Greece and the Eurozone's Federal Moment

I am defering my follow up post to Fissures and divides in politics - Europe and Australia: a comparison until Thursday. I found events over Greece to fascinating to leave alone, leaving me with too little thought time given other things I had to do. I really hadn't expected to become so involved in the Greek crisis, but the European media coverage and especially that from the BBC was just so good, giving me a crash up-date in European politics and economics.

In my first post on the crisis, The Greek crisis - a high stakes game marked by blindness, inexperience and rigidity, I wondered

I hadn't expected the Tsipras Government to adopt such a high stakes approach. Looking at the IMF/ECB/EC document from a purely professional perspective and accepting that it has come about after a series of discussions, I don't think that the Tsipras Government really had clear strategic objectives, nor defined negotiating tactics. It finally devolved down to tinkering with detail. We will all suffer as a consequence. 

Maybe in the few days before the referendum, Prime Minister Tsipras may set out more than what, in the end, comes down to we were robbed. I wouldn't count on it, however.

In a very interesting interview in the NewStatesman, former Greek Finance Minister Yanis Varoufakis suggested that Greece was "set up." It is clear that his early attempts to start discussions on changes to the Greek bail-out deal met opposition. It is interesting that he was apparently effectively sidelined quite early in the discussions, more interesting that he wished to implement what one might describe as a modified Grexit to assert Greek control, issuing Euro denominated IOUs and seizing control of the Greek Reserve Bank. Creditors would have been given some form of compulsory haircut. This move was rejected by Cabinet.

Based on what I have read, it appears that Professor Varoufakis met with what might be termed objective reality. There were several things that I had not properly realised about the European scene. A Greek bail-out required contributions from other Eurozone states. Here the debate was framed in terms of lack of trust. Greece could not not be trusted. Trust must be rebuilt. Beyond that, and this was captured by the Estonian PM, Eurozone taxpayers in other countries were very reluctant to put more of their money on the table. We have invested considerable political capital in this agreement despite fierce opposition from some of our citizens was his message.

Given this climate, Greek attempts to renegotiate were always going to be difficult. Here there was another problem, one not unique to Greece. The fierce domestic views developed the Greek campaign that elected the Tsipras Government did not provide a sound negotiating base in circumstances where key levers were beyond Greek control. This need not stop renegotiation, but renegotiation requires a very strategic and calculated even low key approach that reassures the other side.

I know that this is easy to say. In strategic terms, the aim is to gain concessions that will ease the Greek position. In tactical terms, you have to ease creditor and partner fears while also satisfying a domestic political constituency whose views have been inflamed by your own political campaign. This is actually not complicated. You focus domestically first. You say Greece must stand on its own feet. There are things that we must do now to give us the best base for the future, including re-negotiating bail-out terms. The harder you go at domestic level, the better base you have. This does not mean that you should not take steps to ease particular austerity measures, but that easing needs to be part of a package.

In retrospect, the fundamental miscalculation of the Greek Government was its failure to recognise that, in the end, the Eurozone countries would simply let Greece go. Greece just did not have the negotiating power. A Grexit came very close. If it had not been for former Polish Prime Minister Donald Tusk it would have happened. Now many might argue that this would not have been a bad thing. They miss the point. It should not have come to this in the way it did.

A Grexit might have been fine if the Greek Government had had an optional exit strategy in place for some time as a fall-back option. However, the Greek people did not want to exit the Euro. The Government itself including Professor Varoufakis wanted to stay in Europe and the Euro. In the end, it was apparently the German Finance Minister who belled the cat by floating the idea that a modified Grexit might be best for the Eurozone as a whole. With Greece in economic collapse, the potential cost was just too high from a Greek perspective.

What would have happened if Cabinet had approved the Varoufakis partial exit strategy? Further chaos, I suspect. By then, it was just too late.

