Home > ECB, EMU Crisis > Push Greece Off the Cliff?

Push Greece Off the Cliff?

February 5, 2015 Leave a comment Go to comments

Yesterday, like many, I was appalled by the ECB announcement that it would stop accepting Greek bonds as collateral for loans. The timing, right after Greek finance minister Varoufakis met Draghi, but before he met German finance minister Schauble, seemed a clear signal: the ECB sides with Germany and EU institutions, and the only possible outcome it expects is a complete rolling back of Syriza electoral promises, and a renewed Greek commitment to austerity and troika-style structural reforms (privatizations plus labour market reform, to say it simply). This would of course be terrible news for Europe (these recipes simply did not work, this is acknowledge  everywhere from the IMF to the White House, passing by Downing Street). And terrible news for democracy as well. The signal to voters would be “Enjoy your day at the polls. Then we decide in Brussels, Frankfurt and Berlin”.

Appalling, I said. This morning I have read a different, very interesting interpretation by Frances Coppola.  Please read the piece. Is wonderfully written. In a few sentences, it says that the ECB move may not be pressure just on Greece, but on both sides involved, i.e. on Germany as well. In a sort of mega game of chess, by weakening Greece, by pushing it closer to the edge of the cliff, the ECB forces both sides to actively look for a deal, in order to avoid the catastrophic effect of Grexit. Coppola mentions the principle of “coercive deficiency” (famously applied to nuclear deterrence): a weaker Greece makes it run out of options, and hence a deal unavoidable.

Boy, I hope Frances is right! The alternative interpretation, United Creditors Against Greece, would mean the end of the Euro. And it is true that the practical implications of yesterday’s decision are in the end limited.  But I remain worried, for at least two reasons.

  1. The first is that if the ECB were trying (in a convoluted way) to set the stage for a deal, it should push Greece closer to the cliff, while at the same time showing at least some willingness to negotiate. Now, it seems that the ECB is not willing even to grant an extension of maturities. This is at odds with the interpretation of the ECB as setting the ground for a deal
  2.  Second, even assuming the ECB were in fact trying to crate the conditions for a deal, the game would be dangerous indeed, because it relies on Germany’s leaders to be good chess players! Leaving metaphors aside, it seems that Angela Merkel and Wolfgang Schauble are trapped in their own narrative of debt as a morality tale, in which punishment of the sinners is by definition impossible. So the question becomes whether they would recognize that pushing Greece off the cliff would entail huge costs for the EU at large. And even if they recognize it, they may be willing to pay the price “to teach the sinners a lesson”

Difficult times ahead. I am not optimist

  1. February 5, 2015 at 11:27 am

    Reblogged this on Arjen polku and commented:
    I am not optimistic either. The decision by the ECB leaves the Greek government with very little time and very little options. It is insane that there are rules and processes for debt restructuring for indebted individuals and bankrupt firms, but somehow for countries this is different. The way Greece is treated by Germany and the ECB you’d expect Germany be full of debtors’ prisons.

  2. jpd
    February 6, 2015 at 10:25 am

    Reblogged this on DAMIJAN blog.

  3. k.
    February 6, 2015 at 11:46 am

    The Germans have realized the folly of Austerity – this one exists on political discourse, but less and less on actual terms (which is good).
    As a Portuguese, I think the issue is a bit more related to moral hazard than anything else; The issue with Greece is, however, that if they are alowed to default, they will just get into the same old habits again (not paying taxes).

    And you need to be careful on playing the “oh its bad for democracy” card. The Greek voters have all the right to elect a government that demands debt renegotiation.
    And the rest of us have the right to elect governments that demand that they get their act toghether.

  4. Patrick VB
    February 6, 2015 at 12:15 pm

    I have the impression that those who think that it is Draghi who is calling the shots and engaging in subtle game theoretical moves overlook the fact that these ECB decisions may be influenced by Draghi but are in fact made by the ECB Governing Council. The Governing Council is made up of the Executive Board members plus the heads of national euro area central banks. It is thus in reality the majority of euro area NCB governors that swing decisions in one or another direction. I fear that these NCB governors are at the same time under pressure from their national governments who push for their views and agendas to prevail, even if their reading of the economic situation of Greece and the Euro Area is out of sync with reality… So, I fear that the ECB Governing Council could well, one day not too far off, pull the plug on Greek ELA without really understanding all of the implications and thereby unwittingly push Greece and the euro area off the cliff… I also am not optimistic here.

