Greece on the Brink

I'm reposting here my comment on Naked Capitalism this morning:

I think there are rather simple, uncomplicated explanations for what is going on.

1. Tsipras and his Syriza allies really oppose the creditors’ terms.  The current situation of Greece is intolerable, and there is no way out through the “bailout” deal on offer.  It only prolongs the depression and leads to the next round of fruitless negotiations, and the next.  The Greek government is not following a game-theoretic strategy.  It has reached the limit of what it can put on the table, period.  Arguably, as Yves and others here have said, their limit was too broad.

2. The creditors believe, with some justification, they have a grip on Greece that extends beyond the current set of arrangements.  A “default” is not the same as a writedown, at least not in this case.  Greece can miss payments, and the ECB can force them out of the eurozone, as I think likely.  But Greece’s economy is so enmeshed with the rest of Europe’s that repayment conditions can be attached to a neverending list of rights and privileges: citizen movement, access to electronic fund transfers and clearing, tariff exemptions and trade access, regulatory approvals, you name it.  There will be permanent pressure to repay.  Under these circumstances, from a strictly repayment perspective, it makes no sense to give a centimeter.

3. The eurozone is also a political vehicle to facilitate the disembedding of capital, a project that is infeasible at the national level in most European countries where durable social bargains have been struck.  This is what the end of national capitalism means in Europe, and why reform always translates to liberalization.  Consider the current strike of pharmacists in Greece, resisting the removal of laws that prevented pharmaceuticals from being sold only in pharmacies.  This could not have been achieved without strong supranational pressure.  And it isn’t happening (yet) in Germany, precisely because no such pressure has been applied.  If the demand to liberalize on all fronts can be rejected by a government as exposed to pressure as Greece’s, what’s the point of the entire project?

4. Despite the handwringing I hear, I have no doubt that finance officials in Greece have prepared a rapid transition to a parallel currency which may or may not be the drachma, complete with transitional capital controls.  Obviously they cannot publicize this in advance.

5. Default and the introduction of a new currency will be accompanied by at least several months of economic and political chaos.  The middle class, whose need for liquidity prevented them from simply squirreling away their assets to a safe location north of the Alps, will be hit hard.  There will be intense political polarization, with demonstrations and counterdemonstrations.  But no elections are scheduled.  (Incidentally, this is one reason why it makes sense for Syriza to hold the line and face the crisis now rather than delay for a year or two.)  In the absence of a coup, and assuming that the economic situation stabilizes later this year, Syriza has an excellent chance to emerge from the transition even stronger than before.

6. The only murky point for me has to do with the possibility of a coup.  In a period of extreme polarization, it is always possible to make a military invention appear to be a step toward calm, reasonableness and the restoration of democracy.  It’s not as though we haven’t seen a number of such coups in the past few years, in places like Honduras, Egypt and Thailand.  The question is whether there is a faction willing and able to step in and assume this role.  I have absolutely no idea.  But if there is, it cannot act without getting a preliminary nod from Europe.  Is it conceivable that support for a coup could be part of the punishment meted out by Europe in retaliation for the “irresponsible” behavior of Syriza?