Europe Flinches At Greek Default

ATHENS, Aug 22 (Reuters) - Eurogroup chief Jean-Claude Juncker kept alive Greek hopes of winning more time to push through austerity cuts but warned the country was staring at its "last chance" to avoid bankruptcy.
Mired in a fifth year of recession, Greece has been lobbying for two more years to hit budget targets promised under its second, 130-billion euro bailout from the European Union and International Monetary Fund.

Juncker said a decision to grant more time would depend on the findings of a review by EU and IMF lenders on the country's progress in fulfilling its pledges. He accompanied that with a warning to Greece to shore up its dire finances, saying the country's next tranche of aid would depend on it producing a credible strategy for austerity cuts. "As far as the immediate future is concerned the ball is in the Greek court," Juncker said. "In fact this is the last chance and Greek citizens have to know this."

Right now, two members of Club Med are calling Europe’s bluff.

Spain is refusing to apply for aid until it is told what conditions it will have to meet and how much aid it will get. Europe wants to offer loans from the EFSF and limited bond-buying by the ECB. Spain demands unlimited bond-buying in order to bring down its bond yields.

Because Spain is about as TBTF as you can get, Europe cannot allow her to default and Spain knows that. By threatening to default, Spain has leverage with Europe. Since ex ante we know that Spain is TBTF, we know that she won’t default and something will be worked out. Spain may even get what she is demanding.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now

Similarly, Greece continues to defy Europe in an in-your-face manner. Her long-standing negotiating strategy has been to agree to everything and then do nothing. This has expedited negotiations: the Troika presents its demands, Greece agrees, gets her money, and goes back to protesting austerity and calling the Germans nazis.
One might think that this game would run out, and that Europe would realize that Greece has not implemented any of the agreements to which she has agreed, in writing. (It’s touching the way the Germans think that having the Greeks sign the agreement makes it more binding.)

Well, Europe is quite aware that Greece has cut nothing, restructured nothing, laid off zero workers, collected no additional taxes, and has sold no state assets. Those things are hard to miss. But Europe, despite all of its confident bluster about a Greek exit being manageable, is afraid of a Greek default. They are worried that a Greek exit would be a black swan that would throw the eurozone into chaos. And so they prefer to paper over Greek defiance and pretend that everything is going according to plan.

Antonis Samaras, the Greek PM, is aware that Europe will tolerate almost anything to avoid a crisis. So, instead of saying “Because you have failed to comply with the agreed fiscal strategy, there will be no more money”, Europe says that the country's next tranche of aid will depend on Greece “producing a credible strategy for austerity cuts”. And then, of course, the big threat: “this is the last chance and Greek citizens have to know this." We first heard this recording played two years ago; we may hear it again in the future.

It is interesting that Dutch and Finnish officials seem much more angry at Greece than the Germans are. My guess is that this is because they are free to say what they really think, while Germany is thinking beyond its understandable anger. Germany knows that the fuse that lights in Athens leads ultimately to Paris.

http://prosyn.org/NGOjtXl;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable


    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.