Greece Needs to Start Playing

Hardball With Germany

Berlin has been pushing Athens around for long enough. Alexis
Tsipras has more leverage than hes using he just needs a strategy.

BY PHILIPPE LEGRAIN-APRIL 10, 2015

The newly elected Greek governments demands for debt relief and policy freedom
from its eurozone creditors are both just and necessary. But Syriza doesnt seem to
have thought through how to achieve its objectives. Athens has tactics, policies,
positions, poses, postures, arguments, claims, hopes, fears, and words aplenty but
seemingly no well-considered plan. With perhaps only weeks until it runs out of cash,
Alexis Tsiprass administration needs to get a grip and focus on how to get what it
wants.
Athens has scraped together the 460 million euros due to the IMF on April 9. But with
other big bond payments due over the next three months, as well as wages, pensions,
and other expenses to cover, the prospect of default will soon return. A chorus of
commentators argue that Greece has no choice but to comply with its creditors

demands and count on eurozone authorities (supposed) wisdom and goodwill to pull
it through. But that isnt true. Athens can obtain debt relief while remaining in the
euro but only if it plays its cards right.
While eurozone authorities position is weaker than it seems, they certainly have a
coherent strategy. This consists of conceding as little ground as possible, making clear
that their commitment to keep Greece in the euro is conditional on it complying with
their demands, and curbing Greeces access to cash thereby forcing Athens to
capitulate. Thus eurozone authorities insist that Greece must pay its debts in full, while
hinting that the terms of those debts may be eased a little if Athens implements a list of
reforms. Berlin and Brussels have allowed the new government to draft its own list,
while insisting that the effects of those reforms must be equivalent to those of the ones
imposed on its predecessor.
While Athens kicks, screams, and struggles to comply, eurozone authorities tighten the
noose. Since the formation of a Syriza-led government in January, the European
Central Bank (ECB) in Frankfurt has cut off Greek banks access to the unlimited cheap
liquidity that other eurozone banks enjoy and instead drip-feeds them pricier
exceptional liquidity. Eurogroup president Jeroen Dijsselbloem has suggested that
Greece may need to impose capital controls, encouraging withdrawals from Greek
banks and hence deepening those banks dependence on the ECB. Frankfurt has also
refused to allow Greek banks to buy more Greek Treasury bills, limiting the
governments funding options.
Eurozone authorities calculate that their bullying will force Athens to its knees to
obtain the remaining 7.2 billion euros in its bailout agreement. Their gamble is that
Greece will neither deliberately nor accidentally default, because this would threaten
an exit from the euro, which most Greek voters dont support.
These dirty tricks confirm that Athens is right not to trust the good faith of eurozone
authorities.
Remember that they are largely responsible for the suffering Greeks have endured
over the past five years: piling more debt on their shoulders in 2010 to bail out the
French and German banks that recklessly lent to an insolvent Greece, followed by
brutal austerity that has caused a depression without restoring the governments
solvency.
In 2012, eurozone authorities promised Greece debt relief once it achieved a primary
surplus, which it did last year. Now, they are demanding further reforms, too. Greece
undeniably needs root-and-branch economic and political reforms, but eurozone
authorities insistence on instant action now is more about forcing Syriza to break its

election promises than rescuing the Greek economy. For the past five years eurozone
authorities have allowed previous Greek administrations to neglect reform so long as
they implemented austerity measures.
The ECBs claim that it is only following its rules in squeezing Greek banks is also
disingenuous. In fact, it is acting in a naked political manner. Its assertion that it must
limit T-bill purchases by Greek banks that are dependent on ECB liquidity because
these would constitute prohibited monetary financing of government borrowing is
nonsense. Remember that the ECB provided ailing eurozone banks with 1 trillion euros
in ultra-cheap liquidity through its long-term refinancing operations (LTROs) in 2011
and 2012, much of which was used to buy sovereign bonds. And now it is due to buy up
to 1 trillion euros of government bonds and other securities through its quantitative
easing (QE) program.
But pointing out that Greece is being treated unfairly isnt good enough: Athens is
trying to win a political wrestling match, not a university debate. For that it needs an
effective strategy. Unfortunately, its unclear whether it has one at all.
For instance, Tsipras initially said Greece was tearing up its bailout agreement; then
on Feb. 20 he agreed to extend it for four months. He tried to isolate Germanys
chancellor, Angela Merkel, then to woo her. He has hoped that Washington, then
Moscow might come to his rescue. And so on.
Perhaps Tsipras is trying to sow confusion: saying one thing to Greek voters, who
approve of him standing up to Greeces creditors, while eventually complying with
most of what those creditors want. Or perhaps he is going through the motions: doing
just enough to keep Greece going and daring its creditors to force it out of the euro
and take the blame for it. Or maybe he is simply winging it, trying one thing after
another in the hope that something sticks. But unless he has a secret plan that is about
to turn the tables on eurozone authorities, it doesnt seem to be working. So here is
some friendly advice.
First, Greece should ignore the defeatists who wrongly say it must comply with
creditors demands because Athens has no leverage and the alternative would be
worse. Capitulation is not a solution to Greeces plight: It merely stores up bigger
problems for the future, because the economy cannot recover without debt relief and
unending suffering is not politically sustainable. Even if the costs of challenging
eurozone authorities prove to be large in the short term, they are dwarfed by the
enduring misery of debt bondage.
Second, Athens should prepare plans for a parallel currency, so that if eurozone

