Compromise is possible but it is far from inevitable
By Buttonwood
SO THE talks between Greece and the EU finance ministers broke up in acrimony last night and we have a new "deadline" of Friday. That is the date Jeroen Dijsselbloem, the Dutch finance minister, set for Greece to apply for an extension of the bailout programme. Greece called the EU plan "absurd and unacceptable".
The good news is that this is partly an issue of semantics. The EU wants Greece to apply for an extension to the existing bailout programme, and the conditions can be altered once the extension is in place; Greece wants the existing programme to be abandoned and a bridging loan to be offered while a new deal is agreed. It is not difficult to see how a form of words might be found to bridge this gap; one wag suggested that the deal be called an extension in the German language text and a bridging loan in the Greek version.
But the bad news is also that the argument is about semantics. Syriza won election on a platform of rejecting the bailout terms, so needs a victory on this specific issue; the EU has constructed an entire system of condition loans and bailout programmes and does not want to see this destroyed. Neither side will want to give way on the language. It is also a matter of negotiating tactics; the EU is in a better position to drive a bargain if Greece is operating under the existing bailout, Greece will be in a much stronger position if it is able to get money without conditions. So success on this seemingly minor point of language may lead to success on the entire deal.
The markets have inclined, all along, to the view that a deal will be reached in the end because both parties will lose from a breakdown. Perhaps investors have been made cynical by the kind of rhetoric that accompanied debt ceiling talks in America, when threats of default and shutdown were averted at the 11th hour. My feeling is that this attitude is complacent; Syriza was elected precisely because its leaders did not believe in "politics as usual".
Among the commentariat, the consensus view has been that, since EU austerity has been misguided from the start, the Greeks are right and should get what they want. As Charles Grant of the Centre for European Reform made clear at a meeting yesterday, this is not the view from Brussels; the belief there is that reforms have been working in Spain and will work elsewhere if patience is shown. Allowing Greece to head in the opposite direction will undo the good that has been done. Indeed, this isn't really an issue about the debt any more; Greece has already had its debt service costs reduced massively by a combination of maturity extension and low rates. It is an issue of reform. The EU seems more than happy about Syriza's attempts to crack down on tax avoidance, although experience suggests this raises less money that you hope; it is not so keen on the rest of its programme.
All this gets tied up, rather confusingly, with the idea of democracy; that Greece has just elected Syriza and thus has the right to put its programme into place. The issue was brought up in a Radio 4 Today interview with the economist Christoper Pissarides; what about the rights of German voters, the interview asked? The answer from Mr Pissarides is that German voters should understand that this is an issue of EU solidarity from which one day they might benefit. But this is not what German voters feel. One assumes that Mr Pissarides thinks German voters should change their mind. But once one goes down this road, an appeal to democracy is lost; if the German voters can be "wrong", then the Greek voters can be wrong too. Who decides who is right? Economists with the right degree? Democracy is no longer the gold standard.
It is generally accepted that democracy has its limits. First, the rights of minorities must be respected; 51% of the population does not have the right to enslave, or kill, the other 49%. But the second constraint is extraterritorial and financial. Voters cannot create prosperity simply by voting; they can vote for the preconditions of prosperity but a lot of hard work and skill are still needed. If they run persistent current account deficits and thus incur debts overseas, they must find a way to keep servicing those debts or lose that financial support. Greece could indeed refuse to do a deal. But that implies refusing all the other support from the EU including the liquidity that stands behind the Greek banking system. This will not be a pleasant option.
This brings us back to the game of chicken. Will a failure of the talks lead to more damage in Greece or in the wider EU? The former seems more likely at the moment and certainly seems to be the belief of EU finance ministers. But Syriza may have raised unrealistic expectations among its voters about the kind of deal it can pull off. That is why compromise is far from certain.
