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The humiliation of Greece and Tsipras’s fatal mistake

Gérard Roland, E. Morris Cox professor of economics and professor of political science | July 15, 2015

A large part of Europe is still shell-shocked by the “compromise” that was decided in the Sunday, July 12 Eurozone marathon. Without repeating the list of reforms imposed on Greece, they are much harsher than what had been negotiated weeks and months before, even harsher than anything imposed on Greece since the beginning of the crisis. Whereas a few days before, debt relief for Greece was in sight, this was taken off the table. If Greece is to stay in the Euro, only further austerity and misery are to be expected. How did we get there?

Syriza was elected because of the Great Depression imposed on Greece by its creditors since 2010. The new Greek government had a mandate to alleviate the Greek debt, but also to stay within the Euro. Eurozone governments and Finance Ministers, Schaüble, Dijsselbloem et al. were dismayed. Greek voters had had the bad taste of electing a leftist government. That this election was the result of the extremely harsh austerity imposed on Greece did not seem to sink in.

Greek flagThe new Greek government was told that contracts are sacred and that they had the duty to implement the promises signed by the previous Greek government. This was of course unacceptable to the newly elected Greek government. Negotiations went nowhere after months of discussion. Then Tsipras came up with the referendum on the latest Eurozone proposal. This ended the negotiations for a week until the end of the referendum. The ECB’s Emergency Liquidity Assistance to Greek banks was strongly reduced, forcing Greek banks to close. The Eurozone countries and the Greek opposition presented the “No” as a vote in favor of Grexit, which Greeks did not and do not want. This blackmail did not work and the “No” still won, with over 60%.

Tsipras then showed the will to come back to the table of negotiations. In the meantime, the deadline for extension of the second bailout program had expired and Greece failed to make a payment to the IMF. Angela Merkel was the first to react to the victory of the “No,” saying that conditions were not present to start a negotiation on a third bailout program and that Greece had to make a proposal.

Tsipras, with the help of the French, made a proposal to the Eurogroup that was hardly different from the Eurozone proposal that Greek voters had rejected. This seemed like a smart tactic. Indeed, by making a proposal similar to what the Eurozone had proposed, this was a way of bringing debt relief on the table, something the Greeks had asked since Syriza’s electoral victory. Indeed, the Greek proposal was met with positive remarks. Lagarde, Tusk, Juncker and others started talking about the need to associate this Greek proposal with debt relief. It looked like the referendum had given Tsipras a new mandate against austerity and that his willingness to compromise should bring the Eurozone to agree on debt relief in exchange for reforms.

Nightmare scenario

Things started looking good for Tsipras, but then things turned to a nightmare. On Saturday, July 11, at the Eurogroup meeting of Finance Ministers, Schaüble and Finance ministers from nine other countries rejected outright the Greek proposal and insisted on a much harsher list of reforms. At the same time, while not being officially discussed, a paper by Schaüble circulated, invoking the possibility of a Grexit “for five years.” Indeed, it appeared that there was a push to exclude Greece from the Euro. There was no consensus on that position and the debate was brought to the heads of state.

We know the outcome. Monday morning, Tsipras accepted the much harsher austerity conditions in order to avoid a Grexit. Debt relief was still excluded. This was a clear capitulation, because Tsipras was now accepting a proposal that was much harsher than what was rejected by a large majority of Greeks in the referendum. Tsipras courageously took responsibility for this defeat and managed to pass Wednesday night through the Greek Parliament the list of measures the Eurozone had been asking for.

What went wrong? Tsipras’s fatal mistake is that no preparations had been made for Grexit. The reason was that this is not an option that was ever desired by the Tsipras government. They thought that since Grexit would be catastrophic for everybody inside the Eurozone, it was not credible. The support in the referendum should show the support of Greek voters and help increase the bargaining position of Greece.

This lack of preparation is the weakness that was exploited by Schaüble. Once it was clear, that Germany and most of the partisans of austerity were ready to exclude Greece from the Euro, basically by getting the ECB to cut funding to Greek banks, it would have been a catastrophe of major proportions for the Greek economy. Truly, there was a large risk for the Euro, but by showing readiness to exclude Greece from the Eurozone, Tsipras literally had a gun to his head, and had no other choice but to capitulate.