  5. Dave
    February 6, 2015 at 1:16 pm

    Krugman had a similar thought ._.Do really want a Gexit, Germany ? Are willng to risk Eurozone?

  6. February 6, 2015 at 2:11 pm

    “they will just get into the same old habits again (not paying taxes).”

    How do you know?

    • hanno achenbach
      February 6, 2015 at 6:22 pm

      That is what they have continued doing since the crisis broke out. Is that so hard to understand?

      • February 6, 2015 at 6:55 pm

        I don’t know too much about Greek tax collection, but I do know that Greece has, for some years now, been collecting considerably more in taxes than it pays to run its government programs. It only has a deficit because it sends far more off to pay its creditors than it gets in new loans. That doesn’t sound to me like a government that still has an unusually serious tax collection problem.

    • k.
      February 9, 2015 at 5:14 pm

      I don’t know, but I have no reason to believe otherwise.
      One of the key elements of their agreement with the IMF was to improve their tax collection efforts, and they have failed;
      Anyway the OECD as extensive literature on that.
      The point is, if Greece collected all the taxes its supposed to collect, it wouldn’t have problems paying the debt. So why should we let them default, if they don’t get their act togheter?

  7. hanno achenbach
  8. Richie
    February 9, 2015 at 12:19 am

    Let’s be clear here. The Maastricht treaty contains no exit provision from the monetary union. The only available option is to scrap the whole treaty, in accordance with international principles that signatories can’t cherry pick which parts of a treaty to follow. In other words, a unilateral exit from the monetary union automatically means an exit from the European Union (which was set up in the Maastricht treaty). This was deliberate, the Euro was meant to become permanent by setting such a high price for exit that no government would try it. The European Court of Justice knows full well the intention behind this omission and will rule accordingly on the question of whether a Grexit also means an EU exit.

    The only option therefore is a negotiated exit, to amend the Maastricht treaty. Dollars to donuts, Euros to peanuts, the EU creditors will push their demands during those negotiations. So I doubt Syriza is seriously entertaining the idea of Grexit.

    • k.
      February 9, 2015 at 5:30 pm

      You are totally right. I think there is a real risk of Greece “hitting the wall”.
      But would that be bad?

      February 28th comes, and there is no agreement between Greece and the rest.
      The ECB cuts funding to Greece. Greece starts defaulting on its payments, dragging its banking system down since these hold lots of government debt. It also defaults on the ECB, but crucially, it is still on the Eurozone (as in, its Central banker still gets a voice in Frankfurt)

      Greek banks go under, but guess what – most savings (capital) fled Greece long time ago.
      The hit on the bankswill be taken by Greek shareholders.
      Th hit on the ECB is imperceptible in its now burgenouning balance sheet.
      The Greek state is now a pariah in capital markets (for the time being) but crucially, it has a surplus. It can keep functioning
      People get very angry, but since the impact is not felt anywhere (although the ECB will have to “share” its losses with the member states, its not like interest rates will move), so the whole issue blows off.

      Greece is still a member of the Euro, albeit one that as no access to the ECB funding.
      The capital that fled slowly comes back to Greece. Not so constrained by a huge debt, they get can to their feet again – hopefully having cleansed their cleptocratic rulers in the meantime

  9. Marco Cattaneo
    February 9, 2015 at 7:54 am

    Syriza would like to avoid Grexit but Grexit is hugely better to them than pretending to keep on following the failed Memorandum strategy. By the way, Greece (or any other eurozone country for that matter) has a much more efficient strategy than a breakup: introducing a parallel national “tax currency” http://bastaconleurocrisi.blogspot.it/2014/11/solving-economic-depression-in-eurozone.html.

  1. February 5, 2015 at 1:19 pm
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