May 22, 2015

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The gap between official and private statements

Please note that there will be no newsbriefing on Monday because of a bank holiday across large parts of Europe. 

Alexis Tsipras talked with Angela Merkel and Francois Hollande for two hours until around midnight yesterday. None of them talked to the press afterwards. Merkel and Hollande told Tsipras that "they would personally contribute toward the direction of a viable, long-term solution for Greece and accelerate the procedure,” the Wall Street Journal cites one Greek official saying. But a breakthrough it is not. They still insisted on a deal with all three institutions, including the IMF, as a pre-condition. Jean Claude Juncker did not attend the meeting. The official version was that it would have been inappropriate to include only one of the three institutions. Tsipras will meet Juncker today.

Note there is a big gap between what is said officially and privately. Officially, the Greek side continues to demonstrate optimism, telling the press that Athens is 'close to a deal' after Riga talks. But privately, those within Syriza who were once confident of reaching a compromise with lenders are now alarmed, writes Paul Mason on his Channel 4 blog. Euro exit plans drawn up by the far left of the party are being studied seriously by those previously dismissive of them; articles contemplating a debt default have begun to appear in the party’s daily paper Avgi. 

The German and French statements made no mention of long-term prospects but focused on the immediate need to agree on reforms, Reuters reports. The three agreed to stay in close contact, and also agreed that Greece should keep negotiating with the creditors, according to the Guardian live blog. The sticking points are still the same: labour and pension reform, differences over the sort of VAT reform, and the primary surplus target.

Despite expressions of optimism from the Greek side, European officials indicated that little progress has been achieved in the talks. Apart from the key sticking points of pension and labor reform, officials were said to have different views on how to reform value-added tax rates, Kathimerini reports. The Greek side wants three VAT rates – at 7%, 14% and 22 or 23% (Is this a new proposal?) – while the creditors are said to want two rates – one at between 10% and 12% and one at between 20% and 23%. If the institutions prevail, several products like medicine and books as well as the islands would see a significant increase in prices. Alternate Tourism Minister Elena Kountoura said yesterday that Yanis Varoufakis assured her there would be no changes to VAT this summer. 

Talks also focused on primary surplus targets which are said to be close to 1% of GDP this year and 1.5-2% next year. There was also discussion about a 30% reduction to the solidarity tax on income being revoked for those with an annual income above €30,000.

Hostility towards an agreement with creditors is rising, though. Mason writes that Syriza may not be sticking to the script the eurozone has in mind for the crisis, which he outlines as follows: Syriza spilts, Varoufakis resigns, a moderate government of the centre-left emerges; debt relief happens but on terms agreed by lenders. What might happen instead is that the Greek parliament might sue the government to force a debt write-off. 

We have reason to believe that, in the scenario outlined by Mason, a mutated social-democratic Syriza would not be politically viable in the long term as it would have alienated its base which would migrate to a breakaway faction. A breakup is thus a real threat. If the hardline Syriza faction were to try to bring down the government on a bad deal, Tsipras would be faced with the choice of uniting his party against a deal, i.e. calling a referendum with the recommendation to reject the agreement, or the choice to accept the deal, and possibly force new elections to bring about a Social Democratic majority. He would only make the latter judgement if he believed that the public at large would support a deal. Conversely, he would not make such a choice if the public did not think this agreement would be materially better than what was negotiated by the previous government. The outcome will thus depend on the perceptions of the deal in Greek and on whether Tsipras does not miscalculate.

The Syriza faction that would split in the event of Tsipras' acceptance of a deal has three apparent figureheads. Energy minister Panagiotis Lafazanis, which Macropolis mentioned yesterday as leading a faction of MPs opposed to an agreement; Costas Lapavitsas, who is leading the group drawing up plans for Grexit; and Zoi Konstantopoulou, the speaker of the parliament who has launched a "debt truth" committee that, according to Mason, has found evidence of unconstitutionality in at least one tranche of Greek debt and may launch legal proceedings demanding not only a debt write-off but that the Greek government unilaterally cease to recognise it. This, as Mason says, would "take matters out of the hands of Syriza ministers" and derail the creditors' script unless, of course, Tsipras is forced to call fresh elections before the Parliament has time to file its lawsuit.

One other political development to watch out for, as noted by Nick Malkoutzis of Macropolis, is the comeback of none other than Kostas Karamanlis, PM between 2004 and 2009, who has emerged as the most popular candidate to take over from Antonis Samaras as New Democracy leader. Samaras is trying to frustrate a leadership election, which could only be triggered by a majority of ND MPs and MEPs. Malkoutzis writes:

"...if you pause for a moment, it is really not that surprising Karamanlis is being mentioned again as a potential saviour, not only for New Democracy but for the country in general. On the one hand, his faults have been systematically obscured, while on the other, Greece’s pool of political leaders has virtually dried up."

Philip Stephens argues in his FT column that the Greek debt is no longer about economics, but about politics. Two political impulses are at work. The eurozone has realised that Greece is unable and unwilling to reform. And each member state has its own political pressures. The real hardliners are not Germany, but Spain, Portugal and Ireland. The irony is that while politics is driving Greece out, geopolitics is the only thing that could keep it in now. 

Greece sits in the strategically vital southeast corner of the European continent. It provides an entry for migrants and asylum seekers fleeing the fires of the Middle East, and a potential stepping off point for Islamist jihadis seeking to bring their war to Europe. The Balkans are an area of intense focus in Russian president Vladimir Putin’s efforts to destabilise the western alliance. Greece is a member of Nato. Can Europe really allow the government in Athens to fall into the arms of Moscow? What would be the signal to the rest of the Balkans? What about divided Cyprus?

This is a matter for the heads of government, not for technicians. 

Our other stories

Today we also have stories on how much money Greece have left; our take on the ECB minutes; what the sanctions are and are not doing to the Russian economy; this weekend's Spanish elections; and shifts in German politics.

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