<nettime> The Hard Line on Greece

[Felix Stalder <felix@openflows.com>]

The Hard Line on Greece

June 29, 2015
Andrew Ross Sorkin

http://www.nytimes.com/2015/06/30/business/dealbook/the-hard-line-on-greece.html

In July 2012, Timothy F. Geithner, the United States Treasury
secretary at the time, traveled to Sylt, an island off Germany in the
North Sea.

Mr. Geithner was there for a meeting with Wolfgang SchÃuble, Germanyâs
finance minister, who would spend his summers at his vacation home on
the tiny island.

The topic was Greece.

In the homeâs library, the two men spoke about Greeceâs prospects and
begun discussing ways for the European Union to keep the country in
the eurozone.

To Mr. Geithnerâs dismay, however, Mr. SchÃuble took the conversation
in a different direction.

âHe told me there were many in Europe who still thought kicking the
Greeks out of the eurozone was a plausible â even desirable â
strategy,â Mr. Geithner later recounted in his memoir, âStress Test:
Reflections on Financial Crises.â âThe idea was that with Greece out,
Germany would be more likely to provide the financial support the
eurozone needed because the German people would no longer perceive aid
to Europe as a bailout for the Greeks,â he says in the memoir.

âAt the same time, a Grexit would be traumatic enough that it would
help scare the rest of Europe into giving up more sovereignty to a
stronger banking and fiscal union,â Mr. Geithner wrote. âThe argument
was that letting Greece burn would make it easier to build a stronger
Europe with a more credible firewall.â

Fast-forward three years. What Mr. SchÃuble articulated that summer
afternoon to Mr. Geithner is finally taking shape.

Greece is in a harrowing last-minute standoff with the European Union
over whether it will remain part of the eurozone, and Greek citizens
are set to make the decision in a referendum vote on Sunday. That vote
is happening against a backdrop of bank runs; citizens are camped
outside of banks, where capital controls now restrict the amount of
money that can be removed.

Politicians and investors have been trying to âwar gameâ the outcome.
Who is bluffing? The Greeks or the European Union.

The conversation between Mr. Geithner and Mr. SchÃuble gives a strong
indication. As Mr. Geithner said of another conversation he had with
Mr. SchÃuble: âHe has a clear view: Greece had binged, so it needed to
go on a strict diet.â

Jean-Claude Juncker, the head of the European Unionâs executive
branch, said on Monday that âthe door is still openâ and that he was
hoping to bring Greece back to the negotiating table. But that was as
far as he would go.

He was no doubt sincere in his hopes that Greece would agree to the
latest proposed bailout arrangement. But this time, the Europeans have
nothing left to give Greece, and any concession will only undermine
the strength of those left in the eurozone â possibly inspiring other
countries like Portugal, Spain and Italy to ask for even better loan
terms.

A crucial decision made over the weekend had largely gone unremarked
upon but is telling. The European Central Bank decided to halt an
expansion of its emergency lending facility to Greek banks. That
facility could have allowed the banks to continue operating without as
much panic and helped avoid some of the capital controls by providing
additional liquidity.

No central bank likes lending into a bank run in which it expects it
will lose money, so the decision may make sense on the merits. But it
also serves another purpose, one that is political.

By closing the cash spigot, the E.C.B. managed to instill additional
fear and panic into the day-to-day lives of the Greek people, ahead of
the vote on the referendum.

That panic could cut two ways. The Greeks could look at the lines
around the banks as a warning of whatâs about to come, which would
undoubtedly be worse in the short term, and vote in favor of the
latest bailout agreement.

Of course, they could also view the lines as further evidence of their
subjugation to the eurozone and the continued austerity they would
experience under the bailout, pushing them to vote against it.

The E.C.B.âs decision also has another important purpose outside of
Greece: It might be a warning to countries like Spain and Italy,
should they ever consider following Greece out of the eurozone â if
that comes to pass.

It may seem counterintuitive, but rather than make a Greece exit easy
and seamless to avoid dislocations in financial markets, the E.C.B.
has the perverse incentive to make it messy and difficult to deter others.

None of this is to suggest that the E.C.B. is the source of Greeceâs
problems. They were largely self-inflicted. Regardless of whether you
think that the creation of the euro was a terrible mistake, Europe has
severely mishandled the situation in Greece.

âThe economics behind the program that the âtroikaâ (the European
Commission, the European Central Bank, and the International Monetary
Fund) foisted on Greece five years ago has been abysmal, resulting in
a 25 percent decline in the countryâs G.D.P.,â Joseph Stiglitz, an
economist and professor at Columbia University, wrote on Monday. âI
can think of no depression, ever, that has been so deliberate.â

In his book, Mr. Geithner reflected on his conversations with European
leaders about the measures they sought to take. âThe desire to impose
losses on reckless borrowers and lenders is completely understandable,
but it is terribly counterproductive in a financial crisis,â Mr.
Geithner said.

At one point, he told Mr. SchÃuble: âYou know you sound a bit like
Herbert Hoover in the 1930s. You need to be thinking about growth.â


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