The credible threat of Grexit is what did him in. If Greece had made serious preparations and was ready to weather a Grexit, things would have been completely different. The threat of exclusion would not seem that terrible to the Greeks, whereas the risk of Grexit to the Eurozone would seem much more serious. The threat of Grexit would then have seemed less credible. To me, this is the fatal mistake that Tsipras made. Overall, he was still able to push the bad agreement through the Greek Parliament. Germany now looks very bad to the outside world and Greeks look like victims, but are likely to go through a terrible time as their economy is further strangled.

What next?

Where do we go from here? Tensions inside the Eurozone have become stronger than ever. Popular indignation against austerity policies is increasing, especially in countries that have suffered most from them. But overall, people are becoming more and more disgusted with Europe as it is. In Germany and parts of Northern Europe, recriminations against Greece are getting stronger and stronger. Many people think the Greeks should have been kicked out of the Euro.

The hardliners inside the Eurogroup do not trust Greece to implement the harsh policies it has signed up for. They do not feel Schadenfreude, but feel cheated by the Greeks. The fact that Tsipras said he was forced to sign the agreement in order to avoid Grexit is seen by them as proof that he does not want to implement the measures imposed on him.

In reality, we are at a dead end. The Greek debt is clearly unsustainable; there is not in Greece the state capacity to implement many of the austerity measures agreed on; the privatization part of the deal is a terrible idea, since prices of privatized assets can only be extremely low, and the whole program amounts to a spoliation of Greek public wealth. Moreover, the Greek economy is set to continue a vicious spiral of depression, deficit, further austerity and depression. This cannot and should not continue.

Maybe there will be substantial debt relief after all for Greece, and maybe there could then be a set of measures that would bring growth back. Even in this optimistic scenario, the European dream has been tarnished to such a degree that it is hard to imagine how things can be repaired.

At best, there should be deep reforms to reduce the democratic deficit inside Europe and have a fiscal policy comparable to the U.S. federal policy. This is probably not going to happen. Nationalism is flaring up everywhere and European solidarity is at a low point.

The pessimistic scenario looks more likely at this stage. Grexit has been avoided for a few weeks or months, but the Greeks will be pushed out when it appears that austerity does not work. The Greeks will of course be blamed for it. This will lead to deep divisions inside Europe that will almost certainly lead to its breakup into several pieces, sooner or later.

Germany will then, for a third time in a century, have wrought havoc on the European continent. All that only because of its misguided economic ideas, because they have not learned the lessons from the Great Depression and the murderous follies that followed.

