Most of you will know the story of Hobson’s choice: once upon a time in Cambridge a canny stable owner offered customers the horse nearest the door or none at all. Take it or leave it. What we see playing out in Greece seems to be in some ways that type of thing: the Greeks are being told to agree to ‘take it or leave it’ as regards the October bail out by Merkel and Sarko. However, in fact there are a whole series of choices that seem better described as choosing between competing evils. Morton’s choice relates to the story of a wily Archbishop of Canterbury in the 1480s (seen above) who advised when collecting taxes to present ratepayers with the following choice: any man living modestly probably had enough spare cash to taxed, any man living extravagantly was obviously enough well off to be taxed. The net result was the same-the evil outcome of paying taxes!
If the Greeks, do hold a referendum, the last available guidance was that the question would be phrased as a choice between staying in the Eurozone or leaving, and therefore we assume, returning to the Drachma. In fact while some economists have suggested having their own national currency would be advisable, the reality is that getting from here to there would be carnage. It would in effect be some sort of disorderly default, whereas what the Euro deal agreed in the last week of October was about was a semi-ordered default, where creditors were bullied and bribed into accepting 50 per cent losses, which of course was more than they morally deserve and really a sweet deal for them. No surprise there because many were politically connected French and German banks!
The problem would be that if the Greeks switched to the Drachma from January 2012 they would then be paying back loans denominated in Euros with probably a very low valued Drachma….which would mean in effect further unknown losses on those banks. At what rate would they convert Euros to new Drachmas? Would it be the same rate at which Greece joined? The mechanics and legalities of any Eurozone exit are mind boggling-although if there was political will in Greece and EU capitals, for them to leave, no doubt it could be done. Its easy for pundits and experts to suggest leaving the Eurozone should happen or will happen, my guess is that the powers that be in Athens and Europe will do everything they can to avoid that outcome.
Note that under the EU Treaties there is no mechanism by which a country can leave the Eurozone, so it might well be the case they would be invited to leave the EU under negotiated terms as is set out in Article 50 of the Treaty of Lisbon. Of course that might change-but there is only limited scope for the EU to agree even a quick emergency change of the Lisbon Treaties that would be substantive. I think if its put that way, its possible that many Greek voters will balk at having to choose to leave the EU, to leave the Euro, even though emotionally they may now wish they never joined the Eurozone, and may well be fed up with the governing classes and be itching for a chance to dump on their ‘leaders’.
Perhaps Papandreou’s thinking was that faced with an appalling vista of an unknown future outside the Eurozone and even outside the EU, perhaps in some form of temporary suspension by consent, then the gamble was that Greek voters would simply choose to vote for and accept the latest EU plan, which writes off some Greek debts, injects some cash, but all with huge strings and heavy austerity attached. For the Greeks its “Morton’s choice”.
Of course, all of that is based on the hypothesis that the referendum will go ahead. What is now clearly a plausible plan B, is that Papandreou might be forced to stand down (even if wins the vote of confidence on Friday November 4th), and/or elections may well be called, which surely will see the vote share of PASOK decline, and as I’ve said in an earlier post, those elections could mean that either New Democracy can form a government on its own, or in fact what is more likely is that some type of coalition may be required to re-elect a polarization of the electorate as smaller more radical parties gain in votes. Yet that would mean either PASOK or New Democracy would have to work with the Communists (KKE), the ultra nationalist far right (Popular Orthodox Rally/LAOS), or the radical new left (Synaspismós). At one level it would be healthy for Greek democracy to see one or other of these parties inside Government, however, the trouble here is that pretty much all of these smallish parties are by now fairly Eurosceptic and oppose some or all elements of the EU bail-out plans. They would prove difficult in coalition and Greece has only a limited tradition of coalition politics. The markets might well go into an even steeper free fall after the results of any election as much as any referendum.
This raises a third option (Plan C?) much discussed today and yesterday: a cross party government of ‘national salvation’. This may or may not emerge independent of fresh elections. It is undoubtedly what the technocrats of the Commission, or national civil servants in France and Germany would want, and what they markets would prefer. Given the extreme situation Greece is facing it would seem like the best outcome to be hoped for politically and economically. On one reading it would be highly democratic-reflecting cross parliamentary sentiment. On another reading, it would be an emergency suspension of normal democracy.
