1. The Troika is more interested in imposing conditionality than talking about debt.

FLASSBECK: [T]he most important thing is not debt as such, but it is the reforms, the so-called reforms, the so-called structural reforms, where the countries have the conditionality to do something. And whether the debt is now repaid in the next ten years and next 20 years or so is not important. And that is not what it’s all about. What you have to discuss is the conditionality, and this is not covered by Varoufakis’ proposal. …

JAY: So … this is things like lowering the amount of pensions that are paid, the minimum wages.

FLASSBECK: Everything, all the things, the long list of 100 points, including the privatization of the port in Piraeus or things like that, crazy things that have nothing to do with the Greek performance–or not much, at least. Only under a neoliberal ideology it has much to do with the Greek performance. So these things are very important. And there, is far as I understand, the German finance minister said very clearly, no, no way to change that.

So – if this analysis is right – the two sides are much further apart even than the recent coverage suggests. Greece is talking apples, the Troika is talking oranges. But it’s also a sign of the way in which the election of Syriza has changed the game, and the shape of the Overton window. This is one reason why both sides are negotiating in public, as Peter Doyle pointed out in the FT’s Alphaville blog. When you can’t even agree on what the discourse is, the usual channels and the usual forums break down.

2. Since the European debt problem is still being fuelled by German trade surpluses, it’s not going to go away soon.

FLASSBECK: [T]he German surplus of the current account for this year and the official forecast of the German government is, again, 20-30 billion higher than last year. It’s more than 200 billion–a surplus of more than 200 billion, which clearly means, logically means that the German economy, the German politicians are building their whole model of the German economy on more indebtedness of other countries of the rest of the world, including Europe. So they need new debt from the rest of the world of 200 million for this year to get a small growth of 1.5 percent, which is ridiculous….

JAY: Let me just break this down and make sure I’m understanding it … They’re sitting on all this surplus, and what they need to do with it is loan it to somebody. So they need some debtors to pick up this $200 billion.

FLASSBECK: They need debtors. Germany needs debtors more than anybody in the world, because the whole economy is built on this surplus, on this idea that the rest of the world would be debtors and Germany’s always a creditor, which is a foolish idea … Every reasonable economist knows it’s a foolish idea. It’s mercantilism.

Two points about this. The first is that it goes to the heart of the Eurozone’s low-growth problem – it won’t grow until Germany starts buying more. The second is that this isn’t a problem stemming from the financial crisis. It’s a problem stemming from the way in which Germany is choosing to manage its  economy. And generally, mercantilism went out of fashion in the 18th century.

3. The only way for Greece to resolve [1] and [2] is to build a coalition.

FLASSBECK: [I]t’s a violation of the rule inside the Monetary Union that you should not have macro economic imbalances that go beyond a certain point. The Germans insisted that it should be 6 percent of GDP, but now the German surplus is even going far beyond that. It would be 8 percent of GDP this year. So I would, if I were Mr. Tsipras, I would take this point. I would say, you see, the Germans are violating everything, and the most important thing under the sun, namely, the current account balance–and at the same time, they’re accusing us of violating other parts of the treaties of the European treaty. So who is the biggest violator, and who’s going to play along the rules or against the rules?

JAY: And this is the logic with which you try to build your coalition.

FLASSBECK: I would build my coalition exactly along these lines, and then it would be very difficult for the Germans to argue and to say, no, we don’t care about that; our violations do not count; only yours count. If you then have a strong political coalition, including Italy and France, they could easily, in my view, easily get a majority in Europe against the Germans. … That’s where you have to go.

Of course this makes political sense, but it also requires time; and political time and the time of financial markets run at different speeds. Indeed, you can go one step further here and suggest that the ECB’s intervention last week might have been designed to accelerate the speed of a Greek financial crisis and reduce the time and the opportunities to build such a coalition.

But all of this is a complex and dangerous game.

Whirling dervishes

In his excellent Alphaville post, Peter Doyle reminds us that everyone has the same aims for the euro:

The issue is not that the ECB and Syriza have fundamentally different aims for the euro: both want it; both want it to secure stable sustainable growth area wide; and, to that end, both agree that policy in it has to be designed and coordinated at area level because everyone working “by and for themselves” above pre-set floors and subject to “no-bailouts” has all-too-clearly-and-all-too-utterly failed.

But the eurozone has been so badly designed that the only way to keep it in the air is for everyone to keep threatening to crash it.

It is like a mid-air jumbo jet, flown by a large one-member-one-veto committee, with one wing on backwards. So orthodox procedures (all engines on forward thrust) spell ruin … In that context, the current pas-de-deux is not a matter of “whether the Greeks or the ECB blink first.” It is a case of whether the fallout from the perpetual dance of death can be contained.

