Greece: It’s not politics vs. economics; Politics IS economics and vice versa

One of the steady refrains from the rather unsteady talking heads on television since last weekend when the Greek crisis broke fresh ground (see “Bubble and Squeak”) is stuff on these lines

  • Greek crisis is about politics not economics
  • The eurozone is a political construct not an economic one
  • For political not economic reasons, Germany will bail out Greece

And so on.

Perhaps these folks don’t really get it – politics IS economics and vice versa. When a particular political party sweeps into power, as Syriza did in Greece earlier in the year, the political choice was largely a function of an economic one – in this case by the Greek people namely to get a political party into power that promised to deliver a better economic solution. Specifically, Syriza promised a continuation of European bailouts for Greece without the accompanying austerity, in other words.  In another election this year, the British public shrugged off months of downbeat political drama and rallied around the Conservatives – distinctly not for political views which many didn’t seem to share but for the economic track record (or rather, the fear of the other side’s track record), as I recounted in “Is the UK headed for a challenging election result”.  In both cases, economics trumped politics; subsequently we have seen the two apparently different forces moving largely together.

The efforts of the PM Tsirpas were boosted by the game theorist chosen as Finance Minister, Yanis Varoufakis whose specific goal was to focus on the weak areas of the counterparties namely:

  1. The potential losses that would be underwritten by the European Central Bank should Greece declare bankruptcy
  2. The direct losses that European taxpayers would have to bear due to the guarantees on Greece (the EU)
  3. Losses that would be suffered by the International Monetary Fund

In effect, the core idea behind Varoufakis’ version of prisoner’s dilemma here was to suggest that both sides would choose a sub-optimal outcome. The problem in my view is that he mistook the sub-optimal outcome for Greece to be the same as that for the Troika as the following table makes clear.

Dilemma Troika Relaxes Austerity Troika Maintains Austerity
Greece agrees to bailout conditions Positive for Greece, Troika gets to defer losses Political nightmare for Syriza
Greece rejects bailout conditions Political nightmare for Troika Greece out of euro, Troika has to absorb losses immediately

Mr Varoufakis imagined himself to be pushing the Troika towards the top left corner of the table, but ended up on the bottom right instead. The reason is nothing more prosaic than timing – being an academic perhaps he forgot about the changes in dynamic conditions and what those mean for game theory; in other words he was using in mid 2015 a strategy that would have worked out well in mid 2009 or even, at a stretch, mid 2012.

The reason he missed that was he wasn’t thinking clearly about the changes in political reality since 2009 in Europe:

  1. Pro austerity parties had won power and shown progress in countries such as Ireland and the UK, while anti-austerity parties in countries like France had simply failed to deliver any real growth or turnaround in economic conditions
  2. With the passage of time (and nationalization of various banks), the risks of a Greek exit on the financial system had receded
  3. The so-called contagion risk that was a hot topic in 2009 was simply not the case anymore based on fundamentals of even the weakest Eurozone countries

He also missed something a bit more interesting, if sinister. From a purely German political perspective, Greece had become a dispensable and expedient member, economically:

  • Germans all suspect if not explicitly knew that around half of $350bn of total Greek debt was a write off, much of it to be borne by themselves
  • Pushing the Greeks out would highlight the very real costs and consequences of small countries getting out of the euro
  • In turn this would help to rein in any “wise guys” (in strictly the New Jersey sense of the word) in Italy and Spain, preventing any copycats
  • Losses on Greek debt would be a political embarrassment but the eurozone would move on given the relatively small size of the Greek economy and the predictable reduction of noise that would accompany an exit

In all of the above calculations, its clear that whether you consider the point of view of the Greeks or the Germans, and everyone else involved the simple focus is never economics alone, or politics alone. The two are completely intertwined.

