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Has the Greek government always wanted Grexit?

- July 4, 2015

A protester sports the word ‘No’ in Greek on his forehead as he waves a Greek flag during an anti-austerity demonstration in Syntagma Square in Athens on Friday. (Yannis Behrakis/Reuters)
Greece’s economy and society have been through the wringer over the past six years. Following the rise of Tsipras and his Syriza party to power in the January 2015 elections, there was widespread hope for better days to come for both Greece and Europe. Yet, as we speak, the country is finding itself in a state of economic turmoil and social unrest caused by capital controls and the closing of banks following the announcement of a referendum last Friday.
According to the conventional reading of events, the Greek government made a series of blunders and excessively risky gambles in its effort to play tough in its protracted negotiations with the country’s creditors over the bailout program and debt relief. But if one takes a hard view of how the events of the negotiations unfolded (using Greek FM Yanis Varoufakis’ beloved game theory), then it is become increasingly clear that Tsipras’s true aim had never been a better deal, but Grexit itself.
Let us first take a look at the facts and then try to determine whether the conventional view or the more radical one have more purchase. In January 2015, Syriza wins the snap elections (caused by the previous government’s inability to garner 180 votes in a 300-seat parliament in order to get a figurehead Head of State elected) with 36.3 percent vote share, mainly by promising to put an end to austerity while keeping the country within the euro.
Greek PM Alexis Tsipras’s choice of coalition partner, the nationalist anti-austerity Independent Greeks party, takes many by surprise regarding them as strange bedfellows. Still at the time the majority of moderates regarded the ambivalence of these two Euroskeptic (but avowedly not Europhobic) populist parties over the currency question as a strong bargaining advantage in the negotiations between Greece and its creditors.
Varoufakis’s professorial anti-conformist rhetoric sets the stage for a protracted period of high-level meetings, strategic posturing on both sides, and fruitless staff-level negotiations. In one euro group meeting after another, the Greek government is finding itself increasingly isolated, shunned, and reprimanded for deliberately stalling and failing to engage in any sort of number-crunching exercises.
According to the conventional explanation, which is based on the premise that the ‘red lines’ of the Greek coalition government and the creditor institutions do actually intersect at some point, the Greeks’ bargaining strategy is one of ‘coercive deficiency’, ‘creative ambiguity’, and politicization.
In that vein, Tsipras and his party were trying to leverage their strong popular mandate for the implementation of the party’s Thessaloniki program in order to achieve a more favorable deal. In other words, they were gambling much of their political capital (boosted by Tsipras’s soaring popularity) on an aggressive high-risk strategic posture in the renegotiation of the existing bailout program without jeopardizing the country’s position in the EMU against the will of a large majority of the population.
According to the logic of ‘coercive deficiency’, a debtor’s (economic) weakness is (bargaining) strength vis-à-vis its creditors. The weaker the economy appears to be, the lower are the primary surplus targets to which the debtor can credibly commit. Yet, this protracted period of economic uncertainty, marked by a freeze-out on public and private payments and a ballooning of the government’s arrears, was bringing the Greek economy back on the verge of insolvency and recession.
Therefore, there seemed to be an inescapable trade-off between the attainment of a less austere and front-loaded bailout program and the acute economic costs of a bargaining standoff in terms of overall economic activity. Regardless of the outcome of the negotiation, the Greek coalition government was evidently making a clear choice to safeguard the disposable income and pensions of its core supporters in the public sector and the salaried middle class at the expense of the beleaguered private sector.
The tenet of ‘creative ambiguity’, which had been openly proclaimed as a key feature of the Greek government’s bargaining posture, was closely wedded to the latter’s attempt to politicize the bailout negotiations to the highest degree possible. Varoufakis’s own use of this term seemed to imply the government’s preference for flexible and anti-cyclical fiscal rules and targets achievable by a ‘home-grown’ and politically feasible mix of fiscal consolidation and structural reforms.
The politicization of the bailout negotiations amounted both to the choice of European summitry as the appropriate institutional arena for an ultimately political solution, but also the attempt to avert the imposition of wide-ranging conditionality arrangements enforced by self-serving and unaccountable supranational bureaucrats. It appeared that this strategy dovetailed well with the government’s avowed electoral mandate to regain ownership of the country’s reform strategy and growth plan.
