English
By Danae Leventi, Analyst KEDISA
Since the beginning of the sovereign debt crisis, Eurozone policymakers have been required to face a need which was not existent before; the provision of financial assistance to Eurozone member states. This exigency came as a result of the absence of an institutional firewall to the risks of contagion of the international financial crisis, which enhanced the dynamics of uncertainty and uncovered the insolvent debt of Greece in 2009. The Greek debt crisis introduced unprecedented dynamics to the European Union, as the economic downturn, the fiscal contractions and the confidence crises were happening parallel to the establishment of a crisis management regime. The strengthened fiscal and economic surveillance within the multidimensionally challenging context of a banking union, significant regulatory reforms and enhanced coordination, depict the ability of the European member states to ‘speak with one voice’ through institutional responses. On the contrary, the Greek crisis management illustrates the increased power of interstate strategic negotiations in the process of challenging the institutional landscape of the EU, primarily due to the magnitude of the internal (Greek) and external (European) threats of the debt crisis.
The Greek financial problems are traced back to the period of the country’s accession to the EMU in 2001, as the unsustainable fiscal policy in combination to the inefficient public administration and structural rigidities resulted in debt accumulation (Arghyrou and Tsoukalas, 2010). The increased yield spread of Greek government bonds above the German benchmark transformed the crisis of fundamentals to a confidence crisis and triggered the need for a collective policy response to the risks of a default. All financial assistance programmes that have been provided to Greece have been negotiated with the Troika and negotiations were never easy; instead they were often contentious as the proposed austerity packages were constantly bringing the country closer to a humanitarian crisis, while the European stand was demanding restructuring in exchange to its support. Germany has always been a tough negotiator, as since 2010 and the first bailout it has proved that its support is not unconditional. The interstate negotiations happen in a climate of hard bargaining among the two sides, Greece and its creditors, which has been preserved over the years, despite the changes in the negotiating stances of the Greek government.
Hard bargaining during the first two bailouts
During the first two bailouts, the uncertainty related to a Greek default and the risks it would pose to European markets and politics, allowed Greece to push the Troika for extraordinary financial support on the basis of ‘too-small-to-fail’ (Pitsoulis and Schwuchow, 2016). However, the EU was circumspect about Greek financial assistance and procrastinated on reaching an agreement (Zahariadis, 2012). The German front was on the offensive having a ‘this is a Greek problem’ approach and insisted on not providing financial assistance based on the no-bailout clause of the Treaty. This situation fed uncertainty, demolished any foundations for greater future stability and led to a decentralisation of decision-making. This illustrates a form of hard bargaining, as the deteriorating situation and the markets’ uncertainty gave no alternative to Greece than accepting a fundamental reform of its fiscal system. These delays were damaging but provided Germany a negotiating leverage in its hard bargaining strategy, as its reluctance to sign off a rescue package was bringing the Eurozone closer to the brink (Hübner, 2012). Its reactions only when the yields of governmental bonds were skyrocketed illustrates how Germany was committed in its brinkmanship and was only willing to provide assistance under the condition of Greece reforming its growth model (the Economist, 2011).
Brinkmanship in the third bailout and the ‘Grexit’ Referendum
The third bailout negotiations occurred in a fundamentally different institutional context as the ESM had come into force in 2012 and the IMF would not join the creditors’ camps as the Greek debt was unsustainable, violating its lending conditions. The Greek stand had also changed towards hard bargaining; once the real threat of a default was gone and Greece was experiencing a primary surplus enough to pay its public expenditures, the newly elected left-wing government of Syriza deliberatively run the threat of an accidental ‘Grexit’ to secure certain concessions. In this way, it engaged in a process of brinkmanship, promoting an image of irrationality to the creditors and being prepared to take high risks to pull everyone off the brink (Pitsoulis and Schwuchow, 2016). The initial dreadlock on negotiations came by Syriza which following its failure to secure the endorsement of the proposed reforms in March 2015, proceeded on a discussion of a bilateral cooperation with Russian president Vladimir Putin and a demand for wartime reparations from Germany. The ultimate escalation of the bargaining crisis came with the announcement of the Greek bailout referendum for July 5th 2015 and the government’s decision to not extend the ongoing bailout and thus miss the IMF payment on June 30th. Negotiations were now time-constrained by the deadline of bond redemptions to the ECB by July 20th, while the decision of the Greek government to hold a referendum on the terms of the Greek bailout utterly changed the negotiation games. Even harder bargaining was now happening in a context of brinkmanship, despite the many accusations for an ignorant strategy based on ‘misconceptions and wishful thinking’ (Klapsis, 2015).