Away from the main players, let’s look at how others around the world have responded to the prospective exit:

  1. UK’s chancellor warns of “serious adverse consequences” of a Greek exit from the eurozone. Here, we have a combination of political (the upcoming referendum on whether Britain stays in the EU or no) and economic (a rush to safety of the GBP from the EUR would diminish the attractiveness of UK exports, and affect the above mentioned referendum).
  2. US has expressed a wish for both sides to continue their dialog – which is what a good friend would do anyways; but focus instead on the next piece of information which is the fears expressed about Russian overtures to Greece and the likelihood that post default, Greece could spin out of the Western European orbit towards the more hostile Russian one. That’s politics on the surface, but economic interests are more obvious – this would seriously weaken the euro, and pose major challenges for US companies
  3. China has expressed an explicit desire for Greece to stay inside the euro. The economic rationale is obvious from the point of view of demand; but the political calculus is clearly intertwined, which is that if Greece “can” exit the euro, why do Xinjiang or Tibet need to be part of the RMB?

In every case, it is clear that both the political and economic considerations go hand in hand. So a memo to the talking heads : stop talking about the two as if they are two different things.

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Categories: AT Top Writers, Chan Akya

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  • Mr. Bernard Wijeyasingha

    Quoting the article ” this would seriously weaken the euro, and pose major challenges for US companies”. that stood out. Also the message to other European nations, that this option is a viable option than staying with the Euro. If Germany’s pragmatic calculation is that economically speaking, Greece is expendable, then who maybe next? how much should European nations now need to tow the line or else?

  • Cronos Sin Apellidos

    Nice ideas. But… i think the author put his faith too high in “bank numbers”. In the short term they will use greece as an example of economic failure when someone disobey they orders. But… Greece will rebound. Because others would like to show that there are options…

  • only the lonely

    but the faith (or should that be the fear) the british showed in the conservatives is utterly unfounded

  • Martin

    It’s only politics, I’d say. Be it ‘oxi’ or ‘nai’ the greek people have already won. Oxi opens the road to Argentinian or Icelandic restructuring. ‘Nai’ means the austerity has to come with spectacular results within 4 to 5 years or greek parties will be campaigning with ‘grexit’.

  • teddyfromcd

    which can show that it IS politics.

    the politics that says ”OUR NUMBERS” (EU, TROIKA, IMF, WASHINGTON DC , GERMANY, BANKERS) – “are what matter”…

    which means ”they” are correct — correct to PILLAGE greece…
    as they have for decades (consider alone that germany refuses to pay greece complete reparations, or Goldman Sachs pushed corrupt greek officials to ”borrow and spend” completely without refrence to the real economy affecting greeks ) and then , finally,

    ”demand repayment” of politically motivated ”loans” to enrich the rich northerners and washington – while blaming greek populations for being ‘LAZY’.

    it is therefore the politics of northern/far western EUROPE , WASHINGTON DC, wall street, bankers and their ‘investors’

    whose politics amounts to :”let;s make money off of the misery of a poor country — beautiful – and for us to privatize and own…the greeks are expendable and useful only as slaves”.

    THAT is politics — expressed as ‘CORRECT ECONOMIC NUMBERS”.

    in short — the politics of greed and pillage — by the powerful over the weaker , by the privileged private few over the entire populations .. by the use of ‘economic numbers’ to justify PILLAGE – and economic WAR against a people and a culture …

  • Mr. Bernard Wijeyasingha

    I could not understand the basis of your comment till I read mine. I should have added that the Greek people chose to elect a government whose policy was the same old “cradle to grave”, “womb to the tomb” socialist policies that put Greece’s economy in such a bad situation.
    To the very end Athens refused to give in to her creditors and wanted to maintain the status quo. That cannot happen. Athens cannot eat her cake and have it too. She has to change her uneconomic policies or face the consequences.
    No one would bail out anyone who just Gambles away his money. He has to stop doing that and reform Greece is not reforming and Europe is tired of bailing stubborn nations who will not bend a bit.

  • tinhatter

    Proof ?

  • tinhatter

    Later events show you and the Greek Govt to be wrong.

  • Martin