By Cees Bruggemans
A Pyrrhic Victory inflicts such a devastating toll on the victor that it is tantamount to defeat. Is this the true lesson from Greece’s “No” vote?
Will there be a second major surprise this week, after the surprisingly strong (60%) Greek “No” vote to European creditor demands, namely that Europe will now turn around and do the decent thing, meanin
g do the bidding of the Greek majority?
Somehow this seems unlikely.
The omens early Monday morning didn’t start off well, with Greek finance minister Varoufakis (the game theory artist) reportedly resigning as he is not welcome at Eurozone meetings this week. That sounds rather ominous.
Markets started off early with a heavy preponderance of Grexit expectations, its probability now overnight seen to have risen from 20% to 70%. But then markets didn’t see the overwhelming “No” vote coming either. Could they be wrong twice, about Grexit Next, too?
It is true that this Greek business splits Europe (again) in two parts, the softer south and the harder north, those southern socialists with strong sympathies for their Greek fellow travellers who have spoken democratically, and the bigger creditors up north loathe of throwing good money after bad as good governance principles are being sacrificed.
France and Italy are reportedly willing to negotiate a deal, but what will Germany do? Or are we talking “good cop, bad cop” here? France and Italy “in principle” wanting to do the “right” thing for Greek people, looking good in their leftish home press, but leaving it to the bad cop with bad breath & attitude to lay down the law?
Merkel, too, is apparently inclined to take account of the larger picture. But despite a rather deep inclination towards eastern mischief it isn’t obvious that either China or Russia will happily foot the bill of Greek troubles, bearing in mind the Greek unwillingness to reform.
For European creditors, the money involved is one thing. More important are the principles underlying the Union. These are being trampled in the stampede for supposedly “easier” solutions. That won’t sit well.
The Greek population overwhelming voted against more hardship. Yet what the country requires in cold daylight is more reform, specifically lower state deficits through less government spending (pensions), higher taxes (VAT reform), and less structural rigidity (labour, industry reform).
Even if the IMF has suggested that Greece needs €60bn more aid support over the next three years, and that at least €55bn of old debt (a quarter) be written off (forgiven), cannot be offered up in isolation as the main reason for now going easy on the Greek population. For needed reform remains central to the overall creditor demand. And it is ‘reform’ (more hardship) that is detested and rejected most by a majority of Greeks.
Irish, Spanish and Portuguese people have incurred great hardship in recent years in order to abide with creditor demands to reform their deplorable situations. For Greece to expect to somehow be treated more leniently isn’t quite the obvious outcome to this challenge.
Instead, expect the ECB to be instructed not to increase its accommodation to Greek banks (so that yet more Euros can be withdrawn from circulation in Greece, to be put under mattresses’ or smuggled across borders). Also, expect the Eurozone leaders to butt heads & lock horns, whether to be more forthcoming or to allow Greece to drift towards the exit.
There is likely to be a call for European humanitarian aid in coming days as things on the ground in Greece keeping grinding to a halt, with money circulation ceasing with banks not operating as usual. Food & medicine access may be especially problematic.
Such humanitarian gestures, however, should not prevent a hard-nosed attitude at the negotiation table. Greek PM Tsipras rejected previous offers, the old offer is off the table, trust in Greek politicians at a low, and principle probably the main stumbling block. To belong in the Euro implies acceptance of common rules which cannot be selectively accepted or rejected.
Coming days and weeks will show how Europe will digest the wilful Greek majority. Markets are voting for a Greek exit without undue European strain. That may carry its own logic.
*Cees Bruggemans is consultant economist at Bruggemans & Associates