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Monday, February 2, 2015

Syriza and EU lenders appear on a collison course

The new leftist government of Greece, led by Alex Tsipras, demands that part of the Greek debt be written off and austerity policies changed. There is little sign that EU lenders are willing to make significant alterations to the bailout conditions.

Many liberal economists agree with Tsipras that the EU austerity bailout conditions have failed to solve the debt problems of Greece while leading to sustained and mounting misery. Critics of the programs suggest that the austerity policies reduce demand causing a fall in output and growth and suggest Keynesian spend and grow policies as a solution as well as a write off of some debt to make the remaining debt manageable. Added to Joseph Stilglitz, and Paul Krugman both winners of the Nobel economics prize , James Galbraith recently wrote an article The Greek Hope supporting Syriza's policies.

The Troika are negotiating from a position of relative strength. Greece faces debts coming due that it cannot pay. Greek banks rely on the Emergency Liquidity Assistance(ELA) of the EU Central Bank. The Troika could threaten to cut access to the ELA.The new Quantitative Easing program ensures that if Greece exits the euro zone other countries will be somewhat insulated from the negative results. Given these weapons, the EU finance ministers in their meeting on January 26th showed little interest in renegotiating the bailout terms “The eurozone has ruled out debt forgiveness for Greece and warned its new anti-austerity coalition government must honour all past agreements…” German Finance Minister, Wolfgang Schauble, had said last December: “New elections change nothing”. Galbraith admits the past record of Greece is poor but the policies of the Troika have only made the situation worse. As the policies fail and Greece is still unable to pay its debts, the Troika follows a policy of "extend and pretend". This keeps Greece continually at the mercy of the lenders forcing Greece to accept even more drastic measures and begging for more money. This makes a write-down of the debt imperative.

 Galbraith says that Greece should not be compelled to negotiate out of fear. He admits that Greece does not have the sort of leverage in negotiations that the EU has: What leverage does Greece have? Obviously, not much; the heavy weapons are on the other side. But there is something. Prime Minister Tsipras and his team can present the case of reason without threats of any kind. Then the right and moral gesture on the other side would be to throw the three cudgels out of the room, and in particular to grant fiscal space and to guarantee Greek financial stability while talks are underway. Tsipras could claim to have the Greek populace behind him who would might very well come to support a Grexit or exit of Greece from the euro zone, if negotiations for relief from some debt and austerity conditions are not possible. However, it would seem that the EU already has accepted that may be the result. Syriza, on its part, so far has not indicated what plans it has if it should find itself forced to Grexit.

Tsipras had softened his more radical rhetoric as victory neared at the polls. He suggested that negotiations should be, as Galbraith describes them, without threats and both sides negotiating on the basis of "reason". The Greek populace, investors, and lenders, should all end up with a positive solution, as the Greek economy would begin growing at a good pace again. Yet after the election, Tsipras chose an unlikely coalition partner in the Independent Greeks (ANEL) Rather than pick the larger more centrist grouping To Potami, The River, Tsipras chose to approach a party that is quite right wing on social issues such as immigration. ANEL will be more reliable in supporting changes to the anti-austerity conditions than To Potamos: Analysts have described it as an unnatural alliance and warned it might not survive long, pointing out that ANEL - best-known for vitriolic attacks on Germany and the Troika and for the occasional unashamedly antisemitic, racist and homophobic outbursts of its populist leader, Panos Kammenos – are unpredictable and that the two parties, while they agree on the need to end austerity, hold directly opposing views on many key social issues including immigration. This choice shows that Tsipras' highest priority is to push through changes to the bailout conditions. To Potamos was rejected as a partner because it was "too soft on the bailout":"The River, a new, broadly centrist party which some expected to be the coalition partner, made clear it opposed Syriza's hard rhetoric towards Berlin."

 Tsipras has chosen a leftist economist, Yanis Varoufakis, as finance minister. Varoufakis described the EU austerity polices as "fiscal waterboarding". Varoufakis, is a dual Greek Australian citizen and left a job at the University of Texas to work on Tsipras' election team. In celebrating the election results he drew on the Welsh poet Dylan Thomas: “Greek democracy today chose to stop going gently into the night. Greek democracy resolved to rage against the dying of the light.” I have appended a lecture from some time ago with both Varoufakis and James Galbraith. In any negotiations there will always be a lot of posturing, with the parties actually giving ground when actual negotiations begin. Perhaps this is the case with respect to Syriza and the EU, but from the statements of the two sides up to now, it is difficult to see how much progress is possible.

UPDATE: Vourafakis has indicated he will not negotiate with the Troika but only through leaders and officials of EU countries.

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