One of the steady refrains from the rather unsteady talking heads on television since last weekend when the Greek crisis broke fresh ground (see “Bubble and Squeak”) is stuff on these lines
- Greek crisis is about politics not economics
- The eurozone is a political construct not an economic one
- For political not economic reasons, Germany will bail out Greece
And so on.
Perhaps these folks don’t really get it – politics IS economics and vice versa. When a particular political party sweeps into power, as Syriza did in Greece earlier in the year, the political choice was largely a function of an economic one – in this case by the Greek people namely to get a political party into power that promised to deliver a better economic solution. Specifically, Syriza promised a continuation of European bailouts for Greece without the accompanying austerity, in other words. In another election this year, the British public shrugged off months of downbeat political drama and rallied around the Conservatives – distinctly not for political views which many didn’t seem to share but for the economic track record (or rather, the fear of the other side’s track record), as I recounted in “Is the UK headed for a challenging election result”. In both cases, economics trumped politics; subsequently we have seen the two apparently different forces moving largely together.
The efforts of the PM Tsirpas were boosted by the game theorist chosen as Finance Minister, Yanis Varoufakis whose specific goal was to focus on the weak areas of the counterparties namely:
- The potential losses that would be underwritten by the European Central Bank should Greece declare bankruptcy
- The direct losses that European taxpayers would have to bear due to the guarantees on Greece (the EU)
- Losses that would be suffered by the International Monetary Fund
In effect, the core idea behind Varoufakis’ version of prisoner’s dilemma here was to suggest that both sides would choose a sub-optimal outcome. The problem in my view is that he mistook the sub-optimal outcome for Greece to be the same as that for the Troika as the following table makes clear.
|Dilemma||Troika Relaxes Austerity||Troika Maintains Austerity|
|Greece agrees to bailout conditions||Positive for Greece, Troika gets to defer losses||Political nightmare for Syriza|
|Greece rejects bailout conditions||Political nightmare for Troika||Greece out of euro, Troika has to absorb losses immediately|
Mr Varoufakis imagined himself to be pushing the Troika towards the top left corner of the table, but ended up on the bottom right instead. The reason is nothing more prosaic than timing – being an academic perhaps he forgot about the changes in dynamic conditions and what those mean for game theory; in other words he was using in mid 2015 a strategy that would have worked out well in mid 2009 or even, at a stretch, mid 2012.
The reason he missed that was he wasn’t thinking clearly about the changes in political reality since 2009 in Europe:
- Pro austerity parties had won power and shown progress in countries such as Ireland and the UK, while anti-austerity parties in countries like France had simply failed to deliver any real growth or turnaround in economic conditions
- With the passage of time (and nationalization of various banks), the risks of a Greek exit on the financial system had receded
- The so-called contagion risk that was a hot topic in 2009 was simply not the case anymore based on fundamentals of even the weakest Eurozone countries
He also missed something a bit more interesting, if sinister. From a purely German political perspective, Greece had become a dispensable and expedient member, economically:
- Germans all suspect if not explicitly knew that around half of $350bn of total Greek debt was a write off, much of it to be borne by themselves
- Pushing the Greeks out would highlight the very real costs and consequences of small countries getting out of the euro
- In turn this would help to rein in any “wise guys” (in strictly the New Jersey sense of the word) in Italy and Spain, preventing any copycats
- Losses on Greek debt would be a political embarrassment but the eurozone would move on given the relatively small size of the Greek economy and the predictable reduction of noise that would accompany an exit
In all of the above calculations, its clear that whether you consider the point of view of the Greeks or the Germans, and everyone else involved the simple focus is never economics alone, or politics alone. The two are completely intertwined.
Away from the main players, let’s look at how others around the world have responded to the prospective exit:
- UK’s chancellor warns of “serious adverse consequences” of a Greek exit from the eurozone. Here, we have a combination of political (the upcoming referendum on whether Britain stays in the EU or no) and economic (a rush to safety of the GBP from the EUR would diminish the attractiveness of UK exports, and affect the above mentioned referendum).
- US has expressed a wish for both sides to continue their dialog – which is what a good friend would do anyways; but focus instead on the next piece of information which is the fears expressed about Russian overtures to Greece and the likelihood that post default, Greece could spin out of the Western European orbit towards the more hostile Russian one. That’s politics on the surface, but economic interests are more obvious – this would seriously weaken the euro, and pose major challenges for US companies
- China has expressed an explicit desire for Greece to stay inside the euro. The economic rationale is obvious from the point of view of demand; but the political calculus is clearly intertwined, which is that if Greece “can” exit the euro, why do Xinjiang or Tibet need to be part of the RMB?
In every case, it is clear that both the political and economic considerations go hand in hand. So a memo to the talking heads : stop talking about the two as if they are two different things.
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