by Frank Schnittger
Mon Jul 6th, 2015 at 06:54:10 AM EST
When I wrote Beware of Greeks bearing gifts: a study in negotiating styles, it was because I had grave doubts that Yanis Varoufakis' negotiating style would yield the kind of results he sought. Of course I had even graver doubts that any kind of negotiating style would yield a reasonable result for Greece, and so that question was essentially moot: We where heading for a diplomatic disaster one way or the other. The neo-liberal fantasy of austerian "reform" was simply too deeply embedded in the culture of the EU governing elite for a successful outcome to be possible.
It is as yet unclear whether the Greek referendum result will prompt a fundamental re-think on the part of the EU elite. Merkel's hastily arranged visit to Hollande at least provides a signal that there is some awareness that a new approach is required. Krugman encapsulates the EU dilemma nicely: Ending Greece's Bleeding - The New York Times
The [European] central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn't it will effectively force Greece into introducing a new currency.
Specifically, if the money doesn't start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency -- and which might soon turn into the new drachma.
Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.
In the failed negotiations that led up to Sunday's referendum, the central sticking point was Greece's demand for permanent debt relief, to remove the cloud hanging over its economy. The troika -- the institutions representing creditor interests -- refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece's debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?
I have no idea -- and in any case there is now a strong argument that Greek exit from the euro is the best of bad options. Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue -- let the drachma's value drop, both to encourage exports and to break out of the cycle of deflation.
The problem with any negotiating style is that if you as negotiator become an issue, you're losing. That is why Corporations and Governments change their key negotiating personnel so regularly. If you become identified with a failure, you become part of that failure, and it doesn't matter how brilliantly you conducted yourself during that debacle.
At one point during my corporate career I was a key assistant to a Chief executive pushing through a major change programme within the company which was necessary to secure its long term future. We succeeded, but at a price. Head Office, which at that stage had moved to London, was extremely unhappy at the price which they had had to pay to get the change programme agreed. Even though the price was absolutely justified, and delivered a significant return on investment for the company, my bosses' days as Chief executive were numbered. I was destined to go down with him unless I too could move smartly, stage left.
Whilst he negotiated a high profile position in the public sector, I switched career from Human Resources to Information technology. I had been convinced, for some time, that IT was the key to the organizational transformation that would be required to keep the business in Ireland afloat. So the change was not as dramatic as it might have seemed to others. The issue with our IT department at that time was not any lack of technical expertise, but its inability to bring in major projects to specification on time and within budget. My experience in that area made up for a lack of technical qualifications.
I have absolutely no doubt that Yanis Varoufakis will remain an absolutely key figure in the future of Greece, whatever his formal role. His departure from the Finance Ministry gives the Eurogroup the fig leaf of blaming his personality on their previous failure. The fact that Tspiras, too, has been the victim of a concerted campaign of character assassination will be conveniently forgotten. Victory in a major election or referendum has the effect of granting him a fresh start.
The EU now has one chance of getting this right, otherwise the parallel currency option followed by effective Grexit as also outlined by Krugman will become the only game in town. My best guess is that a deal on the following lines will be agreed:
- The ECB will provide more or less unlimited ELA support to enable the Greek banking system return to normality. If the solvency of a bank is at issue, the ESM will also do the job it is supposed to do.
- No new debt forgiveness will be agreed as this has become politically toxic for many Eurozone members, but maturities will be extended to prevent defaults and ease cash flow difficulties, and the interest rate charged will be reduced to virtually zero. Inflation and growth in the Greek economy will then be tasked with making this sustainable over time.
- Most "reforms" i.e. public expenditure reductions and tax increases will be retained if only to provide a fig leaf for Eurogroup ministers but they will be counterbalanced, to some degree, by a European investment Bank funded programme of infrastructural investment and modernization to mitigate the deflationary effects of the above, and to improve the prospects for real growth and employment creation within Greece.
- A relatively small programme of "humanitarian aid" to alleviate the worst aspects of poverty and youth unemployment in Greece will be included perhaps mainly as a PR exercise and to salve collective consciences. However, this could include the seeds of a future longer term commitment by the EU to guarantee the provision of minimal unemployment, healthcare and educational services within the EU on the lines of previous regional, cohesion, and structural aid programmes and to put some flesh on the bones of The Charter of Fundamental Rights which is a legally binding part of the Treaty of Lisbon.
All of this presupposes a level of basic competence and decency on the part of the EU, but also a degree of enlightened self interest. The consequences of a Grexit are extremely damaging for the EU, and sometimes, if rarely, a crisis like this can lead to an imaginative step forward by all concerned. For all her dominance in EU politics, Merkel has yet to put her stamp on European history.
Adenauer led Germany into economic recovery after a disastrous war; Brandt initiated his Ost Politik out of the debacle of the cold war and Berlin blockade; Schmidt assisted in the rehabilitation of Germany within a growing EU, and Kohl re-united Germany. Will Merkel succeed in re-uniting and re-invigorating the EU by making the preservation of basic human dignity and living standards a competence and responsibility of the EU?
Merkel risks losing the UK if she tries to do so too blatantly, and much of it will probably be clothed in neo-liberal jargon. A two speed Europe with the Eurozone as its inner core seems an unavoidable consequence, but I remain optimistic that it is still possible to achieve a positive and even trans-formative outcome from the disaster that has been the management of the Greek crisis to date.