Slow-Moving Game of Chicken

They did it again, the Greek government it is. When many commentators still speculated that Greece would have to declare its illiquidity, the government sent another Euro 754 mio back into the IMF coffers. Now speculation is abound how often this can happen over the next few months. If only parts of the stories about Greece’s desolate financial situation is true, then the economic limits for such transfers will soon be hit. The fact that Greece managed this tranche only by tapping into its own reserve holdings at the IMF does not hint to a easy next weeks. Then there are political limits as well as a strong but not majoritarian part of the Syria party is less and less willing to accept the unified austerity front of the Eurozone governments. When Greek hardliners meet austeritarians like Slovak Finance Minister Peter Kasimir, trouble is brewing, and what has been interpreted as a – slowing down – game of chicken between both sides easily can derail. ‘Graccident’ is becoming more and more probable.

The most recurrent IMF payment may have been meant  as signal that Greece is willing to fulfill its obligation, even under adverse conditions. The simultaneous re-hire of dismissed civil servants then should be seen as a signal to its voters that the governments does not intend to move away from its core campaign promises. The problem is that both policies do not add up; rather, in a time of shrinking financial resources they contradict each other. The Greece government will have to make a clear-cut decision, and this will happen soon. So far, the hope is that eventually the Eurozone will give in and fee the tranche of Euro 7.2 billion, and/or that the ECB would generously increase the Emergency Lending Facility. As it looks, this will not happen, or more precisely: this will only happen if the Greek government  gives up its rigorous anti-austerity stance. For the Eurozone such a move would be advantageous: Not only would it make clear for other potential rebels that TINA reigns, more so, in short-term the Greek government would lose its legitimacy and would have to call in new elections, and maybe soon be a event of the past. This would be a risky strategy, though. Besides the economic damages for Greece and the speculations against the Euro, a Grexit would damage the common currency irretrievable as from then on the common currency would become a fixed exchange rate system. Such a regime differs from a common currency fundamentally, mainly as former comes with fixed but eventually adjustable exchange rates. As soon as membership becomes kind of optional, financial markets will take a totally different take on the Euro, i.e. one that feeds speculation. Rather then stability such a currency zone comes with a potentially high degree of instability. The question is whether Greece is worth the price or whether it would not be rational to overthink the current economic policy stance. This does not mean automatically to give Greece a card blanche, nor should it imply such a free lunch. It seems to me that the Greek economic model is broken, and it is broken due to the state capture practices of political actors, a practice that is deeply entrenched into the political economy of Greece. Fundamental reforms are overdue. The idea to inject a strong dose of Brussels liberalization medicine seems not very convincing nor does it seem that the current Greek government is willing to radically transform the ingrained economic model. This stalemate promises troubles.