And sitting in the middle of the whirling dervishes, of course, is Angela Merkel. As Peter Doyle argues, she could decide that the markets seem relaxed about a Greek exit, and let them go, to discover that the markets have just been quiet because they’ve been momentarily doped with a-trillion-or-so of quantitively-eased Euros. Or she could decide that’s too much of a risk, and over-rule her hawkish finance minister Wolfgang Schaüble – fresh from his defeat on the quantitative easing – to have him cause political mayhem internally.

Merkel always prefers the less risky option. But in this context, it is not clear what that is for her. Thus is her dance with the markets.

Someone said dismissively of Yanis Varoufakis this week (sadly I can’t find the link) that he resembled a man holding a gun to his head and demanding a ransom threatening to shoot (a bit like the new sheriff in Blazing Saddles). In such a volatile situation, acting crazy may be the sanest thing to do.

The image at the top of the post is by Greek designer and illustrator Stefanos Papadatos, and is used with thanks. You can read more about it here, or look at his portfolio here.

The interview was with The Real News Network. You can view it here.

It’s impossible to tell how the stand-off between Syriza, Germany, and the ECB will turn out, and events are shifting daily. But some of the thinking in a Futures Company Future Perspective I co-wrote with the journalist and analyst Matthew Lynn on The Future of the Eurozone helps make sense of the situation. It was published in 2012. It’s clear from re-reading our analysis from then that Syriza, and Greece, holds more cards than many people think it does.

The Future Perspective observed that financial crises are a routine feature of market economies, and followed familiar patterns. “This time” is never different. A diagram outlined the tensions that framed responses to a debt crisis.

The first observation is that in Greece it has taken quite a long time, and some astonishingly adverse social and economic outcomes, for the political dimension at the bottom of the diagram to push its way to the forefront. This is partly because Greece’s mainstream parties chose to align themselves with austerity programmes, as they did elsewhere in Europe. But perhaps we should be surprised instead by the speed at which an opposition party from way outside of the mainstream has come to power: historically, such shifts take a generation or more, not a decade. Podemos in Spain, and Sinn Fein in Ireland, could follow.

Partners in growth

The second is that bondholders always want to be repaid in full, but that’s not normally what happens in the wake of a financial crisis. As it happens, almost all of the Greek debt went on repaying risky loans the German banks made to Greece – and now it’s largely held by other European governments. But cleverly, the proposals constructed by Yanis Varoufakis focus on two things: (a) reducing the annual repayments (but not removing them) and (b) linking repayment to growth. As he said on the Today programme before he became Finance Minister, “We want the Germans to be partners in our recovery, not our misery.” Just to underline the point: there’s no proposal here for any debt write-off.

The third is that all financial crises are a systemic problem, not a national problem, and this is no exception. (Michael Pettis has a brilliant long essay about this). As Matthew Klein noted in the Financial Times:

[I]t makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded. … It’s logically impossible for excess borrowing to occur unless there is someone sufficiently reckless (or stupid) to provide the financing.

German public opinion seems to think that Greece should pay its debts or leave the Euro, but departure would not be orderly. Departure has short-run costs, but the pain might also be quite short-lived for Greece. While unemployment remains debilitating, at 27%, its economy is now growing, from a low base, and it has a budget surplus and a trade surplus. (Unlike the UK, for example). In other words, as well as political support, it has a bit of economic breathing space; it’s not come to power in a economic crisis. Returning to the drachma could work well, even if Syriza says it won’t take that step. One of our Eurozone scenarios also envisaged countries using the Euro as a trade currency and a local currency (or currencies) to give it a degree of internal flexibility.

Currency manipulation

Germany should also be concerned about the possibility of Greece leaving the Eurozone. The short-term reason is that if Greece goes, other countries could follow, quickly. Germany does very well out of the Eurozone, both economically and diplomatically, as John Aziz has observed. And even if Greece left on its own, in the medium term a Greek recovery outside of the Eurozone would send a strong signal to other economies in Europe suffering from the deflation that’s been imposed by the policies of the European Central Bank.

Alan Kohler, a business columnist on The Australian, argued that it would be good for Greece to leave the Euro – but he didn’t think the Germans would let them.

So, while it’s true that if Greece returned to the drachma it would be excluded from capital markets for a while, it really would only be for a while.

In the meantime, there would be long queues of tourists at Athens Airport and crowding onto ferries into the Aegean Sea. Tourism would soar, as would its shipping industry, along with the flowering of a thousand export industries. …

Of course, the question is whether Germany would actually let Greece exit the eurozone, and the answer is definitely “Nein!”

