What went wrong? Tsipras’s fatal mistake is that no preparations had been made for Grexit. The reason was that this is not an option that was ever desired by the Tsipras government. They thought that since Grexit would be catastrophic for everybody inside the Eurozone, it was not credible. The support in the referendum should show the support of Greek voters and help increase the bargaining position of Greece.Somewhat paradoxically, if the Greek goal was to avoid "Grexit" from the euro, they had to prepare to be leave the eurozone and set up their own new currency, at least to the extent that the other euzozone governments could believe they were willing to do it.
This lack of preparation is the weakness that was exploited by Schaüble. Once it was clear, that Germany and most of the partisans of austerity were ready to exclude Greece from the Euro, basically by getting the ECB to cut funding to Greek banks, it would have been a catastrophe of major proportions for the Greek economy. Truly, there was a large risk for the Euro, but by showing readiness to exclude Greece from the Eurozone, Tsipras literally had a gun to his head, and had no other choice but to capitulate.
The credible threat of Grexit is what did him in. If Greece had made serious preparations and was ready to weather a Grexit, things would have been completely different. The threat of exclusion would not seem that terrible to the Greeks, whereas the risk of Grexit to the Eurozone would seem much more serious. The threat of Grexit would then have seemed less credible. To me, this is the fatal mistake that Tsipras made. Overall, he was still able to push the bad agreement through the Greek Parliament. Germany now looks very bad to the outside world and Greeks look like victims, but are likely to go through a terrible time as their economy is further strangled. [my emphasis]
Niels Kadritzke in Was nun Alexis Tsipras? takes a careful look at the outcome of the Greek negotiations and their immediate aftermath in Was nun Alexis Tsipras? Nachdenkseiten 17.07.2015. He deals with the question of whether Tsipras "betrayed" his program or the Greek people, and rejects that position. He notes correctly that Tsipras and Syriza were consistent in their goal of keeping Greece in the eurozone.
And he brings up the point that wasn't publicly clear a week ago but is now much more so, which is that the Merkel government's goal now appears to be to push Greece out of the eurozone. So Tsipras threatening to take that path would have played into that position.
This reminds me of an interesting historical parallel that I'm very hesitant to even mention. Because it has to do with possibly the most ill-used and damaging historical analogy ever used, the infamous "Munich analogy," the one that Republican warmongers use pretty much daily against whoever they want to bomb that day.
One fact about the Munich Agreement of 1938 is that Hitler was actually furious that Britain and France had agreed to let Germany annex the Bohemian and Moravian provinces of Czechoslovakia without coming to Czechoslovakia's defense. He wanted to take the territory by force without Anglo-French agreement.
Without worrying why he was taking that perspective or how well it might have served his objectives, that raises the obvious question, would it have been worse for Britain and France to not agree? After all, if that had been their decision, they would have been doing what Hitler expected and preferred! Isn't Hitler's outrage at their agreement to allow him to take Bohemia and Moravia a sign that Chamberlain and Deladier were taking the better position in doing so?
The answer is no, because whatever Hitler's was thinking, it was a dangerous disadvantage to Britain, France and their later wartime ally the Soviet Union for Hitler to seize those territories and to do it with the West's explicit agreement. It gave Germany access to the vast Skoda arms works which qualitatively increased their military potential. It convinced Soviet leaders that Britain and France were unwilling to resist German aggression and that it was in the Soviet interest to cut a deal with Hitler if they could to buy time for their own armament program. And while Britain and France weren't prepared for the kind of military action that could have stopped the German invasion of Czechoslovakia, an alliance with the USSR in 1938 would have at least given them a greater chance to do so.
I bring that up here no because I see any exact analogy, but because doing what the other side doesn't want isn't in itself a sign of a good or bad position in a negotiation. Merkel and Schäuble may well have preferred for Greece to leave the eurozone right now. But the fact that Tsipras avoided that immediate result doesn't in itself mean that was the optimal position for him to take.
I agree with Kadritzke that Tsipras' surrender, grim as it is, didn't constitute a political betrayal of his party or constituents.
But Kadritzke also seems to share Tsipras' apparent conviction that Grexit is effectively impossible or, at best, far worse than the gruesome alternative which they have now accepted at Germany's insistence and enormous pressure that constituted the opposite of "solidarity" on the Merkel government's part. He writes that in the case of Grexit:
... der würde in Wahrheit die Kapitulation vor der „Souveränität“ der realen Finanzmärkte bedeuten. Und die würden dem Land einen noch brutaleren Sparkurs diktieren als derjenige, den die meisten Griechen zurecht als Erpressung empfinden.On this issue, I would ask the same question I previously quoted Paul Krugman as asking (History Lessons for Euro Debtors 07/15/2015):
[... that would mean a capitulation before the "sovereignty" of the real finance markets. And they would dictate to the country an even more brutal austerity course than the one that most Greeks rightly perceive as blackmail.]
