ECONOMY

Rift talk may be self-fulfilling prophecy

The Greek government has submitted the long-awaited list of reforms to the lenders but the initial signs do not point to an agreement anytime soon that could open the spigots of liquidity to the cash strapped economy. Fully aware of the difficult choices ahead, some in the government obviously think they could strengthen the country’s negotiating position by raising the specter of a breakup in the negotiations with the lenders that could even lead to a euro exit. However, these tactics weaken Greece’s position further rather than strengthening it and should be abandoned.

In the minds of many leftists, the country’s strong card in extracting as many concessions as possible from the lenders is an exit from the euro. For some of them, a minority, an exit is better than eurozone membership and they are willing to go the distance. Although they recognize in private talks the cost will be large for Greece initially, they counter the new currency will boost economic growth and employment in the years to come by propping up exports, inducing import substitution etc. They may not say that in public, but some of them have a change in the country’s socioeconomic model in the back of their minds.

When asked whether they are concerned about the public’s reaction to a sharp drop in living standards, they argue the majority of people will understand, positing it as a battle against foreign interests and the domestic oligarchy.

For the majority of the leftists who want to play the card but want Greece to stay in the eurozone, the rationale behind this strategy is simple. The lenders and others do not desire a Greek exit for geopolitical, political and economic reasons, they say. For geopolitical reasons because it could have a destabilizing effect on the region – i.e. the country could approach Russia etc. For political reasons because it could undermine and perhaps fatally wound the euro, the biggest political project of our times, marring Angela Merkel’s term because she would become the chancellor overseeing the breakup of the eurozone. Finally, for economic reasons because it would cost a lot of money and more importantly show the euro is not irrevocable, opening the door for other euro-area countries to follow in the future.

In the leftists’ view, the lenders have too much to lose by not accepting most of the Greek demands for an end to austerity and the kind of reforms envisaged by the SYRIZA-Independent Greeks (ANEL) government. “It is not worth destroying the euro project for a few billion euros. This is peanuts for them,” says a senior SYRIZA party member.

He adds that the success of the leftist-led government could strengthen other radical, leftist movements in other eurozone countries and this is something conservative forces will try to stop. The leftists agree the government has the mandate to keep Greece in the eurozone and negotiate hard-to-end austerity.

Theoretically speaking, the use of the exit card could be part of a negotiation strategy. But this card has to be credible for the strategy to succeed and Greece’s exit from the eurozone does not look like one. As a matter of fact, it looks more suicidal given the dire consequences for the country and the government seems to understand that.

Most analysts agree the agreement between Greece and the eurozone may not have been reached on February 20 if it were not for the threat of capital controls in view of large bank deposit outflows at the time. The government was able to communicate it to the public in a skillful way as the product of tough negotiations and overcome internal opposition by highlighting the implicit reference to fiscal relaxation.

We suggested last week that the government should work closer with the lenders’ technical teams in Athens to prepare the ground for an agreement on reforms but we understand this was not the case. This implies further delays at a time the state is struggling to pay wages to civil servants and pensions and honor its debt obligations. In this regard, any public threats by government officials to sever the negotiations undermine Greece’s position because they increase uncertainty and spur more deposit outflows. So, the banking system becomes even more dependent on emergency funding (ELA) by the Eurosystem, testing the ECB’s patience. The latter is a result of both the state of the negotiations between Greece and the lenders and the magnitude of outflows in our view.

We are sure the leftist-led government is in a position to communicate any agreement on reforms in a way that would convince Greek public opinion that it is better than any its predecessors could have signed, portraying them as yes-men in the process.

However, we are also convinced it is going to find itself in a very difficult situation if it allows the standoff with the lenders to go on for a longer period. A sensible deal on reforms is the best way forward and public threats of a breakup or euro exit, which lack credibility, do not serve this goal.