Lessons from Greece: More Crises to Come

Syriza has failed Greek voters by backing down on all its key promises, says Morningstar's Jeremy Beckwith, so with the situation little changed there's no reason to not fear further upset

Jeremy Beckwith 25 February, 2015 | 10:54AM
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It is now one month since Syriza came to power in the Greek general election. Much has been said across Europe, many meetings held but little has changed.

Syriza said, both ahead of and immediately after the election, that they would immediately and unilaterally throw out the Troika (the term for the EC, ECB and IMF group that oversaw Greece’s adherence to the bailout conditions imposed) to regain sovereignty over economic policy and end austerity. They said that they would demand a haircut on the amount of debt owed and that the rest of Europe would agree to this because it was a) fair and just and b) Europe would be scared that Greece might pull out of the euro and set off a chain reaction amongst other members that would call into question the very existence of the single currency.

Over the last few days Syriza has backed down from all of these demands, with apparently very little gained in return. Europe has stated very clearly that any write-down in the value of the outstanding debt is unacceptable to them, and Europe has continued to demand that the same trio of institutions (though now called the institutions rather than the Troika) determine whether Greece is complying with its obligations under the original bailout agreement. Also rather than anything happening immediately, as Syriza demanded, further discussions will take place over the next four months and conclude just before Greece is required to repay the next tranche of its debt.

It seems difficult to argue anything but that Syriza has failed miserably to deliver what it had promised the Greek voters. Indeed, the risk now is that Syriza is unable to get its own MPs to give parliamentary approval to what it has agreed with Europe, which would lead to a new crisis.

With a finance minister who was formerly a professor of game theory, everyone was interested to see the negotiating techniques that Syriza adopted. At the time, and even more so with hindsight, they do not seem to have been very smart. The first acts of Prime Minister Tsipras and Finance Minister Varoufakis seemed designed to upset and offend the Germans, which may have been good for domestic politics but are not ideal for bringing on board the key decision-maker in reaching agreement with Europe. They also made significant concessions very early; within a few days of coming to power, Tsipras was saying that Greece intended to repay every euro of its debts. Syriza’s maximum leverage was always likely to be immediately after the election, when “democracy” was on their side. By allowing discussion to go on for another four months they will lose that benefit. Finally it became clear as time went on that the “disaster” scenario of Greece pulling out of the euro was something that Germany was quite prepared to live with (indeed many Germans are actively campaigning for it), whereas Syriza did not have a mandate to allow this given that 70% of Greeks want to remain in the euro.

By contrast, Europe – led by Germany but strongly encouraged by other Northern countries such as Finland, who share the German approach to economic discipline, as well as by Southern countries such as Spain and Portugal, who have been through similar austerity programmes to Greece without (much) complaint and did not see why Greece should get any special treatment – played their hand in a very robust style.  Schauble, the German Finance Minister, seemed to revel in the role of “euro-enforcer” and has insisted on Greece backing down on almost every substantive element of their demands.

The lessons from the last month seem to be: i) when going into a negotiation you need a credible fall-back position if you can’t get what you want – Syriza rather put a gun to their own head and threatened to shoot; ii) Syriza, by conceding externally in Europe, may well have lost credibility internally, disappointing both many of their own party members and many Greeks who voted for them; and iii) Europe does not recognise democracy as an appropriate reason to go against past agreements and the rule of law (Juncker has made this point explicitly). It should now be abundantly clear that being a part of the euro means a substantial loss of sovereignty for a nation, especially if they have a weak financial system.

Not much has changed in the last month. Greece is still stuck with debt it will never be able to repay; the Greek government has almost no say in how its economy is to be run; and the European political class have asserted their right to ignore the results of democracy in their quest to maintain the structurally-flawed single currency. This is not a long-term equilibrium – there are more crises to come.

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Jeremy Beckwith  is Director of Manager Research for Morningstar UK