If Greece still had its own currency, the case for devaluation would be completely overwhelming at this point. What this means, in turn, is that everything — the ongoing economic disaster in Greece, the bitter divisions within the euro area, the perplexity of even the best intentioned policymakers — flows from the supposedly insuperable technical difficulties of going off the euro.Grexit would mean taking a path similar to that Argentina took in 2001-3. It would be tough in the short run. But the current program imposed on Greece looks like nothing but the German plan to push Greece out of the euro while doing an enormous amount of damage to their economy at the same time. And this program really gives them no hope of getting their economy out of a seriously depressed state.
Can this possibly make sense given the extremity of the situation?
In another post (Bernanke Isn’t Serious 07/15/2015), the Shrill One quotes from Greece and Europe: Is Europe holding up its end of the bargain? by former Fed Chairman Ben Bernanke at his Brookings blog, where Bernenke writes:
The risks for the European project posed by these economic developments are real, no matter what the reasons for them may be. In fact, the reasons are not so difficult to identify. The slow recovery from the crisis of the euro zone as a whole is the result, among other factors, of (1) political resistance that delayed by many years the implementation of sufficiently aggressive monetary policies by the European Central Bank; (2) excessively tight fiscal policies, especially in countries like Germany that have some amount of "fiscal space" and thus no immediate need to tighten their belts; and (3) delays in taking the necessary steps, analogous to the banking "stress tests" in the United States in the spring of 2009, to restore confidence in the banking system. I would not, by the way, put "structural rigidities" very high on this list. Structural reforms are important for long-run growth, but cost-saving measures are less relevant when many workers are already idle; moreover, structural problems have existed in Europe for a long time and so can't explain recent declines in performance.Commenting on the first paragraph just quoted from Bernanke, Krugman asks:
What about the strength of the German economy (and a few others) relative to the rest of the euro zone, as illustrated by Figure 2? As I discussed in an earlier post, Germany has benefited from having a currency, the euro, with an international value that is significantly weaker than a hypothetical German-only currency would be. Germany's membership in the euro area has thus proved a major boost to German exports, relative to what they would be with an independent currency.
Nobody is suggesting that the well-known efficiency and quality of German production are anything other than good things, or that German firms should not strive to compete in export markets. What is a problem, however, is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home, as shown in its extraordinarily large and persistent trade surplus, currently almost 7.5 percent of the country's GDP. [my emphasis]
Does all this sound sort of ... familiar? Kind of like what other bearded Anglo-Saxon economists have been saying? As I’ve tried to point out for a long time, in this policy debate the supposedly radical types are the ones doing standard, more or less textbook economics, while the respectable voices have subscribed to fantasies ungrounded in either history or theory.I quote that here because the idea of Grexit as an alternative to crackpot austerian economic policies isn't radical or kooky. Whether it's desirable or not is a difficult call that Tsipras in the past week made according to his consistent policy and positions.
You might think that having one of history’s most celebrated central bankers weigh in on the anti-austerity side of the issue would change perceptions about what’s serious as opposed to Serious. But don’t bet on it.
But at this point, it's clear that any successful resistance in the immediate future against Germany's draconian austerian policies for the eurozone periphery will have to be willing to risk going back to their own currency. Tsipras tried bluffing. Merkel and Schäuble called his bluff.
The next country that tries it has to be willing to take the real risk of leaving. And prepare for it. Only then can they assume they will have even the possibility of getting other eurozone countries like France or Italy to pressure Germany for a reasonable, non-austerian solution within the eurozone.
And speaking of France and Italy, I'm taking a show-me attitude toward the supposed opposition they are said to be showing against Merkel.
Kim Willsher and Philip Oltermann report in A 'marriage' in crisis: Greek bailout row puts strain on Franco-German alliance Guardian 07/17/2015:
Disagreements over how to handle the Greek debt crisis have led to a major falling out between Paris and Berlin, the “couple” at the heart of the European project. ...Yeah, get back to me when there's more than superficial diplomatic kabuki to talk about.
To the north, Germans are grumbling that they were stitched up to avoid Greece leaving the eurozone at all costs. To the south, a hard-hitting missive by the leader of the governing French Socialist party accused Berlin of forgetting the “atrocious crimes” committed in its name.
“Germany must pull itself together, and quickly,” Jean-Christophe Cambadélis wrote in an open letter addressed to “mein lieber Freund” – my dear friend.
In Berlin, officials accused Paris of operating behind other member states’ backs and deliberately playing a game of chicken with the German delegation to force through a deal.