Tuesday, 7 July 2015

Now what?

The discussions between Greece and the Euro Group are a curious sort of negotiation. Normally when two parties negotiate each has something that the other wants. Greece, with a bankrupt economy, an intransigent socialist government and a population who overwhelmingly rejected the proposed bailout, doesn't appear to have anything to offer. Across the table meanwhile sit the European institutions and governments whose agreement is needed to recapitalise the Greek banks, enabling the country to function again.

So one might think that this was less a negotiation and more of an impassioned plea for a slightly less drastic austerity package to secure the funds needed before the banks are empty, the fuel pumps run dry and the hospitals run out of vital medicines. After all if the two sides ultimately can't agree on this then Greece will be ejected from the Euro, something Tsipras has expressly said he is against on several occasions.

The trouble is, this is the only bargaining chip Tsipras has. Leaving the Eurozone is the only course of action which actually makes any economic sense at all for Greece. Trapped in the single currency it will remain uncompetitive and locked into a downward spiral of high unemployment and negative growth. Outside, with a greatly reduced currency and the now inevitable debt default Greece can begin to rebuild its tattered economy.

Of course, this is the very last thing the Euro Group want. If Greece were to leave the Euro and return to growth then Portugal, Spain perhaps even Italy would follow. The whole single currency project would be shown up to be a damaging and ill-conceived project driven entirely by political dogma, without so much as a nod to well-established economic theory.

This is not a case of the Eurozone deciding on whether or not to eject Greece, but of the European Union mandarins preserving their political project in the face of economic reality. Their method, of course, will be bullying and threats, and with Greece running out of cash, fuel and medicine they have a very strong hand to play.

The best possible hand Tsipras could play is to demonstrate that he is quite prepared to leave the Euro and issue it's own currency. He does of course need to be actually prepared to follow through with this. A drastic action, and a certain loss of prestige for Greece, but in the long-term almost certainly better than the status quo.

However my feeling is that threatened with the collapse of their project and a public admission of the errors the EU officials would offer Greece something very much more attractive in order to stay in, and would also realise that ultimately their interests are best served by returning Greece to growth, not bleeding it dry to punish them for a debt they can never hope to recover.