authorities cut off its access to cash, it can default while remaining in the euro. It could
issue tradable IOUs that could be used to pay past, present, and future taxes, and thus
would be valuable for other domestic payments. This isnt as crazy as it might sound:
In 2009 the state of California issued IOUs without quitting the dollar. The knowledge
that the Greeks have a backup plan to create a parallel currency would make eurozone
authorities think twice before trying to push them over the edge.
Third, Tsiprass government needs to learn to speak with one voice and instead of
public grandstanding, negotiate calmly and firmly in private. It should stop making
wild threats, such as the far-right defense ministersthreat to unleash a wave of illegal
immigrants and Islamic State combatants on Europe. Ministers shouldnt talk at cross
purposes. Everyone should remain measured, focused, and private. To be fair, Tsipras
seems to have tried that at his meeting with Merkel in Berlin on March 23, from which
he emerged empty-handed. But that is because he didnt have the leverage of a backup
plan.
Fourth, the Greeks should try to find ways to achieve debt relief without harming
European taxpayers too much. One idea would be to suggest that they be compensated
by a levy on the French and German banks that were, in effect, bailed out by their
loans to Greece.
Fifth, they should emphasize privately, at the highest level that while Athens
wishes to remain in the euro and is prepared to issue a parallel currency, the rest of the
eurozone has most to lose from (illegally) forcing Greece out.
The explanation could go something like this: Quitting the euro would be very
disruptive for Greece, especially if it happened chaotically. But soon, freed of debt,
with a much cheaper currency and much greater policy freedom, growth would
resume. It is ludicrous for some to suggest that Greece would become as poor as
neighboring Bulgaria if it left the euro. Greece was much richer than Bulgaria before it
joined the euro and living standards in new euro members such as Latvia havent leapt
since they joined. So why should Greeces living standards be permanently lower if it
left?
The costs of a Grexit to the rest of the eurozone, though, would be substantial. The
immediate ones are financial: default on all of Greeces obligations to eurozone
authorities, as well as the Bank of Greeces Target2liabilities. The enduring ones are
economic: Confirming that countries can leave the euro would add an uncertainty
premium to every struggling southern European country, stifling investment and
making the eurozone even more fragile. In a post-QE world, it would make it more
likely that the ECB would need to trigger its outright monetary transactions (OMT)

program exposing that ECB chief Mario Draghis declaration that he would do
whatever it takes to hold the euro together isnt as robust as it seems.
Grexit would also cause political contagion. If Greece were soon growing again outside
the euro as even European Commission officials privately suggest it would other
countries could decide to leave, too. Could the euro survive the departure of Italy,
where all three main opposition parties are anti-euro? What about France?
Then there is geopolitics. Since the end of the Cold War, Western European politicians
have been lulled into thinking that they live in a postmodern la-la land. But now that
Russia has invaded Ukraine and is also trying to destabilize the Baltics and cozy up to
Serbia, Greeces Balkan neighbor, it would be reckless to cast Greece out of the
European club.
Finally, Tsipras may also want to broaden the discussion. Many governments are
unhappy with both the substance and the nature of the German-led response to the
crisis. France and Italy would have much to gain from a debt conference that crafted a
grand bargain for a less disciplinarian and more fiscally flexible and democratic
eurozone. Many other governments are unsettled by Germanys bullying of Greece:
They know that what Berlin does to Athens, it could also do to them. (That said, if
Tsipras can get a narrow deal, he should go for it.)
Greeces plight, while terrible, is not tragic in the ancient Athenian sense: Its fate is still
in its own hands. With a skillful strategy, it can still all end in smiles, not tears.
Photo credit: LOUISA GOULIAMAKI/AFP/Getty Images
Posted by Thavam