Comments to “The humiliation of Greece and Tsipras’s fatal mistake

  1. Reply to j. mcintosh: I do not understand your argument. Of course the mindset of the southern countries is closest to Turkey, Israel and the Arab countries. We form the border with these and deal with them more than the central countries Europeans do.
    And the Eastern countries are more similar to Russia. The entirety of the balkans have been affected by Europe – Middle-East and Russia.Do not also forget that Greece had been occuppied by Turkey for 400 years, missing the great Renaissance that the rest of the Europe had. But keep also in mind all European values stem from Greece.
    I am not sure how you define “Europe”. As a Greek I was taught when we entered EU and Eurozone that Europe meant solidarity, meant unity, meant support and that we would not have to deal with the rest of the world and with some of our most dangerous enemies on our own. This was the vision of a united world from the ancient Greece era. It seems we were taught wrong. I do not think Germany in the last two centuries worked in favor of that. And even now still:
    -Cyprus is still under foreign occupation – Europe could not even care less even though they could have intervened by now and enforced an EU-NATO solution and allow the proper integration of the whole island.
    Turkey should not have military stationed on the north side.
    -The south-east and north-east european borders are undermined and threatened on every-day basis and the southern countries are on their own to handle the flux of immigrants
    The response of the rest is :” Kick them out” as if you are going to get a disease or something, instead of actually helping resolve these problems…
    And in Greece’s issue, again the response is you do what you are told , you follow the rules because we (Europe-Germany) has made them and the rules work for us and there is no other discussion. It is like trying to enforce a young kid your own ways and then threatening to kick the kid out of the house if it does not comply and does not become like you.
    As I presume , from your perspective Europe should just be the rich,fully-developped, fully-industrialized countries club that goes skiing in the Alps or plays golf or something. So in that sense not only Greece should be kicked out but a lot of east europe countries that joined recently and cannot compete. So again, if a minor country cannot compete the central EU coalition (which is normal since a single country on its own cannot compete EU) it does not deserve to be in? And of course, the fact that the greek prime-minister decided to ask for the opinion of his people, was the reason for Germany to actually punish Greece for this even more.
    Europe has spent a lot of their resources to build the core, they created the european organisations with their own standards with the impression that the rest will simply imitate this. Then they gave money to the periphery with little control/guidance over how this is spent and without paying attention to the specific problems of each country.
    Obviously, issues have to be resolved and discussions to be made,solutions to be found but the centralised Europe has little invested in the periphery of Europe. And unfortunately the writer is spot on.
    For the majority of us, the way this issue has been handled, the dream that we had for Unified Europe is out of the window. Modern Europe is the europe of bankers.Personally, I have travelled enough within the continent but I have grown to hate it day by day with what is going on and with the existing mentality and conditions. The current leaders do not seem to be capable to fix this situation and even if they could to a degree, the glass has already been broken.
    This crisis has shown how many differences and how much hatred is still festered between the nations of Europe and has actually added even more to it.

  2. Quite appalling, both the blog on “The humiliation of Greece and Tsipras’s fatal mistake” as some of the comments following it. I cannot but conclude that anti-European lines of reasoning and – unfortunately – not so “lingering undercurrents” against Germany i.e. its past are the underlying principles governing them.

    Let first be clear that not only Greece is spending more than it should. Please refer to the trading deficits table below:
    Country Surplus (+) or deficit (-) in billions of USD
    China 382,4
    Germany 293,5
    Saudi Arabia 190,5
    Russia 188,7
    Qatar 97,6
    U.A.E. 97,0
    The Netherlands 85,6
    Greece – 27,4
    Spain – 33,2
    France – 96,0
    Japan – 138,4
    UK – 176,1
    US – 786,2

    As one can easily calculate the US deficit is larger than the surpluses of China & Germany together. The simple conclusion should be that countries like the US, UK, Japan and France are living above their standards. It is a ticking time bomb.

    How do these deficits get financed? By credits supplied to them by the international community, China – for example – is doing that on large scale securing the unpayable debts by rare earth metals, mineral rights and oil in all less-developed countries in the world. In our case Greece is supported by the EU.

    Greece, Italy, Spain & Portugal had these problems from early on. But at that time their solution was in devaluation of their respective currencies, leaving the loss abroad, in the currency markets. However that policy intention they maintained after admission in the Eurozone. And that … doesn’t work any more!

    One of the comments was on the falsification of the economy data sets. I seem to remember that only three countries passed the original Euro test, i.e. Ireland, Denmark & The Netherlands. All other’s found ways to pass it by creative bookkeeping. So nothing new under the sun when reflecting on the bookkeeping in Greece.

    When a country closes its borders for import and safeguards its domestic industry, economic knowledge tells us that the country is stealing from itself. Their industry lacks the need for adoption to the world market, their innovation holds and prices for their inhabitants rise. Lending for consumption leads to the same effects.

    Lending for consumption favours imports. China subsidies her industry to secure business and therefore exports i.e. a positive trading balance. EU local industry loses market share, experiences pressure on their profits and become less attractive for investments. Surplus money looks for ROI and therefore the capital balance will show outgoing flows towards industries abroad (China could be an idea!?), while at the same time ingoing flows re investments from countries like China in land, infrastructure, company take-overs and of course debts financing.

    Conclusion: not adjusting your consumption to budget means hard measures later on!