The politicization of the Greek bailout negotiations also entailed the pronouncement of the country’s geopolitical salience as a member of the E.U., EMU and NATO, and the systemic ripple effects of a potential Greek default. If successfully done, this could have been potentially a winning strategy for Greece as it sought to enlist the support of major economic powers outside of the EU (such as Russia, China and the United States) and, thus, to exploit the preference heterogeneity among its creditors.
All of the above appeared to be part of an optimal strategy that would lead to an endgame (at some point before the expiration of the existing program) comprising a negotiation agreement with less austerity and possibly a debt haircut for Greece, while at the same time avoiding the mutually deleterious effects of Grexit.
However, the events of the last couple of weeks proved the above negotiation strategy to be entirely unsuccessful. This would then beg the question whether this failure was down to sheer incompetence or miscalculation on the part of both Greeks and their creditors or whether we had gotten the Syriza’s intentions egregiously wrong from the beginning.
On June 22, Tsipras sent a signed proposal advocating fiscal adjustment measures of around 8 billion euro. During the crucial euro-group meeting of June 25, the Greeks were presented with a slightly improved version of the Juncker plan comprising pension reform and tax measures of the magnitude of 8.5 billion. On the following day, Tsipras declared the proposal an unacceptable ultimatum and flew back to Athens in order to announce a referendum on the creditors’ latest draft proposal. The referendum is approved by parliament, banks close, and capital controls are imposed in order to stave off the bank run already underway.
All of the above does not seem to make sense if one ascribes to the standard view of Tsipras’s brinkmanship politics. Most polls conducted in the past few months had evinced a high level of popularity for the Tsipras government, but also at the same time significant majority support (close to 67 percent) for the euro even with cumbersome conditionality attached (56 percent). Therefore, he arguably had ample political capital and legitimization to bring any last-minute rescue plan to parliament and have it ratified even with the added votes of centrist opposition parties (assuming he feared defections from his left flank). So perhaps Grexit had always been the desired endgame of his overall strategy.
Let us now try to make sense of how the negotiation culminated on the premise that Grexit was actually Tsipras’ preferred outcome. The Greek government stuck to its act of a forceful bona fide negotiation up until the extant bailout program expired and the country officially defaulted on its latest IMF payment of around 1.5 billion euros. Sunday’s problematic referendum then appears to be Tsipras’s last major gamble before his desired endgame of Grexit. With the economy and its inhabitants in a state of complete insolvency and asphyxiation, the day after a potential ‘No’ vote will usher in the reintroduction of a national currency (‘Drachma’?) as economic salvation and redemption of national dignity. The fact that government officials have painstakingly avoided any allusion to such a scenario or reference to concrete contingency plans for the day after would imply that these are exactly the plans to which they aspire despite their widespread lack of popularity.
One may naturally ask oneself why Tsipras and his party would operate under such an extreme set of preferences. One explanation would be if we take seriously the name of the party itself: Syriza is short for the Coalition of the Radical Left. If we take Syriza to be a purely ideological policy-seeking party of the far left that cannot implement its policy agenda within the confines of EMU and EU membership then perhaps rather exit rather than compromise makes sense as an ultimate goal. But if even parts of this alternative theory hold, then Tsipras has given an interpretation to his fresh electoral mandate that may go beyond what voters intended.
In 2011-12, we got the economics of the Greek crisis wrong. Now we seem to be getting the politics wrong. Greece is a severely injured state in desperate need of surgery; the question is whether this type of shock therapy will come in the form of Grexit or through some new Marshall plan and a carefully engineered reformist blitz.
Nikitas Konstantinidis is university lecturer in international political economy at the University of Cambridge, department of politics and international studies. He is also a member of the Greek Public Policy Forum.
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Read more about Greece and the euro at the Monkey Cage:
Joshua Tucker: Why the Greek referendum is like a badly designed game of three dimensional chess
Melissa Schwartzberg: What ancient Athens can and can’t teach us about the Greek referendum
Manuela Moschella: Rescuing Greece means rescuing Europe too
David Steinberg: Will Greek voters say goodbye to the Euro on Sunday?
Mark Hallerberg: Why an agreement on Greece is so difficult.