2 Mar 2015

Greek European deal: where are we?

The European deal done six days ago was supposed to stabilise the Greek debt crisis. In return for a bit of fiscal autonomy the Syriza government (a) recognised its debts as legitimate (b) gave its lenders a running veto on any measures taken that might impact on the economy, the banks or the budget balance.


But the situation in Greece is still critical. First because Greece gets no new loans from the deal. Because it is pledged to run a budget surplus it has to finance the state from tax receipts. But these have reportedly slumped by 22 per cent since December. Normally the government could bridge the gap by issuing short term bonds called T-Bills but the ECB has placed a €15bn cap on that and it’s been reached.

Second, Greece faces some imminent debt repayments. €2.5bn this month, mainly to the IMF, €1.7bn in April-May, then €3.5bn to the ECB and European governments in June. Finance minister Yanis Varoufakis said they would definitely pay the IMF, but that the ECB debt was “in a different league” and he would seek to renegotiate it alongside the bigger debt deal he is trying to do in June.

Read more: missing from the Greek deal: the figures

The ECB meanwhile has failed to lift limits on what Greek banks can borrow under the Emergency Lending Assistance scheme; nor has it re-qualified Greek banks for normal loans from the ECB. So the pressure on the banks remains.

Third, pressure on the radical left government from its support base is growing. PM Alexis Tsipras announced five laws on Saturday. They included a write off of small debts for 3.7 million people; an instalment scheme for people who owe up to €50,000 in tax; food stamps, free electricity and free housing for those in extreme poverty. Plus the reopening of the state broadcaster ERT and the closure of a controversial gold mine, in Skouries, which has been the target of bitter environmental protests.

There was a small riot in the student district of Exarcheia on Thursday night. More pressing was that 41 per cent of those who voted in Syriza’s central committee backed an opposition motion from the party’s Left Platform, condemning the deal Mr Varoufakis signed.

It was reported that, during a phone conversation with Angela Merkel, Mr Tsipras threatened Greece would default on its debts if pushed too far.

‘Badge of modernity’

But my conversations with Syriza members and leaders since the deal show that – though they want Mr Tsipras and Mr Varoufakis to tough it out with Europe, not all are yet prepared to make that threat good. That is, not all are prepared to go and argue with the Greek people in favour of a default and exit strategy from the Euro. They share the psychological attachment of the Greek small business class to Euro membership as a kind of “badge of modernity”.

Plus, while various journalists from the right-wing press of Europe and America have been punching the air over the ECB and Germany “smashing” Greece, that’s not how it looks in Greece. The government’s popularity is close to 80 per cent. Syriza itself would get 40 per cent if it stood in an election now.

So we are left as always with a mismatch of intent and perception. Mr Varoufakis perceives that the Eurozone will tolerate the “creative ambiguity” in the deal; that there is scope for a long-term settlement in June; and that he can keep both the Greek state and its banks solvent until then.

However, the unknowable here is the ECB. It has been consistently hard line and shows no sign yet of lifting the strictures that effectively triggered a bank run in Greece in mid-February.

Effectively, though he believes the Euro is finished “within two years” unless it relents from austerity, Mr Varoufakis is still fighting for the so-called “good Euro” and seems determined to do so until the June deadline.

But he is negotiating on behalf of a party whose members and voters have no appetite for a default and Euro exit strategy: yet.

The five laws announced on Saturday were designed not to provoke a veto from the ECB/IMF/EU. Any attempt to block them would probably push another tranche of Greek society towards the inevitability of default and exit, strengthening Mr Varoufakis hand as we approach April and June – in the sense that it would strengthen the realism of the exit threat.

Read more: Greece: a debt colony with a bit of ‘home rule’

But the strategic facts emerging from last week’s deal all point towards a further showdown, a further squeeze on the Greek banks by the ECB (which is supposed to be responsible for their safety) and another cliff-hanger.

Here’s why: there is, within the Eurozone, a lobby for less austerity, more debt forgiveness and a growth strategy. Mr Varoufakis was not wrong to think they could be persuaded to reschedule Greek debts, unleash QE and gain fiscal space: in fact, both France and Italy were given leeway to soften austerity by the European Commission last week.

Mr Varoufakis’ mistake was to over-estimate the strength of the anti-austerity camp, and their willingness specifically to back a far left government. When it comes to Greece, the “faction” of Europe that runs policy is the Germans and their allies on the ECB. When it comes to France and Italy, the Commission is in charge.

If, in the coming weeks, we see the ECB soften its stance to Greece – above all approving it to do billions of Euros worth of quantitative easing, and letting its banks borrow normally from the ECB – that would be a sign Mr Varoufakis is making progress.

I still think the most likely outcome is that the unresolved political battle at the centre of Europe goes on being unresolved. And time is Syriza’s main enemy. If, by June, the ECB council is still calling the shots on Greek debt, then the German government – facing a growing revolt in the CDU/CSU over the terms of Greek forgiveness – will force another, bigger showdown.

It will probably leave the commission and the IMF seething, and the lenders openly bickering as they did in 2010-11. But if it happens it will push Greece into a hard default.

Whether the Greek government can take their people with them, on a journey from default, capital controls, parallel currency and Euro exit depends, for many Greeks again on perception: did the government do everything it can to avoid Grexit? Has the government done enough to make us want Syriza in power more than we want the Euro and austerity.