Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics and Chairman of the Institute for New Economic Thinking. A former columnist at the Times of London, the International New York Times and the Financial Times, his article can be read here but is also reprinted in the Guardian.
Kaletsky notes that with both Germany and Greece taking principled and incompatible stands a deal seems impossible. Greece demands a debt reduction while Germany has demanded that no debt be written off. This may have described the original situation but not the situation now since the Greek Fiinance Minister Yanis Varoufakis has insisted that he will honor Greek debt obligations through a debt swap that would make payments contingent upon the growth of the Greek economy. While this would make debt payments more manageable for Greece it could prolong the debt period. It remains to be seen if the other side will even accept these swaps and on what terms if they do.
Varoufakis is well versed in game theory having even co-authored a book on the subject. As Kaletsky points out a determined but weak player can do well in negotiating against a stronger but less committed partner. But the actions so far seem to indicate that it is Germany, the stronger partner that has shown commitment and not Greece. Greece has made commitments only rhetorically while abandoning them in practice. This has happened both on the issue of a debt write off and also on privatization. If the situation were as Kaletsky described, he may be correct that the stable situation would be a draw in which both sides were satisfied in part.
Kaletsky suggests that a reasonable strategy would be for each side to try and achieve what they most want. In the case of Germany the chief aim would be to avoid any debt write off and for Greece it would be relief from the punitive and counter-productive effects of the austerity conditions imposed upon it. Kaletsky claims that a deal should be easily negotiable under these circumstances if they concentrate on these top priorities and then compromise on secondary issues.
Kaletsky claims that Varoufakis negotiation strategy does not pursue these aims but works against them: But his negotiating technique – unpredictable oscillations between aggressiveness and weakness – is the opposite of what game theory would dictate. Varoufakis’s idea of strategy is to hold a gun to his own head, then demand a ransom for not pulling the trigger.
I am not sure exactly what gun Varoufakis is holding to his head but I assume it is the fact that he is rejecting any negotiation of the next bailout tranche that was to be held with the Troika on Feb. 28. Varoufakis has to find some way around the effects of this through bridge financing and ultimately a new deal or face a possible Greek default. In any event Varoufakis also caved on a key demand and election promise of a write off of Greek debt, as well as conceding on other issues as well. It is not clear what, if anything Greece got in return except that there will be no more talk of negotiations with the Troika perhaps. Kaletsky claims that negotiations have become stuck in a passive-aggressive standoff that make serious negotiations impossible.
Yet, markets reacted positively to recent negotiations indicating that investors at least think that not only are negotiations not impossible but are going well from the point of view of investors and creditors. This may be correct and all that remains is for minor reforms to be negotiated that will allow Syriza to save face and claim at least partial victory.
Kaletsky claims that Varoufakis could have consistently held to either of two strategies. He could have demanded debt cancellation until the very last and then traded this secondary demand for deep concessions on austerity policies and structural reforms. Alternatively, he could have granted the main German demand that there be no reduction in debt and show that austerity provisions could be eased while debt was not reduced. Instead of any consistent strategy Varoufakis alternated between defiance and conciliation. Kaletsky claims this has caused Varoufakis to lose credibility both ways. I am not sure this is the case. The Greek populace appreciates the defiant rhetoric and perhaps the conciliation is not noticed or is taken as rhetoric to dampen resistance to his plans. The strategy may be intended to keep the other side off guard. However, Germany has not altered its own stance as a result of these tactics.
Kaletsky believes that it was an error to refuse talks with the Troika ” despite the fact that the three institutions are all much more sympathetic to Greek demands than the German government.” In rejecting an extension of the bailout program, Varoufakis created a deadline of February 28th for “withdrawal of ECB funding and consequent collapse of the Greek banking system.” That deadline surely existed in any event unless Greece came to an agreement with the Troika and surely no agreement was likely given the demands of the Troika and how they treated the former government. The move gave a political boost to Syriza among the Greek populace. The populace still supports the governments tactic by about 70 percent. Kaletsky thinks that it is useless for Greece to brandish its democratic mandate as a weapon: Greece’s idealistic new leaders seem to believe that they can overpower bureaucratic opposition without the usual compromises and obfuscations, simply by brandishing their democratic mandate. But the primacy of bureaucracy over democracy is a core principle that EU institutions will never compromise.
The last sentence sums up the problem.
Kaletsky thinks the most likely outcome of negotiations is that Syriza will admit defeat. While that may be the reality I expect that there will be at least a few changes in the direction of Syriza’s demands and even an acceptance of something akin to the debt swaps to ensure that debt payments are more manageable. If instead the Greek government tries to implement more radical plans for government expenditures, such as an increase in wages and hiring back workers in defiance of Brussels, the ECB could then stop ELA emergency funding, forcing the Greek government to resign and be replaced by Eurozone technocrats. Perhaps Syriza has a plan for a Grexit but so far nothing has been said about any such plan B if negotiations with the EU fail. Germany and others downplay the results of a Grexit and worry more about the effects of giving in to Greek demands on the politics of other southern European countries facing the same debt problems as Greece.
