Heartbroken fans of HBO’s Game of Thrones will understand well the malevolent forces that threaten to destroy Europe’s currency union.
Spoiler alert: In the latest season just ended, the beloved hero, Jon Snow, confronts an existential threat to mankind by forming an alliance with his sworn enemies. It was the type of outside-the-box thinking that McKinsey or Boston Consulting Group would have recommended. But the decision stoked jealousy, fear and incredulity among many of Jon Snow’s brothers in the Night’s Watch. The finale ends with Jon laying in a pool of his own blood, stabbed to death by the men he was elected to lead.
And so it is with Greece and the European Union, a saga lacking in noble heroes, but replete with negative emotions, short-sightedness and simplistic analysis. It should surprise no one that every attempt at resolution has failed.
The latest—and quite likely the final—attempt to avoid a default is playing out this week. Greek Prime Minister Alexis Tsipras flew to Brussels Wednesday to meet his country’s creditors: his counterparts at the European Union, the European Central Bank and the International Monetary Fund—otherwise known as the “Troika.” Finance ministers from the 19 countries of the euro also will meet with the goal of settling the matter before Greece runs out of money next week. European Leaders are scheduled to meet Thursday and Friday. If all goes well, they will ratify an agreement that will unlock bailout funds that would allow Greece to pay the the almost $2-billion it owes the IMF at the end of the month.
So far so good. Or maybe not. I wrote the first sentence of this paragraph at about the time the sun was rising on Europe. In the hours that followed, the Troika rejected Tsipras’s latest offer and handed him fresh terms. The Greek leader promptly expressed his dismay on Twitter. The whispers that followed his offer on money were positive. Stock markets climbed. Get ready for a reversal.
Greece’s potential default is the most important economic story in the world right now. Yet it has very little to do with economics at this stage. Economists would have sorted this thing years ago. A considerable percentage of the country’s debt should have been written off. The eventual restructuring of Greece’s debt was too long in coming and inadequately done. Athens was forced to adopt severe austerity measures that plunged the country into a deep recession. Deprivation angered Greek voters, destroying any possibility of building a broad consensus on sensible economic reforms—such as creating a tax system that would force the some of the world’s most notorious tax dodgers to contribute to the running of the government.
The days ahead will be fraught. Europe’s leaders, who make a habit of all-nighters, surely will suffer through a few more before a decision is reached. Fatigue is a risk—but not necessarily that induced by a lack of sleep. European leaders and voters have been fighting a debt crisis for seven years. Greece, Ireland, Spain, Portugal and Cyprus all have needed rescuing. The Irish took their medicine, repaid their bailout and now are moving on. Their example erodes what little remaining empathy might exist for Greece’s plight. Tsipras hasn’t helped his cause by treating his negotiations with the people he wants to give him money like a game of chicken. More and more members of the European Union seem ready to let him drive off the cliff.
It is when we tire that giving up becomes more enticing. There is danger because a certain hint of fatalism has settled over the talks. It reminds Paul Krugman of the aftermath of the First World War, when the victors sought to punish the vanquished, and were unmoved as it became evident their demands for reparations had crossed the line of economic reason.
Some say Greece would be better off with its own currency. That’s nonsense. Argentina thrived after its default because it was able to sell beef and other farm goods into a global commodity boom. Greece would gain little from a weaker currency because it has little to sell the world. Instead, all of its euro-denominated obligations would become a heavier burden, and imports would become more expensive, putting upward pressure on inflation. The country’s recession has caused wages to sink, giving it a competitive advantage versus its neighbours. That is tough for Greek workers, but will give the country’s employers an incentive to create more jobs.
The economic blow of a Greek exit from the euro zone would be bumpy, but probably not fatal for Europe. It is a small part of the world’s biggest market and the authorities now have institutions and mechanisms in place to deal with any short-term fallout in financial markets. That doesn’t mean Europe holds all the cards. The euro never was a purely economic project. Its creation was part of a larger security exercise meant to pull the continent’s tribes closer together. Letting Greece go risks creating a failed state on Europe’s periphery. Greece would have little choice but to seek help from wherever it could it. Russian President Vladimir Putin already has shown he would be willing to come to the aid of Greece. How could he resist pulling a member of NATO into his orbit?
These are the stakes. They should be enough to bring about an agreement this week. It will be possible to gauge the likelihood of success by analyzing the rhetoric. The winner of this year’s Donner Prize for Canadian non-fiction writing was Michael Trebilcock’s Dealing With Losers: the Political Economy of Policy Transitions. The book recognizes that sometimes, successful agreements require that the winner recognizes that he or she must allow the loser to go home with something.
In the Greek saga currently playing out before us, everyone is a loser. That means Tsipras must recognize that Merkel will have to show German taxpayers that she forced Athens into accepting uncomfortable conditions. At the same time, Merkel and other European leaders must recognize that Tsipras won an election on a promise to end imposed austerity. Lawrence Summers, the Harvard economist and former U.S. treasury secretary, says Merkel should commit to leading a drive to boost Europe’s economic growth, which Greece will desperately need if it is to generate enough money to pay for its debts. All parties will recognize that IMF managing director Christine Lagarde, a former French finance minister, faces questions about where her loyalties lie in this struggle. She must hold a tough line to keep Washington and Beijing on side. That means the IMF can accept only an agreement in which the math works, which hasn’t always been a given.
If these elements float to the top of all the spin and bluster that will be reported from Europe over the next 48 to 72 hours, an agreement likely is at hand. If they don’t, start contemplating the fate of Jon Snow.
MORE BY KEVIN CARMICHAEL:
- Here’s why Canada’s interest rates are going to stay low
- Why the U.S. could raise interest rates sooner than you think
- Why keeping the budget balanced at all costs is a bad idea
Kevin Carmichael is a journalist and senior fellow at the Centre for International Governance Innovation. He has written about economic policy and the men and women who make it for almost two decades from Ottawa, Washington and, currently, Mumbai. Follow him @CarmichaelKevin