Much to my surprise the negotiations between the Troika and the Greek government ended in naught, Greece is officially in arrears after not meeting its latest scheduled repayment last Tuesday, and all bets are off regarding its likely exit from the European common currency (as her own leaders are not clear about the consequences of either a “yes” or a “no” victory in the hastily summoned vote that should happen this Sunday). Utter chaos, with capital controls already imposed, banks closed for a week (we will probably see more of that) and a limit of 60 €/day to be withdrawn from ATMs the life of the ordinary Greeks has taken a turn for the worse (although my particular guess, seeing the amount of money that had been hemorrhaging from retail banks in the last months, is that a sizable chunk of the population didn’t have that much money left in the banks in the first place).
The stock market took a predictable dive the Monday after the announced end of the negotiations which cost the creditor countries almost as much as what forgiving half of the Greek debt would have cost (2% of the market capitalization of listed companies in the main European markets -not taking into account the losses in Asia and America- of roughly 5 trillion would be 100 billion lost in a single day, versus a total Greek debt of 250 billion), although it has recovered most of it by the end of the week, so may be the damage will be contained after all, contained to Greece, where things are already as bad as it was considered they could turn in the most pessimistic scenario, and with no prospect yet of how or when they may start improving, as nobody has a clue of what comes next, when the capital controls may be lifted or in what denominations they may be paying their daily transactions a week from now… but in the meantime they sure as hell will cling to their precious euros as long as they can, which is a total bummer for aggregate demand and for the overall health of the economy, as you may guess.
Summarizing, a royal mess, with each party of the negotiations blaming the other for its abject failure (which illustrates a fourth rule of how organizations function that I may have to add to the three I’ve already identified, namely: “if there is a choice between a doubtful benefit and a certain loss of which somebody else can be blamed, ten times out of ten people will choose the second option”). As it was crystal clear from the start that both parties would be better off now if the negotiations had succeeded (although I already warned that Greece would not meet her obligations no matter what the terms were, as human folly would dictate she would have overestimated the growth caused by the loan extension, the revenues she would be able to raise and her ability to cut expenses; and underestimated the drag on her economy of the austerity measures she would have to agree to), it makes for an interesting exercise to apply the ADVISE model to better understand what has been going on under the radar.
First, let’s try to find out what kind of organizations were involved in the negotiations, as that in turn dictates what kind of goals we may expect them to have been pursuing all along. The Greek government is a “political” organization” if there ever was one. As a government they should have as its main goal the perpetuation of the group they represent, namely the whole Greek people. Unfortunately for such a people, this was a new government whose cadres were hastily formed from a coalition of left-wing parties (Syriza) which didn’t have much time to settle in their role of representatives of all the Greeks, and which thus had a strong bias towards their former goal before they attained power: the perpetuation only of those sharing a homogeneous ideological worldview according to which austerity never works (not far from the truth), multinational institutions are representatives of the elites against the interests of the common people (ditto), capital is inherently evil and opposed to the well being of workers (doubtful at best) and the solution to most of society’s evils are to be found in more regulation and a tighter centralized control of what and how people should produce and distribute (beyond doubtful, into downright falsity territory). At the other side of the table, under the ungainly moniker of “the troika” we have a mixture of representatives of the European Union (a political institution with a most imprecise definition of what and who belong and does not belong to the group it is supposed to perpetuate), the Central European Bank (a monstrosity of half economic and half political nature, as its avowed end is not just to make money for its members, but to keep price stability and “somewhat” facilitate economic growth of its constituents nations) and the IMF (same as before, with even less clear and more contradictory goals, which has a lot of merit). This is to say that everybody around that proverbial negotiating table as at best unsure about what they were trying to achieve, and at worst had incompatible goals with no rules for adjudicating between them.
Let’s focus for a moment in the clearest example: the European Union is as political an organization as can be dreamt of, so at least its goal should be clear enough. It is, indeed, the perpetuation of the countries that form it (in its present incarnation, as it has been varying along time). The means to achieve that goal, as it understand them, is to ensure the greatest economic prosperity (that’s the standard perpetuation strategy since the beginning of the Industrial Revolution: more riches allowed for more and better armed boots on the ground to defend oneself from real or imagined foes, as I have repeated tirelessly, although in a world where all the foes are imaginary it becomes a loosing proposition, because the pressure to produce ever greater quantities of material goods is achieved at the expense of making everybody more miserable, and instead of growing richer they end up not only poorer, but also less and less populous), and the recipe for that prosperity it has settled into can be summarized as free trade and low inflation. Not necessarily a bad recipe, and it has proved successful for many decades, so I do not blame European bureaucrats to stick to it. Unfortunately, what has worked for years may not work any more in a scenario of increasing automation, increasing competition from lower cost countries and falling birthrates that put a brake to the growth of the internal market… but we will come to that later on. Suffice it to say by now that at least the EU representatives were playing according to script and nothing of what has transpired allow us to think there was any bad a faith in their moves (other than relying on a rulebook that has become counterproductive). Along them were a couple of financial institutions (ECB and IMF) that were mainly interested in getting their money back and avoiding moral hazard not because that per se made any economic sense (it should be abundantly clear by now that keeping the austerity measures made that recovery less likely, instead of more, but sadly it is not clear at all that just forsaking those measures and letting the Greeks spend like there was no tomorrow would increase the probability of being paid back one iota) but because that is what brings more respectability to their directors, and let’s not forget that for a banker respectability is the highest currency there is in terms of social position, and social position is what they go everyday to work to attain, so again no surprises here, Tsipras team should have known from the start what he may expect from them (and again, as far as we know, they did not deviate an atom from that preordained script). By the way, the European Union is a fine example of our first law, as with time its ability to deliver its purported goals (more prosperity for all the member countries, as the imagined means to perpetuate them) has grown steadily shakier, the conflicts between those members have grown more intractable (as the second law predicts), and they have shown themselves unable to come up with an innovative architecture to address that inability, resorting to the typical response of attempting to grow outside of it by the incorporation of additional members that only makes the problems worse.