    Accepting debt in order to keep consuming (Anglo-American line of reasoning?!) is in my opinion not done. As a debtor you do not take responsibility for your actions nor do you have the intention of repaying the debt. This is what countries as the US and, as is here the case, Greece have done.

    Referring to the blog I therefore disagree that:
    • the great depression has been imposed on Greece by its creditors;
    • debt relief should be given beforehand and
    • Germany has wrought for a third time havoc on the European continent.

    Debt relief will be a necessity, however only when Greece proves it takes the needed measures and shows it is resolute in executing them. Their turnaround should be permanent. I therefore do believe in an European Union, do not believe the dream is tarnished as suggested. Although some (a minority overall, I would say) are more and more disgusted with Europe as it is, Europe is our only way towards the future.

    It is illusionary to maintain the idea that European countries on themselves can be an equal counterpart towards the US, Russia, India and China to name a few. Only a combined Europe can hope to maintain a position in the Age of China. However, to become that equal power it necessitates us to:
    • create a banking union;
    • create a fiscal union and
    • to create a political union.

    The last steps to integration, which however politicians in power are kicking and screaming to fight in a lost rearguard battle. So I agree to the comment that a “fiscal federation” (would like to choose another term) is lacking, partly that “deep reforms are needed to reduce the democratic deficit” (although I do not like the terms “… reduce … deficit” in this connection, I would prefer “deep reforms are needed to increase the participation of the EU population basis”.

    It is time to abandon reflexes as recalling German’s history during WO I en II. Present day, the majority of the German people have not lived during WO II, their participation in Europe is well intended and they form a backbone for our world position. Anti-Semitism and neo-Nazi thought frames are everywhere: in the US, in the UK, in The Netherlands etc.; so do not blame Germany solely. I think these kind of reactions do not have a place in a sound discussion on the topic Greece, economics and ethical politics.

    So let’s work together towards an unified Europe. Since WW II several crises have been there, more than once Americans and others have declared the EU a lost cause, a project doomed to fail. Nevertheless the EU has emerged stronger out of every crisis. May be the critics fear the success of the EU?

  3. As long as humans continue to enable leaders like Merkel and Trump, crows shall most certainly inherit the earth, unless we turn the planet into another Mars first.

  4. 1) Weltanschauung of a nation of mercantilist engineers

    Could you ever trust Germany? Not only has it consistently been a danger to its own neighbors but, eventually and unequivocally, even to itself. It always ends in a disaster for Germany, no matter how good things might temporarily appear.

    Germany has always lacked long term plans. What kind of world view can it be expected from a nation governed by mercantilist engineers? It will always be Frankfurt and not Berlin in the driving seat.

    Yet again, Germany has been focusing on an Eastern “expansion” now under the banner of the European Union… They might argued that they are an economic soft power. There is not such a thing, and there will never be. Economics are embedded in politics.

    What makes Central and Eastern Europeans think that they are going to fare any better than East Germans even after a quarter of a century since reunification?

    2) The EU, a dead man walking

    Quite a few Nobel prize winners have criticized the EU since its incipience. These are not new ideas: Sala-i-Martin and Sachs, Kenen, Krugman, Stieglitz among others, criticizing the lack of fiscal federalism.

    Some of these issues have been understood since Roman times: Romans would not abandon poor or conflict-ridden provinces inside the Roman Empire to their own faith…

    In the US, the leadership in mostly “blue” states do not abandon the mostly “red” states with net contributions deficits.

    These transfers of payments from richer to poorer states create a long term stabilization for all members of the fiscal union. And these redistributions are not as intuitive and poorly understood because they are mostly done in the US through a tax-and-tranfer system.

    As Malkin and Wilson explain, it requires “centralizing the allocation of resources.” Germany will never agree to this. As Malkin and Wilson’s “simple back-of-the-envelope calculation … suggests that if the European Union had a system similar to that of the United States, Greek nominal disposable income per capita would have fallen 6.9% from 2008 to 2011 instead of the actual 11.2%. Income in Germany would have risen 3.7% instead of 5.9%.” Frankfurt would rather have that increase in income that a less depressed Greece. This is their nature and perpetual modus operandi. This is very unlike California or New York that would rather have a more stable system, and a less depressed Florida.