What does all this mean for the wider debate about democracy and the EU? Many critics of the EU will undoubtedly point out the way is which Greece is unquestionably being bullied by a Franco-German ‘whip’ speaking for the Eurozone as whole. I’m deeply uncomfortable with this assumption that the French and German national leaders are the spokespersons for the Eurozone. This was something that the EU high representative or the Council President was supposed to do under the Lisbon Treaty. Or in fact the technical mandarins of the Commissions are supposed to play the referee role in handing out ‘red cards’ in the Eurozone. One of the reasons we are in this mess is because when they tried in 2003 to give yellow cards out to France and Germany for breeching elements of Eurozone stability pact, they were slapped down and silenced. If the Commission had greater powers to name and shame Eurozone member states whose fiscal policies were out of kilter with the stability of the wider Euro monetary policy, maybe things would not be so bad today. Or at least Banks and investors should have given greater regard to Commission warnings about Irish and Greek government policies that were pro-cyclical and piling on huge debt levels in the long-term.
However, the Commission has been utterly marginalized. One of the less noticed democratic problems in this crisis is they way that Franco-german national leaders are being allowed, even encouraged, to bypass the formal institutional balance within the EU, in particular the role of the Commission. One lesson of all of this, is that from an Irish perspective we need to support a greater role for the European Commission and the European Parliament in giving leadership, to offset the ‘Merkel-Sarko’ show. We need a long term strategy to make leadership of the Eurozone and the EU much more than a Franco-German axis.
But the Greek gamble on a referendum nicely illustrates the EU’s confederal nature; national democratic legitimacy and practices can check-mate other EU nations’ leaders and their democratic mandate to secure a deal. After all, by promising a referendum on the October deal Panpandreou in effect he unilaterally re-opened the deal, which was regarded as done and signed off by democratically mandated leaders and national governments. Moreover, it granted him leverage in working out the details of the deal, which have yet to be finalized. This may be one reason why he took that gamble. If every Eurozone member had to ratify the deal by referendum, the chances of it passing would be unlikely, or at least nil for it being agreed in a timely manner.
Nonetheless, although I understand the prospect of a Greek referendum is unquestionably a high risk economic gamble for everyone, most of all the Greeks themselves, there is some democratic merit in what Papandreou had in mind. By accepting the October deal, Greece would in many ways be locking itself into a long term servile relationship within the Eurozone. It seems rather obvious the Greek people should be consulted about this, either by a referendum or by fresh elections. And if the Greeks did actually vote for leaving the Eurozone, one is tempted to say, ‘so what…should this be the end of the world?’ If the Lisbon Treaty can envisage a mechanism to formally leave the EU why not the Eurozone as well? The obvious objection is this would undermine the Eurozone credibility, but that assume its stock of credibility is high, whereas its clear the wider markets think Greece and maybe other countries will eventually have to leave. If there was a Plan B option for an ordered and negotiated exit might this not actually calm markets down a bit?
One problem I can see in all of this, is what it means for us. The threat of a Greek Eurozone exit, will over the coming days simply either grow or recede. If its grows it will have a knock on impact of the way ireland is perceived. Traders, investors, shorters and buyers of government debt will have to factor into their guesswork the possibility of an Irish exit, probably under duress and probably only as part of wider Eurozone melt-down This at a minimum could delay Ireland’s return to the market…or just make the cost of borrowing higher. Obviously bets are off, in a scenario where an eventual Irish exit may well happen through a domino effect concerning Italy. The Italians need to roll over a large volume of debt fairly soon. If nobody wants to buy that debt, either the ECB will have to intervene, even more massively than ever before, or else the whole show simply stops, and through one mechanism or another the entire Eurozone is suspended, and some countries retreat to national currencies and others circle the wagons around a new Euro. I have no way of judging how plausible the contagion effect is of the Greek crisis to an Italian crisis, but that is really what worries the major Euro powers now. The actual messiness of a Greek exit from the Eurozone (and the EU?) they could just about live with politically and maybe in some ways economically, although it would probably bring down several politically connected French banks.
Faced with all that, the signs are that we can expect the ECB to pull out everything to prevent the Greek gamble leading to an Italian crash: they’ll print money, inject overnight 1 per cent money into the inter-bank market and cut interest rates to consumers to boot, seeing as banks are hoarding cash to meet the new capital ratios. Finally, they will be forced to behave like the lender of last resort. However, that will come with a price. Inflation will rise, although that seems like a trivial ‘evil’ these days and helps erode debt mountains. Worryingly for Ireland, the ECB may well turn to us in 2012 and 2013 and seek to limit the amounts of money we get, on the principle it will be likely more needed elsewhere to shore up bank and public balances in Italy, Greece or wherever. Expect to hear then an argument that ‘Ireland has turned a corner and doesn’t need the same degree of fiscal help’.
Perhaps the obvious thing our leaders should be discussing are sustainable end states: either prepare and plan for a semi-ordered break-up of the Eurozone, or else change the ECB’s rulebook to force it to move into a lender of last resort, which for now seems the least worst options in a long list of Morton’s choices.