Greece: will Merkel budge?

Submitted by Matthew on 23 May, 2012 - 8:36

John Palmer, former European editor of the Guardian, spoke to Solidarity about what the current talk among EU leaders about “growth initiatives” is likely to yield.

In the polls in Greece, New Democracy are about two or three points ahead of Syriza at this point of time, so it’s by no means certain that the outcome on 17 June will be the Syriza victory which looked likely shortly after 6 May.

If Syriza emerges on top, what happens will largely depend on the nature of the agreement which is to be negotiated at the European summit on 23 May. The Syriza leader has been invited to France and Germany, and he is travelling this week to have discussions with the powers that be in Paris and Berlin.

I imagine he will be briefed on what kind of package they think they can unfold at the full EU summit on 28-29 June. The question for him will be whether it is in any sense acceptable — will he reject it out of hand? — or will he claim that the intervention of Syriza, and its determination to oppose needless austerity, has paid off by producing at least the beginnings of a shift in policy.

Tsipras’s position is that Syriza wants Greece to say in the euro, and he also says — what is true — that there is no legal way to expel a member of the euro area.

But if the government in Athens does not pursue a strategy which the rest of the EU states can accept, then those other states are under no obligation to sustain the big cash flows which have kept the Greek banks ticking over.

At the end of June or shortly thereafter, the need for a further major capital injection will become critical because at that point the Greek state will not have funds to pay its own employees, or pensions, or all the rest of it.

What margins are realistically available for something that might be hailed as a liveable compromise? That is difficult to say. If the opinion polls are right, then the more likely scenario is that New Democracy, with Pasok and maybe one or two smaller parties, will emerge to claim some concessions as a triumph for Greek insistence on a change in the euro-area policy.

Within Syriza there is a complex debate going on. I counted, the last time I looked, six or seven different factions, with a wide range of views, as between say the greens and some of the further-left elements within Syriza. On top of everything else, you have to judge what the internal balance of the argument within Syriza will be if — and I stress if — the Euro-summit comes out with a big acceleration of capital investment through the European Investment Bank and through the EU budget within the peripheral economies and especially Greece.

Merkel said the other night in a press conference, and it wasn’t picked up outside the German media, that there “may be circumstances in which we could review the exact terms” of austerity. I think that is code for what they have already offered the Spanish, more time to meet the targets.

There is an area for autonomous decision by the European Central Bank here. In reality the ECB’s decision is made in discussion with the governments, but formally it is their decision. The area in a compromise package that the ECB would be responsible for would be a structured recapitalisation of the Greek banks, which are the most fragile brick in the edifice.

The decision on the granting of the major bail-out funds is a matter for the euro-area governments. They do not have the power to expel Greece, but they have the power to say that their conditions are not being met and they will not deliver the next round of bail-out funding.

A messy default would be triggered not by an act of removing Greece from the euro-area, which they can’t do, but as a consequence of the fact that without further bail-out funds, internal Greek financing of the state’s operations would dry up within weeks. That could easily lead to the famous contagion danger. Financiers conclude that if the EU leaders are willing to do that to Greece, who are we to know that they won’t do it again with Spain or Portugal? That would trigger the kind of run on the banks that you saw the beginnings of in Spain last week.

My judgement is that everybody knows that this a process that could easily get out of control. The EU leaders say they could have a firewall big enough to insulate all the other states other than Greece, but that firewall does not yet exist. There is a firewall, but it is nowhere near big enough to contain the tsunami-like consequences which could flow from a messy unilateral de fact departure of Greece from the euro area.

There are huge pressures on both sides [Greek government and EU leaders] to deliver concessions.

My view, reading the internal German debate, seeing that the opposition SPD has said it may not support the final Bundestag stage of the European fiscal treaty ratification if there are not growth initiatives, knowing that the European Commission has a series of measures all prepared and ready to go ahead to focus investment through the European Investment Bank and the EU funds on the periphery, is that the outcome is likely be within the margins of supplementary investment spending and a year or two extra to meet fiscal targets.

Interestingly, the CSU in Bavaria, which normally is on on the madcap right of the CDU spectrum, is now saying that there should be a more balanced strategy, because the CSU also has a trade-union wing [Catholic trade-unionists].

On balance, I think at this time the forces probably exist to enforce some concessions.

The European Central Bank is limited in what it does by its statutes. It can and does intervene in the European banking system to counteract the liquidity strains, which we now know last year were very close to a Lehman-type collapse — no bank would lend to any other bank because they did not know what they had on their books.

The Tory government is now saying that the EU and the ECB have really got to act, and why? Not so much because the British banks are so massively exposed to Greece — they’re not — but they are massively exposed to other European banks which are exposed to Greece.

The argument that has been going on between the German conservatives, particularly the Bundesbank, and the rest of the ECB, is that although in theory the ECB’s role is restricted to the provision of liquidity [i.e. of cash, to banks and others which have sufficient sound assets but just have trouble converting them to cash], in practice the ECB has been helping fundamentally insolvent countries to keep the show on the road.

The ECB would say no, those countries are not yet insolvent, and so the ECB is free to lend.

Even with a formal suspension of the next Greek bail-out installment, the ECB could buy Greek government bonds. But that would be a clear violation of its statutes which ban the ECB from funding insolvent states.

The ECB could also just provide more short-term liquidity to Greek banks. But if the ECB did that, would the markets be fooled? Or would the financiers just say that the ECB had given them another week or two to get their euros out of every hole in the wall?

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