And Now?

After a amateurish start the new Greek coalition government gets more concrete how it wants to overcome the magic circle of delivering its key campaign promises and simultaneously to get support of its European partners with its debt strategy. The parole is no longer a haircut. Rather it is about getting breaking space for a severely damaged economy and society. At least one of the two tools suggested by Finance Minister Yanis Varoufakis may be acceptable for the Eurozone: Making debt service related to the speed of economic growth is a smart tool, in particular if the calculation of GDP growth is strictly controlled by Eurostat. Such an instrument would create trust with partners and the financial industry as it stresses the willingness of Greece to fulfill its commitments. The second instrument of perpetual bonds, however, will run into nowhere as the ECB will not be willing and even allowed for such a swap as this is too close to monetization of government debt.

A deal with the European partners will be difficult to achieve, though. At this point European governments as well as the ECB expect strict commitments to what is called structural reforms. They need such a commitment to present any compromise to their home bases. Ideological blinders may under such a deal, and the blinders are very much on the side of the creditors. As a matter of fact and contrary to the first impressions generated by the Greek government, this government may be the best bet to    achieve truly structural reforms. It is often neglected that the previous conservative government not only failed -according to the IMF – to implement thirteen out of fourteen critical reforms. It actually continued the clientelistic practices in its way it dealt with the ‘Triangle’. The Syriza coalition government may be the last political chance to effectively reform the Greek society. Chances are, though, that its commitment to the public sector runs even light attempts into the ground. In any case, rather then insisting in structural reforms in the Troika sense, it may be worth it to tie any debt commitment to modernization efforts. Finding adequate indicators that would help to mussier such efforts may be a struggle but a struggle worth it.

It has often been rightly stressed that Greece is a unique case in the sample of Eurozone crisis economies. It is unique in the sense that Greece is a extremely clientelistic society where previous political parties successfully captured the state apparatus. Firing public servants looks like a appropriate way to deal with the capture, but only so on the first sight. State capture is deeply entrenched and it needs a domestic social contract in order to change habits and attitudes. It is as much a societal as a economic restructuring, and the EU boys on the ground are probably the most ill-prepared guys to lead such a change. In this respect it makes sense to cancel any further cooperation with the Troika.

Will all this play out? At this moment it does not look like that. Greece needs cash, if not end of February when the agreement runs out then pretty soon afterwards. The ECB will probably not be the partner who may help out by extending and increasing the T-Bills for Greece. Not that the ECB would not be in a technical position to do so. However,. the ECB has become a extremely contested institution and Draghi may not dare to attract more suspicion from Berlin. On the other side, if the ECB would actually stick to its rigid position, the probability of GREXIT would increase dramatically. I still think, face-keeping compromises are possible but it needs leadership on both sides to compromise.