Germany needs Greece (and Italy and Spain) inside the euro to keep the currency down. In a way, the existence of the eurozone is a form of currency manipulation by Germany that’s every bit as direct and effective as China’s peg to the US dollar.

The failing Eurozone

But the obsession with Greece can also be read as part of a “look over there!” strategy designed to distract from the actual dynamics of the Eurozone crisis.

Greece is a tiny economy (around 1% of the size of the Eurozone), and its problems are a hill of beans compared to the problems of a stagnating Eurozone which has already teetered into deflation. President Obama and the Bank of England Governor Mark Carney are not urging a change in Eurozone policy because they have suddenly become radicalised, but because they are concerned about weak demand in the Eurozone, and the consequences of that for the global economy, which is currently flying on only one engine.

Beyond that, the whole European project could be jeopardised if it doesn’t create a better economic deal for its citizens – just as the austerity policies of Weimar-era Chancellor Brüning paved the way for the surge in support for Hitler. (And hence the reference to Golden Dawn by Greece’s new Finance Minister Yanis Varoufakis in his news conference with his German counterpart Wolfgang Schäuble.) Certainly the financial markets seem less concerned about Greece and more concerned about the “Japanisation” of Germany – the long-term low-growth/deflationary combination that financial intervention such as the ECB’s quantitative easing programme is unlikely to shift.

Protecting the finance sector

In his excellent essay on the Eurozone crisis, Michael Pettis has this to say:

[I]f you separate those who benefitted the most from European policies before the crisis from those who benefitted the least, … it might be far more accurate to posit a conflict between the business and financial elite on one side (along with EU officials) and workers and middle class savers on the other. This is a conflict among economic groups, in other words, and not a national conflict.

In short, then, Germany has since the financial crisis protected the interests of Europe’s financial sector (and the German financial sector), at the expense of the interests of the European economy (and the Germany economy). To a significant extent the election of Syriza has brought this political and economic problem into sharp relief.

One way of understanding this aspect of the issue is by looking at Germany’s labour productivity growth since 1998, data from the OECD via the Financial Times. It’s at the bottom end of the OECD class: even behind Greece.

Game theory

So Germany needs to find a way to re-start the European economy, and it will continue to get political and diplomatic pressure from its allies until it does so. That’s one of the reasons why Syriza’s election was fairly warmly received in many parts of Europe. But it wants to do it in a way that doesn’t encourage anti-austerity parties in other parts of the Eurozone’s periphery. And whatever it does, Germany has to make sure that it doesn’t lose face.

In other words, the game doesn’t stack up. But just to make it more complex, there seems to be no straightforward way to get a country to leave the Eurozone – even if they don’t comply with the terms of membership. When you look at this complexity, you can see why Yanis Varoufakis wrote, at the time of Greece’s 2012 elections, that

starting the ball rolling in the right direction [on debt] requires a government in Athens that is capable of looking our German partners in the eye and not blinking for a few minutes.

In other words, this might be just the right moment for Greece to have a finance minister who understands both economics and game theory.

Not blinking

And it’s worth spelling this out a bit. On my reading, “not blinking” is why Greece didn’t respond when the ECB announced (probably unconstitutionally) that it wan’t going to extend Greek bank financing. It’s why Varoufakis turned up in Berlin to listen, good-humouredly, to Wolfgang Schäuble “talking nonsense“, as the FT put it.It’s why the Euro-talks tonight [11th February] won’t be conclusive. And it’s why Syriza staged the theatre of a “confidence vote” a fortnight after being elected.

But: if Greece is going to get forced out of the Euro by Germany and the Troika, Syriza’s leadership is going to make absolutely certain that Germany pays a high price in terms of its political and diplomatic credibilty, and that the self-interested nature of its management of the Eurozone – and the interests for whom the Eurozone is managed – is made absolutely explicit. [Update: Frédéric Lordon spells out what this looks like for the ECB.]

In other words, their version of the “game” is to make the politics of the Eurozone crisis visible to the naked eye, to move it out of the world of legal and financial discourse about “commitments” and contracts.”

When Matthew Lynn and I wrote the Future Perspective on the Eurozone in 2012 – which, it turns out, is still a good guide – we weren’t sure if the Eurozone would hold. A few months later, the ECB’s Mario Draghi said the central bank would do “whatever it takes” to preserve the Euro. We’re at another crisis moment. But this time we’ve moved from the financial crisis to the political crisis. Political crises are always more dangerous.

A version of this post has also appeared on The Futures Company’s blog. The picture of Yanis Varoufakis is used courtesy of Open Democracy, whose profile of the Greek Finance Minister is recommended.