recklessly lent to an insolvent Greece, followed by brutal austerity that has caused a depression without restoring the government’s solvency.
In 2012, eurozone authorities promised Greece debt relief once it achieved a primary surplus, which it did last year. Now, they are demanding further reforms, too. Greece undeniably needs root-and-branch economic and political reforms, but eurozone authorities’ insistence on instant action now is more about forcing Syriza to break its election promises than rescuing the Greek economy. For the past five years eurozone authorities have allowed previous Greek administrations to neglect reform so long as they implemented austerity measures.
The ECB’s claim that it is only following its rules in squeezing Greek banks is also disingenuous. In fact, it is acting in a naked political manner. Its assertion that it must limit T-bill purchases by Greek banks that are dependent on ECB liquidity because these would constitute prohibited monetary financing of government borrowing is nonsense. Remember that the ECB provided ailing eurozone banks with 1 trillion euros in ultra-cheap liquidity through its long-term refinancing operations (LTROs) in 2011 and 2012, much of which was used to buy sovereign bonds. And now it is due to buy up to 1 trillion euros of government bonds and other securities through its quantitative easing (QE) program.
But pointing out that Greece is being treated unfairly isn’t good enough: Athens is trying to win a political wrestling match, not a university debate. For that it needs an effective strategy. Unfortunately, it’s unclear whether it has one at all.
For instance, Tsipras initially said Greece was tearing up its bailout agreement; then on Feb. 20 he agreed to extend it for four months. He tried to isolate Germany’s chancellor, Angela Merkel, then to woo her. He has hoped that Washington, then Moscow might come to his rescue. And so on.
Perhaps Tsipras is trying to sow confusion: saying one thing to Greek voters, who approve of him standing up to Greece’s creditors, while eventually complying with most of what those creditors want. Or perhaps he is going through the motions: doing just enough to keep Greece going and daring its creditors to force it out of the euro — and take the blame for it. Or maybe he is simply winging it, trying one thing after another in the hope that something sticks. But unless he has a secret plan that is about to turn the tables on eurozone authorities, it doesn’t seem to be working. So here is some friendly advice.
First, Greece should ignore the defeatists who wrongly say it must comply with creditors’ demands because Athens has no leverage and the alternative would be worse. Capitulation is not a solution to Greece’s plight: It merely stores up bigger problems for the future, because the economy cannot recover without debt relief and unending suffering is not politically sustainable. Even if the costs of challenging eurozone authorities prove to be large in the short term, they are dwarfed by the enduring misery of debt bondage.
Second, Athens should prepare plans for a parallel currency, so that if eurozone authorities cut off its access to cash, it can default while remaining in the euro. It could issue tradable IOUs that could be used to pay past, present, and future taxes, and thus would be valuable for other domestic payments. This isn’t as crazy as it might sound: In 2009 the state of California issued IOUs without quitting the dollar. The knowledge that the Greeks have a backup plan to create a parallel currency would make eurozone authorities think twice before trying to push them over the edge.
Third, Tsipras’s government needs to learn to speak with one voice — and instead of public grandstanding, negotiate calmly and firmly in private. It should stop making wild threats, such as the far-right defense minister’s threat to unleash a wave of illegal immigrants and Islamic State combatants on Europe. Ministers shouldn’t talk at cross purposes. Everyone should remain measured, focused, and private. To be fair, Tsipras seems to have tried that at his meeting with Merkel in Berlin on March 23, from which he emerged empty-handed. But that is because he didn’t have the leverage of a backup plan.
Fourth, the Greeks should try to find ways to achieve debt relief without harming European taxpayers too much. One idea would be to suggest that they be compensated by a levy on the French and German banks that were, in effect, bailed out by their loans to Greece.
Fifth, they should emphasize — privately, at the highest level — that while Athens wishes to remain in the euro and is prepared to issue a parallel currency, the rest of the eurozone has most to lose from (illegally) forcing Greece out.
The explanation could go something like this: Quitting the euro would be very disruptive for Greece, especially if it happened chaotically. But soon, freed of debt, with a much cheaper currency and much greater policy freedom, growth would resume. It is ludicrous for some to suggest that Greece would become as poor as neighboring Bulgaria if it left the euro. Greece was much richer than Bulgaria before it joined the euro and living standards in new euro members such as Latvia haven’t leapt since they joined. So why should Greece’s living standards be permanently lower if it left?
The costs of a “Grexit” to the rest of the eurozone, though, would be substantial. The immediate ones are financial: default on all of Greece’s obligations to eurozone authorities, as well as the Bank of Greece’s Target2 liabilities. The enduring ones are economic: Confirming that countries can leave the euro would add an uncertainty premium to every struggling southern European country, stifling investment and making the eurozone even more fragile. In a post-QE world, it would make it more likely that the ECB would need to trigger its outright monetary transactions (OMT) program — exposing that ECB chief Mario Draghi’s declaration that he would do “whatever it takes” to hold the euro together isn’t as robust as it seems.
Grexit would also cause political contagion. If Greece were soon growing again outside the euro — as even European Commission officials privately suggest it would — other countries could decide to leave, too. Could the euro survive the departure of Italy, where all three main opposition parties are anti-euro? What about France?
Then there is geopolitics. Since the end of the Cold War, Western European politicians have been lulled into thinking that they live in a postmodern la-la land. But now that Russia has invaded Ukraine and is also trying to destabilize the Baltics and cozy up to Serbia, Greece’s Balkan neighbor, it would be reckless to cast Greece out of the European club.
Finally, Tsipras may also want to broaden the discussion. Many governments are unhappy with both the substance and the nature of the German-led response to the crisis. France and Italy would have much to gain from a debt conference that crafted a grand bargain for a less disciplinarian and more fiscally flexible and democratic eurozone. Many other governments are unsettled by Germany’s bullying of Greece: They know that what Berlin does to Athens, it could also do to them. (That said, if Tsipras can get a narrow deal, he should go for it.)
Greece’s plight, while terrible, is not tragic in the ancient Athenian sense: Its fate is still in its own hands. With a skillful strategy, it can still all end in smiles, not tears.
* Philippe Legrain, who was economic advisor to the president of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess -- and How to Put Them Right.
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