STOCK MARKET WATCH -- Friday, 31 July 2015

[Demeter]

6. The Greece debt bailout negotiations are really about France, not Greece

https://www.creditwritedowns.com/2015/07/the-greece-debt-bailout-negotiations-are-really-about-france-not-greece.html

The situation in Greece is not about Greece at all. It is about enforcing an economic framework onto all Eurozone countries. And because the policy goal is primarily about enforcing this economic framework everywhere in the eurozone, there is less policy space available for compromise. It is this fact that makes the Greece government debt bailout negotiations so difficult.

In January, just after Syriza came to power I outlined where a deal was possible. I wrote at that time, “Herein lies the only area for agreement then:

“No debt writedown: only maturity extensions and interest rate reduction. From the Troika perspective, a principal reduction looks to be a non-starter. Finland has said so, and the Germans have said so. They do appreciate that the vast majority of Greek debt is in public hands, meaning that contagion from a writedown may be limited. But I don’t think the ruling coalition in Germany could get approval on this in parliament or in opinion polls.

“Back-loaded austerity: although stimulus is the opposite of austerity, Syriza could still get some stimulus in the short-term if they commit to reforms and a plan that has the deficit and debt numbers moving toward the Maastricht criteria over time.”

The crux here however is that in getting to a longer-term deal, the eurozone negotiators are most concerned about Greece as a precedent and example for other countries in terms of so-called reforms. We’re talking about pension reforms, labor reforms, privatization and so forth. German Finance Minister Schäuble has been quite explicit about this. In Mid-April, he gave a talk at the Brookings Institution in which he said that the French wish they had a Troika program the way Spain had one, in order to make structural reforms easier to implement. The French government denied Schäuble’s comments were true because they smacked of anti-democratic fiat from above.

But the incident made clear what is happening in Europe. Individuals in Europe who want less socialism – for lack of a better word – are using this crisis to force their agenda. And in some ways, they have exacerbated the crisis in order to make this agenda stick. With Greece, then, there is less room to compromise than meets the eye, particularly because the Greeks have been the most deviant from the desired model of structural reform. The thinking, therefore, is “if we let Greece off the hook on these issues, the others won’t implement the necessary reforms either. And France isn’t even in a program. The socialist government there has much less political pressure to comply with this agenda. Unless we get reforms, there will not be economic harmonization and we will be back in crisis in short order.”

And this is exactly the area where Greece’s red lines are most important. The Greeks are not going to bend all the way to the Troika position on pensions, on labor markets or on privatization. And these are deeply held views. On pensions, the Greek view is that the pensions are less generous than meets the eye and that due to the recession an excessive number of people near retirement age have been pushed out of the work force and would be indigent unless they received an early pension. On labor markets, the Greeks are saying that minimum wages are not deleterious in the face of asymmetric market power and that even the German grand coalition has implemented a minimum wage, which is relatively high in real terms. So the Greeks want collective bargaining at least at the sectoral level, something the Germans still have. And finally, on privatization, the Greeks are not opposed; they just want to delay privatizations because they believe they should not sell off state assets when their value is diminished.

All of these positions by the Greeks are reasonable. And for the Troika to expect them to give in on them while also meeting the backloaded austerity and no debt writedown provisions will be a complete capitulation politically. I just don’t see it happening. I believe, therefore, that default is likely. There is no blackmail here from either side. What there is is a lack of common ground on some very important bargaining points. And at this point, I don’t think there is nearly enough time to find common ground on these issues to prevent default, and potentially worse.

The fact is that European nations will never have a harmonised view of macroeconomic policy. It is folly to expect this. And the eurozone will thus have to accept differing economic models within the single currency or try -as they are now doing – to force a single model on the the whole of the eurozone in an undemocratic away that risks splintering the eurozone entirely. The weakest link amongst the periphery is Italy because it is large enough to matter economically, and cannot be broken like Greece. If Italy gets into trouble and the same methods are applied, the eurozone will break apart.



Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter.