Who lost Greece

If Greece collapses much will be said about where the fault lies. Sure, we all know the failings of Greek politicians. That said, much of the blame lies with outsiders who pushed Greece beyond its limits.

From the start of the crisis, Berlin sought to get the IMF involved; it was what Wolfgang Schaeuble wanted. The policy was largely driven from a desire to punish Greece for its sins but also from the need to provide German voters with a fig leaf before approving a Greek aid package. The argument that the US used the IMF to manipulate Europe is full of holes, especially in light of Washington’s disagreement with Berlin over austerity. The IMF made plenty of mistakes. Instead of pushing for structural changes, it approved horizontal cuts because Dominique Strauss-Kahn did not want to pressure the George Papandreou government. The IMF underestimated the devastating consequences of the banking crisis on the Greek economy, mainly high borrowing costs for businesses. Also, the IMF insisted that debt restructuring was necessary for the program to be sustainable but it never quite managed to convince European governments to find a solution to the Greek debt.

The ECB on the other hand followed in the IMF’s footsteps on all matters save the debt. In a secret letter to the Papandreou government, Jean-Claude Trichet warned that a rescheduling of the debt “could trigger very large losses for Greek banks.” The ECB also resisted calls by the Commission for a new monitoring system for Greece. Berlin, finally, saw the need for a new deal with the troika but Schaeuble continued to insist on an IMF role.

And that brings us to September. The choice became clearer. If the troika insisted on more austerity, the government would simply crumble. The Commission saw the problem, Jean-Claude Juncker did all he could, but the IMF and the ECB would not be swayed. Christine Lagarde made clear that more sacrifice was needed to wrap up the negotiations. Angela Merkel argued that she had spent a lot of capital on Greece and Portugal and there was nothing she could do without Schaeuble’s backing. Large funds that invested in Greece warned that a hard-line approach would send the country into a political tailspin and put any achievements at risk.

Just over a month ago, a tough behind-the-scenes battle was fought. The Commission lost and the IMF won. The motives are not yet clear. One explanation would be that the IMF and Schaeuble decided that SYRIZA would inevitably rise to power, with or without a deal. By pulling the rug from under Greece, they accelerated political developments. If things go awry, it will be interesting to see who will lose out. The IMF loan to Greece is safe. Europe may deem that Greece no longer poses a risk but it is too early to tell. Berlin will have to explain to German voters why the Greek success story failed. Greeks will suffer. “Who lost Greece?” could become the subject of future seminars.