Things get murkier when we get to the Greek negotiating team, for a reason that clarifies much of today’s political discourse. Under certain conditions, political parties shift gradually their goals and substitute the improvement of the social position of their members for the original intent of perpetuating certain distinctive features of them: more or less imperceptibly they turn from political organizations into economic organizations. What conditions are those? I would dare to suggest that when the identity of the group is imprecise or shifting due to external pressures that can not be resisted, the temptation to stop representing such group and start pursuing one’s private interests becomes too great. According to Acemoglu and Robinson’s terminology, that’s the point at which a party that has recently acquired power intent on representing all its countrymen (and thus lifting all of them out of poverty, or redistributing more fairly the national product) finds the potential of already existing extractive institutions and starts using them for their exclusive benefit. However, I do not think that is what has happened here. There is a real risk of Syriza, after realizing the utter impossibility of delivering the kind of economic miracle (free lunchism at its best) they had promised their electorate may turn instead to steer the state apparatus to their own benefit. But I don’t think they are anywhere near that yet. Rather, they came to the negotiating table as a true political party, not pursuing their own benefit (as an economic organization head would do) but intent on getting the best possible deal for their faction. The problem is that their faction was not (or not yet) the one that the troika representatives imagined it to be. Whilst the latter were thinking in terms of what may make sense (and be acceptable by) the whole of the Greek population, the Sysriza boys were still thinking in their allegiance to the leftist cadres from which they sprang, and so wanted not just the average Greek to get the best possible deal, but also the average far left street protester to have their opinions vindicated. And those opinions had a number of red lines that probably were meaningless for a non ideological Greek but could not be crossed for an anticapitalist: respect the public pensions! Not a single public servant fired! Keep the healthcare budget! And if any of those (individually very laudable and very respectable goals) required additional money to be paid for, the universal response could only be: soak the rich! Have them pay for everything! (never mind those imagined rich had left the country, taking their fortunes with them, long ago, and that the few remaining ones could not burden the enormous pile of entitlements whose perpetuation was being demanded).
It seems to me that the troika negotiating team has never been able to wrap their head around that double representation, as they had grown accustomed to deal with governments that get rid of their previous ideological baggage the moment they engage in intra communitary discussions, and act consistently as representatives of their whole population, with minimal previous commitments, and this greater flexibility to adapt to the give and take of any negotiation of this kind. So in some sense there is truth in the view that the Greek team has been too rigid and doctrinaire (that was the common complaint at the beginning of this little drama: every time Varoufakis took the microphone it was to lecture and admonish his fellow finance ministers, with very little in the way of bartering and haggling that they surely were expecting), but that rigidity and submission to doctrine is a direct result of where the Syriza boys were coming from and what they perceived as the goals of the organization they belonged to. However, it is moot at this point to discuss the true origin of the fracas, what seems certain is that if negotiations are to resume, they will be led by a different team on the Greek side, after (and if) a slim majority decides to accept what were the conditions of the troika a week ago (or some slightly adapted version of it). And no matter what the final result of those negotiations ends up being (something very close to what has been apparent all along it would be: some debt restructuring that will reflect losses of between 20% and 50% on the creditors’ side, a relaxation of the primary surplus target in the vicinity of 1.5% and a couple of “austerity relaxation” measures to throw as red meat to the Greek public, like a marginal increase of some pensions, or the allowance to hire a few thousands of public servants more), Greece will not satisfy them, because the actual economic growth it will experience under them will fall short of the optimistic projections put together to sell the program to the European public.
So we will be back at square one in six months, a year tops. Unless the “no” wins, Syriza feels emboldened, demands the resumption of the negotiations hoping to exact better terms, only to find that their European partners don’t want any of it, and kick them out once and for all, and much as they have vowed not to do it, they soon have to start issuing IOU’s which end up being the basis of a new currency, as the euros their citizens have stashed under their mattresses can only take them so far in the absence of additional credits, that neither the ECB nor the FMI will be in a position to grant. Much as it pains me to say it, the Greeks are past the point of no return, and have been for a long time now (as some commenter said, the only valid option for them would be to rewrite the last twenty years of their history, at a minimum), and their choices are between a lot of pain now and a very uncertain future, or some pain now, lingering uncertainty, and the same lot of pain (and of uncertainty) in the medium term…
What about the application of orthodox (very apt apropos Greece!) Keynesian policies to increase aggregate demand through aggressive government spending that would be enabled by exiting the “euro straitjacket”? wouldn’t that, coupled with the regained competitiveness enabled in turn by a much devalued new currency, allow Greece to quickly bounce back, and even become a shining example of the foolishness of austerity policies, and the kind of beacon for alternative policies some progressives seem to dream about? Dream on, little boy, dream on. I wouldn’t bet a single euro on it. As I’ve said many times, austerity doesn’t work (we have ample proof of that)… but increased public spending doesn’t work either (see Japan). You can grow your debt as much as you want, hoping that inflation will ease the burden of paying it, but increased automation and population decrease will prevent such inflation from materializing and growth to resume. So you would in that scenario most likely have huge devaluation, ballooning debt at crippling interest rates (to pay for imports that could not be substituted), and the same dismal growth and persistent joblessness. Lousy deal, but all deals available to Greece now seem to be equally infested with lice.