    3) A suggestion

    For those that have not heard of transfer of payments in upper div., undergrad. econ. courses, there is a tool called “search engine” (ex.: google, bing, etc). It is possible to read from people that are smarter and more educated. It is even better to read from people that have dedicated their lives to compete in the world of ideas (publishing research) or have won coveted prices (ex.: the credibility that Nobel or similar prizes carry).

  5. Prof. Roland, your concluding statement presents a grave warning:
    “Germany will then, for a third time in a century, have wrought havoc on the European continent. All that only because of its misguided economic ideas, because they have not learned the lessons from the Great Depression and the murderous follies that followed.”

    Specifically, 11 million innocent children, women and men were killed by the “murderous follies” of the German people against Europeans from 1933 to 1945.

    Further, Wikipedia informs us:
    “Study of the era and a willingness to critically examine its mistakes has led to the development of a strong democracy in today’s Germany, but with lingering undercurrents of antisemitism and neo-Nazi thought”

    Needless to say, the German treatment of Europe today must be watched most closely and acted upon most aggressively because of their history.

  6. Matěj, you are actually correct. In order to do this properly though we should go back say 500 years (or as far back as we have data) and everybody should pay what they owe to everybody else (hint, this includes after WWII Germany which is really not that far back).

    If that happens then countries like Slovakia, Estonia and Czech will be much more wealthy than they currently are (which based on the Checks and Slovaks I’ve met in my professional life they more than worth it — Sorry, Estonians, I was not lucky enough to work with any of you, yet ;))). Greeks would be at the 2004 level (aka neutral), which is pretty high and also based on my experience they worth it (actually the technical skills of the people I’ve worked with coming from this 3 countries was astonishing!).

    Countries like Germany, Finland etc will be neutral as well. Basically they will loose their growth but hey, as you said, if you borrow you must pay ;).

    p.s. All of my “computations” are based on my personal experiences (I’ve worked in Austria, Greece and Switzerland over a span of 10 years) and refer to a handful of people so I could be extremely lucky and therefore wrong in my estimations :).

  7. This is the same logic that talked about “predatory banks” and “lending victims” – now we have whole victim nations. Greece should be excluded from the Euro – Greece, Italy, Spain and Portugal are pretty countries but not really Europe – their roots are closer and their mindset is closer to Turkey, Israel and the Arab countries. The Mediterranean basin is not Europe and it should never have pretended to be Europe. The sooner they all leave the better for all involved

  8. I’m sorry to say but this not very wise opinion. I definitely wouldn’t talk about “humiliation” in the case of Greece. Greeks (or their democratically elected governments) were borrowing for long time in the past, knowing their debt is getting unsustainable. The reason for borrowing was keeping much higher living standards than the state of their economy could provide, not investments for the future. They were accepted to the Eurozone through falsification of their economy data sets.

    In the past, citizens of other countries of Eurozone, including those with much lower salaries and pensions (Slovakia, Estonia, …) were forced to take the burden of unresponsible Greek spending on themselves and lend money to Greeks. In my opinion it’s immoral to borrow from someone who has much less than me (post-communist Eurozone members) to artificially increase my living standards, which were already much higher than those of my creditors, and then think I should not give the money back because I feel like I could get a bit poorer than before.

    Greeks shouldn’t blame Germany for their problems, they must take their own responsibility. I know the young Greeks who never voted for any of the past governments which spent too much don’t feel well about paying for the debt, but it’s their parents and grandparents to blame, not Germany. And it’s not only Germany, all representatives of post-communist countries as well as Finland support hard attitude to Greece.

    Debt reliefs harm those who were responsible. If I borrow, I must pay it back. Greeks are not better people than Slovaks or Estonians and they don’t deserve higher quality of live at the expense of others. They must pay back what they borrowed even if it means getting poor. This situation should serve as a warning to those countries which aren’t trying to have ballanced budgets.

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