« L'Europe se fera dans les crises et elle sera la somme des solutions apportées à ces crises »—Jean Monnet
(given the historical moment for the Euro Area and the inevitable ultimate consequences of Tsipras’ electoral triumph back in January, it is worth recalling what I said in February about Mr. Tsipras’ complex decision set. Because game theory isn’t easy if you don’t have complete information.. sources: Euractiv, freespaceeconomics )
In early January, Alexis Tsipras won a snap parliamentary election in Greece, bringing Syriza, the far-left coalition he led, to take over the Greek government. Syriza’s mandate was clear: reversing austerity, renegotiating the outstanding debt stock, and maintaining the Euro Area membership of Greece. The financial markets’ reaction followed suit and for a while it appeared that Grexit was back on the agenda. When, on February 24th, the Greek government and the rest of the Eurogroup led by Jeroem Dijsselbloem reached a preliminary agreement concerning a four-months extension of the Greek bailout terms, many observers considered that the worst had been left back . However, while a break-up of the Euro Area has been avoided once more, Greece is not anywhere closer to recovery (let alone redemption) than it used to be before Syriza’s electoral triumph, and the questions concerning the long term outlook of Greece’s economy are yet to be answered. To fully understand the extension of Mr. Tsipras’ hesitations, we must first realisethat the three flagship goals of Syriza’s programme are deeply inconsistent; they actually consitute a true trilemma inpreventing a coherent execution.
In principle, Mr. Tsipras desires not to leave the single currency, but to ensure Greece’s position in the EMU (1). Second, it aims to achieve a reduction of the debt stock- either through a negotiated default or interests’ payment postponement, or through the outright rejection of public debt in the case of failure of negotiations (2). And finally, he claims he wants to reverse the much-hatred austerity policies that -according to neokeynesian account of economics- have depressed the country (3). As much as one could possibly like these goals they are anyway not consistent: it is impossible to pursue them altogether, hence constituting yet another “impossible trinity”. The next sections will discuss the implications of each of the pairs.
Default and Euro Membership-
Contrary to common wisdom, it is not out of Mr. Tsipras’ reach to pursue further debt restructuring or unilateral rejection of Greek public debt and simultaneously maintaining Euro membership; it does constitute, however, a very complex goal to achieve. Provided that the default brings down to zero the payment of the interests debt (which is unilaterally cancelled, or which interest payments are suspended), if Greece were to have, before such a default, a large-enough primary surplus (which indeed it has right now), then it wouldn’t have to leave automatically the Euro Area. This because having a budget surplus implies not relying on debt emission for financing expenditure, and a primary surplus is simply the net position prior to interest payments; but if— because of the default— interest payments go to zero, then the primary surplus becomes a net surplus. So Greece can actually both default and maintain its Euro membership, as long as it also maintains a budgetary surplus. But having a budgetary surplus is exactly what austerity policies aim at: spending less than earning. So to maintain Euro membership and pursue a default, Austerity policies must be maintained for a long time. The length of this “forced austerity” depends, of course, from the time required to re-establish market’s confidence in the Greek public authority. In recent default episodes (Russia, Argentina) market access has been denied for years, but these countries were able to reduce austerity measures by accepting higher inflation rates induced by their own Central Bank, an option that Greece wouldn’t have if it is to remain the Euro Area. So Euro membership and default are a possible pair, but this would imply continue to purse austerity policies for years.
Reversing Austerity and Euro membership –
The second option on the trilemma includes Euro membership and abandoning of austerity policies. Assuming that Keynesian policies work (this is, overall, a very debatable assumption. However, Mr. Tsipras does believe they work, and this is what matters in this discussion) then this is feasible option. The key, however, is to maintain capital markets’ access. This because for reversing austerity, Greece needs to borrow-and-spend more, which in turn depends on the willingness of financial agents to lend money to the government. So reversing austerity and maintaining Euro membership will never be consistent with a default, because nobody will lend any Euro to the Greek government in case of default for a long time. So to reverse austerity and maintaining Euro membership, Greece has no choice but continuing to honour its commitments with its creditors.
Reversing Austerity and default-
As the reader will have understood by now, the last option- reversing austerity and pursue default- implies abandoning the Single Currency. This because the restrained market access caused by the default is consistent with reversal of austerity policies only if a different source of financing for the public budget is available- and the only possible alternative is monetary financing, which depends on monetary sovereignty.
As it is often the case in electoral politics, Mr. Tsipras has promised too much; the flagship policies of his programme cannot be fulfilled in total. Even if Greece managed to avoid to make a decision now by agreeing to a four months bailout extension, a choice will have to be made before the summer, when the current EU credit line will cease to exist.
Update 1- 27 June
– today, June 27th, the international and European bailouts have been rejected by Greece and the Eurogroup. Greek Government has called a referendum in a latest move to play the citizens against the markets and the other European nations. It is unlikely that Greece will manage to maintain its Euro Area membership, so mr. Tsipras has- at the end- made a decision on its trilemma; the worse possible decision from the point of view of European integration.
Update 2- 12 July
Negotiations have collapsed again on Saturday, 11th of July. Once more, because of Mr. Tsipras failure to understand he will not get debt relief- he can default if he wishes, but then either he will need to implement far stronger austerity than now, or leave the Euro. There is no third way, says the Trilemma.
Update 3- 13 July
an agreement has been finally reached- moving downards on the Trilemma. Euro membership is preserved and the parts have agreed to discuss, in the future, whether to proceed with debt relief; the cost for this is to maintain Austerity over time. We must sadly note that, if Tsipras had reasoned strategically back in January and if he would have understood the challenges of its own trilemma, he would have reached an agreement much before, easing the suffering of its own people.
 Note that this also assumes that no capital outflow happens in case of default, which is very unlikely because of domestic banking system holdings of Greek debt. To prevent or minimize the implications of further capitals’ run, the Greek government surplus has to be big enough to nationalise part of the Banking System- a requirement unlikely to be achieved, but this is another story that concerns the feasibility of a default di per se, not its consistency with the other policies.
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