 In Greece, Jack Lang and the Great Depression: are there lessons? I concluded:

Obviously we have to be careful about the use of historical analogies. However, there are interesting similarities. Like Australia at the time, the EU is really an evolving Federation. The economic challenges are not dissimilar including the differential impact of Federation on diverse local economies.Without over-stating the analogy, and recognising the differences, my feeling is that the most likely outcome with or perhaps less likely without Greece will be the strengthening of central control at least within the Eurozone area. It's part of an evolutionary process. 

The discussion round the post tended to focus on economic comparisons. My focus was an institutional one based on the dynamics of federations. At this point, the outcome appears to be just as I predicted, greater strength to to the Eurozone institutions, a reduction in the freedom of constituent parts.

Is that a good thing or a bad thing? I leave that to you to judge, but certainly some of the commentary that I have seen is simply very silly because it ignores institutional issues. The third Greek bail-out may or may not stick. My feeling is that it will, but it's still line ball. Whichever way it goes, it's an historic moment.

EU Structure

I response to a comment from kvd, I tried to provide a brief overview of the EU structure:

As I understand it, the 1992 Maastricht Treaty effectively sets the EU's broad constitutional framework. All EU Member States form part of the EMU (Economic and Monetary Union) described as an advanced stage of economic integration based on a single market. It "involves close co-ordination of economic and fiscal policies and, for those countries fulfilling certain conditions, a single monetary policy and a single currency – the euro." 

19 of 28 member states have adopted the euro. Two states, Denmark and the UK, have euro opt out provisions and are exempt. The other seven are meant to adopt the euro when gateway conditions have been met. However, and as demonstrated by Sweden where euro membership was defeated in a referendum, there are ways round this. 

The nineteen member states form the Eurozone. The European Central Bank (ECB) and national central banks in the euro countries form the Euro System. The 'Eurogroup' coordinates policies of common interest for the euro-area Member States. 

The EMU applies to all member states. However, additional provisions apply within the Eurozone. The EU itself is a somewhat complicated federation with certain powers delegated to the centre. Within the EU, the Eurozone forms a more tightly integrated entity because of the rules and requirements imposed by the common currency. In a way, its a federation within a federation! This requires decision processes within the Eurozone coordinated by the Eurogroup. 

We saw this in operation during the crisis when the planned EU summit, a meeting of all members, was cancelled and it was left to Eurogroup members to come up with a solution. Sources : Wikipedia, EU. 

There are all sorts of complexities in this that I don't properly understand.For example, the UK is a member of the EMU and as an EU member contributes to the EU budget. However, the UK as a non-Euro member is strongly opposed to the possible use of the EU budget to provide any form of support to Greece.

I think that a key point in institutional terms is that the EU is a political federation with both inherent conflicts and poorly developed central mechanisms that are still evolving.

In an interesting piece on the Lowy Institute Interpreter blog, The big lesson from the Greece fiasco: Don't let the IMF meddle, Stephen Grenville makes a couple of interesting point. The first is that Greece in combination with its partners have effectively plucked at least a degree of defeat from the jaws of victory. The basis was there early on for what might have been an effective compromise. That was lost.

The second is worth repeating in full.

Some see this as the beginning of the end for the euro experiment. With Greece staring at departure, will others follow and the euro disintegrate into national currencies? This outcome would be some kind of wish-fulfillment for the euro-sceptics who dominate the UK press. But for all its challenges (past and future), the core countries of the euro have built up massive synergies and benefited enormously, both economically and politically. The degree of integration now accomplished will not be abandoned lightly. Greece was always an outlier, a misfit in economic structure and maturity. The parting would be painful, but will not unravel the euro.

The third is that the IMF should not have become involved. This was a matter for the Eurosystem to work out. To extend the argument a little, if the IMF was to become involved it should have been an arrangement with the Eurosystem itself, not between the IMF and Greece. Why? Well, Greece is a member of a Federation. It has national sovereignty in certain areas, but not in the areas that are normally the province of the IMF. Greece is to the Eurosystem as NSW is to Australia.

We are not used to thinking in these terms. It may be that Greece should leave the Euro and indeed the EU. However, so long as Greece and the Greek people want the benefits of Federation, there will be a price to be paid.