Either the Troika Has No Hand, Or I’m No Game Theorist

A notable quote (h/t Tom Hickey at Mike Norman Economics):

Germany’s Mr Gabriel said any debt relief for Greece is out of the question at this stage since it would cause a collapse of discipline across the eurozone, triggering copycat demands from other countries in distress. “It would blow up the euro,” he said.

I am no game theorist, but to me Mr Gabriel’s statement underscores that if Syriza holds firm, Greece will ultimately win one way or the other …

If Syriza negotiates debt relief and an end to austerity, it will embolden Italy, Spain, Portugal and others to demand similar. In response, Germany can either go off the common currency, effectively ending the euro, or agree to the common currency arrangement being reconstructed on a more macroeconomically sane (and hopefully democratic) footing. The latter appears to be Syriza’s preferred outcome.

If, instead, no agreement is reached and Greece is forced off the euro, Syriza will be freed to reintroduce the drachma, pursue sensible macroeconomic policy and restore employment and growth. The benefits of leaving the euro would soon become evident to other struggling European nations as well as to the Greek population.

So, to this untrained eye, it seems that the troika has no hand and must rely on Syriza folding inexplicably. The most the troika can do is kick the can down the road another block or two, postponing ultimate resolution (troika capitulation or grexit) a while longer.

Mainstream media, in presenting Greece as without hand, appears to be laboring under two very big misconceptions.

The first is a mistaken view that grexit would be disastrous for Greece. If issuing your own currency was disastrous, the rest of the world would be the economic basket case, rather than the eurozone. It is not without good reason that successive UK governments have given the euro a wide berth all these years. Under present arrangements, the euro is economically and politically unsustainable. Reintroducing the drachma would facilitate a prompt restoration of economic stability and growth in Greece.

The second mistake is to imagine that debt relief and an end to austerity in Europe is “unaffordable” and would destroy the euro. The ECB has unlimited capacity to issue euros, just as currency sovereign national governments have unlimited capacity to issue their own currencies, and such issuance is needed right now to restore demand (employment, growth) and price stability (avoid deflation).

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9 thoughts on “Either the Troika Has No Hand, Or I’m No Game Theorist

  1. Great to have you back!

    I agree with your assessment. One other factor that occurs to me:

    Syriza is tackling an economy in need of structural reform. They are challenging the old ways of doing things, as illustrated by the former, “centrists” government leaders supporting the “yes” side in the recent referendum. Syriza has proposed a number of significant reforms (see for example http://yanisvaroufakis.eu/2015/06/18/greeces-proposals-to-end-the-crisis-my-intervention-at-todays-eurogroup/ ), including “adjust to a new culture of paying taxes” and “make the pension system sustainable by eradicating unpaid labour, minimising early retirements, eliminating pension fund fraud, boosting employment”. So they are taking on established interests, and they may be using the Troika demands as leverage to get needed structural reforms in Greece.

    But I agree with you that if they leave the Euro, and at this point it is clear that they are being forced out, they will be in a better position to succeed in getting their economy back on track.

  2. “…If issuing your own currency was disastrous…” It’s not that issuing a drachma would be disastrous but beyond trading in cash there is no short-term way to clear and settle payments in these new drachma. The new drachma will be shut out of all electronic channels for months (note, foreign exchange markets basically only exist electronically in 2015). Greece will be crushed economically in the mean time and be forced to rely on humanitarian aid which will be controlled mostly from its creditors. While a Grexit theoretically is beneficial to Greece at some point the real world realities must be worked out and that isn’t going to happen in the next few weeks.

  3. Hi Pete,

    “So, to this untrained eye, it seems that the troika has no hand and must rely on Syriza folding inexplicably. The most the troika can do is kick the can down the road another block or two, postponing ultimate resolution (troika capitulation or grexit) a while longer.”

    Maybe it’s a matter of imagination, but I can imagine a third way: in circumstances like these, powerful players can always count on extra-constitutional solutions, if you get my meaning.

    The question is whether TPTB are prepared to resort to that kind of thing?

  4. “there is no short-term way to clear and settle payments in these new drachma. The new drachma will be shut out of all electronic channels for months (note, foreign exchange markets basically only exist electronically in 2015). Greece will be crushed economically in the mean time ”
    What a load of complete nonsense.

  5. Neil Wilson says:
    “Clearing is already in place since Greece runs TARGET2-Greece and can clear within its own banking area very easily (I’m assuming here the Italians, French and Germans that run the computers don’t take their ball home completely).
    SWIFT might have a bit of fun given that the payment references are still in Euro, but that can be fixed with a bank surcharge arrangement – crediting the number on the payment and then applying an adjustment as a fee/refund from the correspondent bank that does the Greece/rest of eurozone exchange once TARGET2-ECB refuses TARGET2-Greece transfers.
    There’s way too much money to be made facilitating this sort of issue for the problems to hang around for very long. But to allow that to happen the government has to make a certain and definite move to a new currency. Private operators are not going to commit capital to enabling systems until the uncertainty of which way Greece is going is removed.
    But the idea that ATMs won’t work, or the internal Greek banking system will stop working is nonsense. The whole Eurozone is structured so that it can come apart easily. Almost like some central bank somewhere in Europe didn’t really want to commit to the relationship whole-heartedly…”
    Seriously. It’s not an issue.

  6. Yup. There is a lot of fearmongering, lunacies & irrational, fearful thinking – (the opposite of wishful thinking – See Raymond Smullyan, 5000BC ) about Grexit out there. Adam’s assertion above is only a mild echo. So it is worth repeating, underlining and saying hallelujah to what Neil & Bob said.

    The key sentence is “There’s way too much money to be made facilitating this sort of issue for the problems to hang around for very long.” There are a lot of rich people and institutions in the world. Chicken Littles may not see the enormous, low risk sums to be made by getting a small percentage vig for such banking services for a whole country. But they do.

    In general, sky-is-falling Grexit fearful thinking arguments rely entirely on one unstated assumption – that is laughable once you see it: That all the thought, mental energy, (profit-seeking) computing power in the world resides in, has been entirely embedded in these mighty infallible compyouterz in omnipotent banks & institutions – Not above the shoulders of every man and woman in the world- many of whom happen to own a lot of electronic computing power too. The EU vision in practice has been: “Humanity is robots”. But it just isn’t true.

  7. Hi peterc – bin walkabout? Very happy to see you back for a while!!

    The Greeks voting ‘OXI’ led me to mapping out one perspective of the human dimension: The Principle of Conflict and the Principle of Sharing [3 pages]

    Everyone knows that basic changes in human attitudes – towards themselves, their environment and society – must be brought about if humanity and the planet are to survive. I for one, believe in humanity, and believe it is up to the task. I am not as confident as to how quickly we will realise that task.

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