Greece: The Tie That Doesn’t Bind

Paul Krugman

http://krugman.blogs.nytimes.com/2015/02/09/greece-the-tie-that-doesnt-bind/

Relations between Greece and its creditors are not improving. Was this bad diplomacy on the part of Tsipras/Varoufakis? Maybe, but my guess is that there was nothing they could do to avoid a bitter confrontation short of immediate betrayal of the voters who put them in office. And creditor-country officials are acting as if they still expect that to happen, just as it has repeatedly over the past five years.

But they’re almost surely wrong. The dynamics are very different this time, and failing to understand them could all too easily lead to unnecessary disaster.

Actually, let me stress the “unnecessary” aspect. What Greece is asking for — although German voters probably don’t know this — is not a fresh infusion of money. All that’s on the table is a reduction in the primary surplus — that is, a reduction in Greek payments on existing debt. And we have often been told that everyone understands that the official target surplus, 4.5 percent of GDP, is unreasonable and unattainable. So Greece is, in effect, only asking that it get to recognize the reality everyone supposedly already understands.

Why, then, are things boiling over? Partly because what “everyone knows” has never been explained to northern European electorates, so that the time to recognize reality is always at some future date. Partly also, I suspect, because creditors have come to expect the symbolism of debtor governments abjectly abandoning their campaign promises in the name of responsibility, and are waiting for the new Greek government to pay the usual tribute of humiliation.

But as I said, the dynamic is very different this time.

I’ve long believed that Matthew Yglesias hit on something really important when he noted that small-country politicians generally have personal incentives to go along with troika demands even if they are against their nation’s interests:

Normally you would think that a national prime minister’s best option is to try to do the stuff that’s likely to get him re-elected. No matter how bleak the outlook, this is your dominant strategy. But in the era of globalization and EU-ification, I think the leaders of small countries are actually in a somewhat different situation. If you leave office held in high esteem by the Davos set, there are any number of European Commission or IMF or whatnot gigs that you might be eligible for even if you’re absolutely despised by your fellow countrymen. Indeed, in some ways being absolutely despised would be a plus. The ultimate demonstration of solidarity to the “international community” would be to do what the international community wants even in the face of massive resistance from your domestic political constituency.

But a genuine government of the left, as opposed to the center-left, is very different — not because its policy ideas are wild and crazy, which they aren’t, but because its officials are never going to be held in high esteem by the Davos set. Alexis Tsipras is not going to be on bank boards of directors, president of the BIS, or, probably, an EU commissioner. Varoufakis doesn’t even like wearing ties — which, consciously or not, is a way of declaring visually that he is not going to play the usual game. The new Greek leaders will succeed or fail, personally, based on what happens to Greece; there will be no consolation prizes for failing conventionally.

Do Berlin and Brussels understand this? If not, they are operating under a dangerous misconception.