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Analysis
The GNV equation

The GNV equation

Why compromise rules over Greece

by David Marsh

Tue 24 Feb 2015

The great game over Greece’s membership of economic and monetary union goes to the next stage today as Eurogroup finance ministers once again deliberate on whether Athens is doing enough to comply with the creditors’ conditions.

Behind all the ritualistic grandstanding on both sides lies a simple equation. EMU’s most troublesome state will remain inside the euro as long as Greek nuisance value (in both political and economic terms) is held to be lower within the system than it would be outside it. For the moment, GNV-I is less than GNV-O. Should that change, partly because Greece’s Syriza-led government cannot possibly carry out the deal agreed with the rest of the Eurogroup on Friday, then the equation will have to be rerun – and the outcome may be a different matter.

The interim accord was designed not to bring about a long-term solution, but simply to protect Europe’s economic and political edifice from a dangerous flare-up that could have led to financial market conflagration and a Greek EMU exit. Possibly, though, the agreement has simply postponed the inevitable. As I have noted before, an agreement termed as conciliatory and a compromise in Brussels has to be sold as a Greek conquest in Athens.

As Wolfgang Schäuble, the German finance minister, observed with the merest hint of Schadenfreude, even (and especially) powerful rhetoricians like Alexis Tsipras and Yanis Varoufakis, the Greek prime minister and finance minister, may have difficulties explaining the terms of any agreement to the Greek electorate.

Canny deal-makers like Angel Gurria, the OECD secretary general, or Jörg Asmussen, the former European Central Bank executive board member, who have spoken to Tsipras and Varoufakis in recent weeks, admit that the new Greek government embodies a lot of positive aspects.

Desire to improve tax income (there has been contact with the UK government about using British tax-gathering technology and even sending in the famed fiscal collection hawks of Her Majesty’s Revenue and Customs), cut down corruption and tame the oligarchs is extremely popular with many God-fearing European governments which otherwise blanch at new Greek unorthodoxy.

Previous Greek mainstream parties have turned a blind eye to all kinds of malfeasance, bolstering the impression that they themselves have profited from illegal cash flows. A man like Varoufakis, who has made his name as a university lecturer and shows every sign of being impervious to dishonest dealing – one of his best-rehearsed quips is: ‘Foreign governments should like to deal with me. I am not corrupt – yet’ – represents, on this basis, an optimal choice as finance minister. Whatever his rasping statements, uncompromising views and relaxed dress code, fellow finance ministers at least know where they are with him.

Where Varoufakis seems to have gone wrong is in his inability to resist temptation to say outrageous things that are likely to antagonise his neighbours rather than build bridges to them – whether in asking his partners to recognise Greece is bankrupt, telling them Italian debt is unsustainable or warning the Germans to repay wartime debts to the Bank of Greece that were actually written off decades ago. He has also wasted too much time talking about a reduction in Greece’s debt burden, which is already relatively low because of low interest rates and stretched-out maturities on most of Greek official debt.

All the signs are that Athens will struggle to produce a revised list of budgetary measures that will both be sufficiently detailed to win over the Eurogroup, and also represent a softening in hitherto-agreed terms that will placate Greek voters.

Syriza’s supporters, emboldened by the party’s defiant brinkmanship, will automatically look askance at conditions approved by Germany – and vice versa.

Creditors – now renamed as the ‘institutions’ rather than the ‘troika’ – will have to rule that the Greek measures to be tabled this week are ‘sufficiently comprehensive to be a valid starting point’ for completing the current bail-out. Without approval, Greece’s EU deal will expire on Saturday – with consequences that no one is partially keen to see unfolding. For the moment, measuring and responding to GNV-I will keep ministers and technocrats very busy. They do not wish to see what might emanate from GNV-O – which is why the search for compromise, for the time being at least, retains the upper hand.

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