Free Lunch: What does Syriza want?

The view from Greece

Another day, another inconclusive euro working group meeting on what to do with Greece. But refraining from conclusions is far better than jumping to them. That's what's happening in much of the Greece commentary, which keeps repeating the idea that without more rescue money the country will have to leave the euro.

Other governments from the euro periphery are buttressing this intellectual short-circuit by going out of their way to say they can live with "Grexit" (in part this is to stem the popularity of radical leftwing opposition at home). A grand old statesman such as Valery Giscard d'Estaing calls for a "friendly exit" for Greece. Even Reza Moghadam, the eminently sensible former head of the IMF's Europe department, joins the act. In an FT op-ed, he makes an excellent proposal for the eurozone: narrow the demand on Greece to a few useful reforms that Athens can and should pass in weeks; offer refinancing of the debt falling due until the end of the summer; and use that time to agree on a new programme that includes a restructuring of Greece's official debt. But then he slips badly into the bailout-or-Grexit camp when he says "If Greece cannot deliver such a limited but critical set of reforms, it had better prepare to leave the eurozone".

What problem exactly do all these commentators think is solved by Grexit? Athens' challenge is how to service its debt in the absence of anyone willing to refinance it. How anyone thinks reverting to its own currency is going to avoid a default is a mystery; and if default is going to happen, what's the point of disrupting the economy further with Grexit? Of course there is a risk the ECB would try to kill Greek banks if Athens restructures its debt unilaterally. I find it hard to believe that the euro's central bank would want to be the agent of the single currency's amputation. (The one time Frankfurt's bluff was called - the Irish promissory note conversion - it blinked.) But even if the ECB did cut off liquidity, Greece could cling on with a combination of capital controls and bank restructuring, following the Cyprus experience.

All depends, in other words, on what the Greek government actually wants. Ignore all the chatter about which game-theoretic tactic professor-turned-finance minister Yanis Varoufakis may be employing. The deep strategic question is whether Syriza actually thinks its political and economic goals can be achieved within the euro, or whether it's really lining things up to leave without taking too much blame. To understand that, economics provides limited guidance and we really need to peer inside the Syriza leadership's views on political economy. So for your weekend reading, here are two texts that do just that.

The first is a speech by economics professor James Galbraith, the alter ego of sorts to his friend Varoufakis. Galbraith articulates the view that another economic policy is possible within the euro and would do both Greece and the rest of the eurozone a lot of good. If Galbraith is a reliable guide, Greece's new rulers are aiming to build support across Europe for such a shift. Not only that: they also feel they are slowly succeeding.

The second is an interview with Costas Lapavitsas, a Syriza member of parliament. Lapavitsas is fascinating and thoughtful, including on such topics as the compatibility of Keynesianism and Marxism. He shares Galbraith's view of what Tsipras's strategy has been, calling it the premise of the "good euro" - the idea that a leftward change of course is possible within the monetary union. Where he disagrees is on whether the premise is correct: "This government had a strategy... And it discovered reality... they fell into the trap that those institutions had set up for them." As Lapavitsas describes it, the "embedded ideology" of the monetary union immediately led the ECB to squeeze liquidity for the banks and other governments to withhold financing for the government. He concludes that "you've got to go for a rupture... It's impossible to reform the monetary union."

The future of Greece and the euro depends on which of those two views prevails in Athens. Free Lunch readers will have detected my sympathy for the "good euro" analysis. But its realism is determined more in Frankfurt, Berlin and Brussels than anywhere else. It is becoming increasingly hard to see what the eurozone is hoping to achieve by dictating detailed structural reforms, especially since many of the ones it has enforced are counterproductive. Given its primary surplus, the Greek government could just be left to sort out its own flawed economy - or not - as it sees fit. Of course the official creditors want to get their money back (about 90% of which was spent on bailing out private creditors, not on Greek public spending). But it's clear to all that they will retrieve more, and in more orderly circumstances, if they back off a little and extend the most imminently maturing debt. The longer the current stand-off continues, and the longer Greece must pay down rather than refinance maturing debt instalments, the truer Lapavitsas' words about "embedded ideology" will ring even to those of us who are not Marxists.

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