|
Neil MacKinnon, global macro strategist at VTB Capital
Analysts and commentators are in furious disagreement over who has the upper hand in the EU’s negotiations with Greece. The Wall Street Journal’s Simon Nixon claimed Greek prime minister Alexis Tsipras had already been forced to eat “humble pie” by the so-called troika, made up of the European Commission, the European Central Bank and the IMF. Martin Sandbu of the Financial Times argued that, on the contrary, Tsipras had won “small but substantive” concessions while managing to preserve a lot of negotiating space for future talks.
Syriza might yet be forced into the total capitulation dreamt of by conservative journalists and politicians. But it would be foolish to assume the negotiations are a zero-sum game: twist Syriza’s arm far enough and the EU wins.
This ignores the practical fact of democracy. In what was essentially a single-issue election, Syriza received a very specific mandate from the Greek people: scrap the austerity policies imposed by the troika. The Greeks have already shown their ability to throw out a government they saw as being in league with Brussels. They might do so again.
The prospect of further political chaos in Greece should worry German chancellor Angela Merkel and her colleagues in Berlin. They must despise Syriza. It used the troika as a political punchbag in its march to electoral success, demonizing every aspect of the bailout agreement reached under the previous prime minister, Antonis Samaras. Its deeply principled, emotionally charged arguments are anathema to the cold, practical logic that reigns in Brussels. Yet the EU needs a stable government in Greece to implement whatever programme of reforms is decided. If it is too forceful in negotiations with Syriza, it might find itself without a negotiating partner at all.
This has implications beyond Greece. The buzzword in Brussels circles has long been “political contagion”. This is the idea that, if Syriza gets what it wants, it will trigger a chain reaction involving other indebted eurozone countries such as Spain and Portugal. Copycat political parties – already waiting in the wings in the case of Spain’s Podemos – will storm into government demanding the renegotiation of their respective bailout agreements on more generous, less austere terms. The idea has been a significant plank in the arguments of the debt hawks: give Greece a good deal and everyone else will want one.
Little thought has been given to the prospect of political contagion if Syriza does not get what it wants. This could come in two forms.
First, if Syriza capitulates, the assumption is that other countries will fall quietly into line. But this is a big leap of faith in the rationality of politicians in what is a highly emotive area. The troika might find that its negotiating partners simply become more determined not to fold – or that more drastic, not less drastic, political solutions are inspired.
|
The second scenario, of course, is Grexit. This is not as fanciful as it might seem. Greece might decide that life outside the euro is preferable to decades of austerity within it. Being outside the monetary union, however unpredictable, could not be much more of a disaster than being in one has proved to be. At least Greece would be in control of its own destiny. Through a severe currency devaluation and the ability to set its own economic policies, the probability of an economic recovery would likely increase.
Moreover, for some debt hawks in Germany, a Grexit is preferable to any concession on the Greek bailout terms, no matter how trivial. In their view, monetary union would be stronger without Greece anyway. The prospects of a short-term financial crisis caused by Greek exit seem much more remote than in 2010: witness the muted impact on eurozone debt and equity markets of the EU-Greek discussions.
However, a Grexit carries its own risk of political contagion. There is an impending series of elections in key European states: Portugal in September, followed by Spain in December and Ireland in March 2016 (not to mention the UK in less than three months). The rise of anti-Brussels parties in all of these countries might threaten the viability of the euro. For these parties, the basis on which the euro was conceived – as a union of equals – has been fundamentally undermined. There is no union of equals if Germany and the core northern bloc get to set the rules that decide who can participate in monetary union and who cannot. More importantly, there is no union of equals if the division between creditors and debtors becomes permanent and the European periphery is reduced to what George Soros has called a “depressed hinterland in need of constant transfer payments”. Eurozone finance ministers should consider this very carefully before signing off on a ‘deal’ that might plunge Greece into political crisis and trigger a Grexit.
This does not mean the troika should hand Syriza a generous deal in order to keep Greece in the euro. But it does mean that eurozone finance ministers need to do more than convince Syriza of the need to stick to the terms of the original bailout deal. They need to speak directly to the Greek people – and those of Spain, Portugal and Ireland – and convince them that they have a vision for the eurozone that includes them as equals, not serfs.
The situation in Greece also raises the prospect that debt repayment negotiations, with all the associated brinkmanship and instability, will be an increasingly common spectacle. One of the key themes we have highlighted over the past year is the fact that debt remains a problem in many economies and a threat to financial stability. McKinsey’s most recent survey shows global debt has risen by $57 trillion since 2007, outstripping economic growth by a large margin. It currently stands at $200 trillion, equivalent to 286% of global GDP.
|
According to the same report, this build-up in global debt is unlikely to reverse in the foreseeable future. Nor is the problem confined to the eurozone. McKinsey highlights China, Australia, Canada and South Korea as substantive risks because of their indebtedness, not to mention the US, where debt is 269% of GDP. Much of this debt is private, rather than public: the ratio of corporate and household debt to GDP in China rose by 70% between 2007 and 2014. These numbers must be keeping policy wonks awake at night in Beijing.
This has led economic commentator Martin Wolf to conclude that the world economy has become “credit addicted”. He makes the valid point that in economies with liberalized financial sectors, the driver towards economic disaster is more often private than public imprudence. Some 74% of household debt is mortgages, and mortgage debt is instrumental in fuelling financial crises. Wolf believes global economic growth is likely to be slower in the long run as credit booms implode in China and elsewhere in Asia.
Of course, the question is how to resolve these problems and tackle the overhang of debt in the world economy. Experts such as the Bank for International Settlements argue that “house-in-order” policies, more regulatory policies and promises of liquidity are insufficient to stabilize the financial cycle. Shadow-banking activity is a growth area and risk has migrated from the traditional banking system, which is retrenching its activities, into more opaque corners of the money markets and repo markets. What is clear is that in a highly integrated global economy, international co-operation is essential; otherwise there is the temptation to retreat into currency wars and protectionism.