This referendum was a bold tactical move which was played on a dual level. On the one hand, it was the government’s strategy to delay the negotiations and demand a better deal while lowering the political costs of it on the basis of demographic legitimacy. On the other hand, it implicitly introduced the threat of ‘Grexit’, as the majority voting of ‘no’ was giving European leaders a more lenient deal as the only alternative to the risk of Grexit. Negotiations took the form of a game of ‘coercive diplomacy’ with Greece threatening with a catastrophic event on the basis of democracy aiming for a change in creditors’ behaviour in order to improve the previous proposal which was now off the table. This strategy was in line with the finance minister’s Yanis Varoufakis’ perception that ‘to negotiate and be taken seriously, you need to have a credible threat. You have to be prepared to blow the whole thing up, simply by being intransigent if you are not taken seriously’ (Huffington Post, 2015) and eventually, ‘Grexit was […] the best threat to use against the creditors’ (Varoufakis, 2017: 83). The referendum and the ‘no’ majority simply allowed the Greek government to prove this ‘intransigence’ in not stepping back from approaching the brink in its effort to achieve a better deal (Pitsoulis and Schwuchow, 2016). This deliberative risk-generation mechanism that Greece mobilised increased the risk of an accidental Grexit and deliberatively allowed the country to go in paths of uncertainty while financial markets were panicking. This was the Greek tactical strategy in negotiating austerity away, which was intentionally promoted by an ‘irrational’ image of the government, even though the finance minister refused it at the time (New York Times, 2015b). The Greek government had a clear plan; by making it widely known that an agreement within the Eurozone was its primary objective, then ‘the blame of Grexit […] would only fall on the EU and the IMF’ (Varoufakis, 2017: 81). On these grounds, the Greek negotiation team used the Syriza’s election campaign promises of negotiating austerity away and reducing the taxation on ownership (ΕΝΦΙΑ), and the outcome of the democratic referendum, as a commitment device. The Greek government was prepared to compromise before entering the negotiation games; its commitment device would allow them to demand a compensation –such as more lenient measures or debt relief – for the humiliation of the government which intentionally made a ‘U-turn’ on its promises. The actions of the Greek government can be therefore rationally understood as the Greek negotiation team was playing an escalating game of brinkmanship, trying to force Europe to give ground.
High risks and a worse deal
Undoubtedly, the risk for the government’s obstinacy was high, as once entered the course of brinkmanship, there was no way out. The Greek government was aware of it and in early stages Yanis Varoufakis warned his negotiation team that ‘in pushing Alexis to the brink they (the EU and IMF) might effect Grexit by accident’ (Varoufakis, 2017: 81). Indeed, negotiations did not go according to plan and the new agreement not only did not put an end to crisis, but instead brought more austerity and higher debt to Greece.[1] Grexit was not a credible threat any longer as firewalls had been constructed to contain financial contagion. The obstinate Greek strategy had backfired with creditors and especially Germany, keeping their tough stance towards Greece. Wolfgang Schäuble, the German finance minister found the idea of a referendum ‘fantastic’ as it would make clear to Greek citizens that the choice is ‘The MoU as it is, with no changes, or the drachma’ (Ibid: 407-408). The German front was sharp and it participated in the brinkmanship by not only ‘endorsing’ the disintegration of Eurozone, but by even aligning Grexit with European interests as it would allow the Eurozone to grow stronger through discipline and stronger safeguard. Germany was even offering a temporary ‘time-off’ (New York Times, 2015c), while the Dutch Eurogroup President, Jeroen Dijsselbloem, was demanding Greece to acquiesce to the troika’s all-or-nothing approach. The outcome of the negotiations and the draconian conditionality attached to the agreements, making Greece face further austerity, privatisation and tax overhaul, reflect how the Greek government ultimately surrendered powers in its bargaining ‘game’. Tsipras realised that ‘if anyone were to threaten Grexit, it must be the Troika, not Syriza’ (Varoufakis, 2017: 83) as the creditors had a third choice in what the Greek team perceived as a two-way path, proving Germany’s bargaining power in the game which diminished all Greek efforts to push politics away from austerity and determined the outcome of the negotiations. This was the unavoidable result of the strategic interdependence and the brinkmanship between the two sides, as from the onset of the negotiations, both sides tried to coerce the other to change its strategy at high risks.
The third package which tightened austerity instead of relieving it reflects therefore ‘a victory of the politics of today’s Europe rather than a viable plan to help the Greek economy’ (New York Times, 2015a), as the 29 pages of conditions conceded control of Greek politics to the Eurozone, with the Troika reviewing the reforms quarterly. This radical overhaul does not allow ‘unilateral fiscal or other policy actions to be taken by the Greek authorities […] without the close consultation of the Troika’ (the Guardian, 2015) allowing the creditors and notably Germany, to preserve the prevailing position within the negotiation procedures, while also acquiring greater domestic agenda-setting power which strengthens it vis-à-vis its home polities. This emergence of a ‘German Europe’ with the associated legalistic-rule based system of reforms indicate that national autonomy and political authority have been substantially reduced at the expense of a rule-based system which ultimately limit further national divergences in policies. These dynamics of the crisis-management highlight the German persistence on austerity, a dominating economic narrative and paradigm which stems from the country’s experiences of hyperinflation due to the monetarisation of government debt (Hübner, 2012). The German preferences inherent in the country’s negotiation agenda are based on the principles of ordoliberalism, transforming austerity to the ideational foundation of the rule-based doctrine to improve international competitiveness and achieve a trade balance surplus. Germany with its dominant bargaining power successfully preserves therefore its strict adherence to its deep-seated ideational norms.
Consequently, the negotiations with regards to the Greek debt crisis management regime is a ‘peculiar expression of the interrelation of policy objectives, institutional concerns and windows of opportunity exploited by political entrepreneurs’ (Diedrichs et al., 2010: 25), a set of factors which constitutes a reflection of national preferences. The magnitude of the internal and external threats of the Greek crisis appointed more power to the dynamics of interstate negotiations, which occurred on the basis of self-interests, with the bargaining threats being the direct costs of default and not Greece’s loan-repayment reputation (Bulow and Rogoff, 2015).
References
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[1] That could possibly be illustrated through a game-theoretic approach of which the result is a classical prisoners’ dilemma with both sides deciding to trump the other and thus resulting in a worse deal, see Pitsoulis and Schwuchow, 2016