On this fine Bastille Day, while it might be more fitting for me to discuss the global political economy of the Tour de France or leave you simply with an entertaining (yet also creepy) rendition of Le Marseillaise, I have decided for some strange reason to discuss the Greek Debt Crisis in my inaugural substantive blog post. While the drama of this crisis has been a popular topic of interest in the news cycle, I have found myself pondering this issue in response to discussions I have had in the classroom this summer with high school students in the National Student Leadership Conference International Diplomacy Program here at American University. In particular, I have been surprised at how many students have brought up the Greek Debt Crisis as an example of conflict in the world today for two reasons. First, I find that young students usually conflate conflict with violent conflict, and while the Greek crisis has its share of violence, it is for the most part a nonviolent conflict. Second, and more importantly, the Greek Debt Crisis is fairly complex, and understanding it requires a level of economic knowledge that is often reserved – arguably with good reason – for university-level curriculum. So, I find that these students have a sort of “naive epistemology” of the crisis that boils down to a power struggle between Germany and Greece, which is a view that the popular media certain does not help to dispel.
My goal here is to attempt to clarify the issues surrounding the Greek Debt Crisis that engages some international relations theory while not be too jargon-y and hopefully amenable to non-economists. I attempt to accomplish this task by answering two overarching questions that are relevant to any rigorous analysis of the crisis: 1) How can we best understand the crisis? and 2) Who’s calling the shots? I offer both the short-term and long-term answer to each of these questions. Then I offer something in the way of a policy suggestion that attempts to balance between these short- and long-term considerations.
HOW BEST TO UNDERSTAND THE CRISIS?
In the short-term, the Greek Debt Crisis is a perfect example of what political scientist Robert Putnam called a two-level game. The first game, played at the international level, consists of unitary state actors bargaining over some kind of agreement, whereas the second game, played at the domestic level, consists of a bargaining process in which the pluralistic polity determines whether or not to ratify the agreement. This sequence is exactly how the crisis is playing out in Greece this week. Tsipras has come to an agreement with Eurozone negotiators, and now we will see whether he can convince MPs in his government to approve the deal. In effect, MPs are also playing a third level game with their constituencies and party leaders. Putnam theorizes that the key to any effective international negotiation is for state representatives to find a consensus that conforms to each of their corresponding domestic “win-sets” – the range of policy alternatives palatable to domestic constituencies. This is why international negotiations among states are often so difficult – representatives must converge around a set of policy options that conforms with all the various win-sets. The inability to do this with a large number of actors likely explains why little to no progress has been made in negotiations regarding global climate change or the defunct Doha round of WTO trade talks. The large number of win-sets are either too varied, too narrow, or both.
The interesting thing about this particular international negotiation is that Tsipras went in with a very good idea of his win-set, and yet he chose to ignore it. Despite the no vote on the referendum last week, Tsipras agreed to what is a more austere agreement for Greece. While this turn of events may be bewildering, a potential explanation could be found in the work of Nobel Laureate economist Thomas Schelling. In his book The Strategy of Conflict, Schelling theorized that actors can actually harness negotiating power from a position of weakness – something he called “the power to bind oneself.” For instance, a negotiator who argues that his parliament will never allow certain policies to be passed actually gains leverage at the negotiating table, and this is how Schelling theorized “the power to bind oneself” would play out – domestic weakness would give bargaining actors power at the international level. In the case of the Greek Debt Crisis, it appears that Tsipras has failed to harness this power in negotiating with European partners. However, there is no reason why “the power to bind oneself” cannot operate in the opposite direction. In fact, I suspect that Tsipras is attempting to gain domestic political power by arguing that Greece is bound to the demands of its European partners, who were unwilling to relent even in light of the Greek referendum. As soon as he saw that Germany would not relax the assumptions of ordoliberalism, Tsipras turned to leverage that display of unwillingness with his domestic constituency.
That is the short-term view.
Taking what historians would call a longue durée view, the Greek Debt Crisis is likely one of several possible similar crises that would have eventually occurred due to the flawed structure of the Eurozone system, in which economies of disparate macroeconomic fundamentals share a common currency without a political union. This is of course a structural argument that would relieve Greece of much of the blame for this crisis and dispel the notion that Germany is Europe’s “knight in shining armor.” Essentially, if anyone is to be blamed for the Greek Debt Crisis (and broader Eurozone Crisis) it is the myopic architects of the European Monetary Union. In the most rigorous treatment I have come across regarding the Eurozone Crisis, economist Michael Pettis explains why it is foolish for us to blame the debtor member states (Greece) for their budgetary profligacy while crediting the creditor member states (Germany) for their economic prudence. Essentially, there is much that goes into determining a country’s national saving rate that has nothing to do with household saving, national character, or economic virtue. In fact, much of the macroeconomic processes among Eurozone member states can be traced back to German industrial policies enacted in the early 2000s to suppress wage increases, which led to a surplus of national saving over productive investment that prompted the flow of capital from Germany to peripheral Eurozone countries. All in all, the conclusion on who to blame for the crisis is that it takes two to tango. In a political union that identifies with a common national purpose, this dance can go on because Massachusetts does not anger at effectively subsidizing states like Kentucky through federal taxes. Rich states effectively bail out poor states within the US every year without the expectation of being paid back with interest. So, a long-term view suggest that if the problem is structural, the long-term solution is likely some kind of structural adjustment in which the European Union develops into a United States of Europe.
WHO’S CALLING THE SHOTS?
At quick glance, it appears that Germany wields all the power in the short-term, two-level game that is the Greek Debt Crisis. If we can define power as the ability to make someone to something they would not otherwise do, this counterfactual definition seems to fit perfectly with the Germany-Greece power dynamic. Certainly, Greece would not voluntarily enact the Eurozone conditions, some of which even Angela Merkel would find outside of her domestic win-set. However, a broader and more theoretical approach to the crisis suggests that Germany is either wielding its short-term power irresponsibly in the long-term or is simply a vessel for the predominant powers in the global political economy.
First, Germany must know that these austerity measures placed on Greece will ultimately be self-defeating. Austerity measures will further contract the balance sheets of an already over-leveraged Greece, and will likely lead to further economic contraction that will reduce government revenue, prompting yet another Eurozone bailout. So, to kick the can down the road is simply to delay an inevitable choice between political union or monetary disunion (a Grexit). In effect, Germany’s show of strength in the short-term may weaken Europe in the long-term.
However, a closer look at the actors involved in this crisis suggests Germany might not be in power as much as a first-glance approach suggests, but rather is acting on behalf of the financial institutions of the Eurozone’s core economies, namely French and German banks. In fact, the overwhelming majority of Eurozone bailout money has simply gone through Greece as a conduit toward propping up French and German banks that heavily invested in the Greek economy before the international financial crisis. In essence, the Eurozone bailouts are a way for Germany and France to indirectly infuse capital into their banking system while looking like they are being tough on Greece. Such an observation seems to conform with a more radicalist theoretical approach to international relations, in which states are not the most powerful actors but instead act at the behest of multinational corporations. This radicalist perspective would suggest that this is not a conflict among nations as much as it is a conflict among private economic actors in a world of fluid capital – a conflict that will continue once the conflict between Greece and Germany is resolved. So long as the Eurozone remains a monetary union without a political union, private economic actors in the financial sector will seek to capitalize on artificially low interest rates in the Eurozone’s periphery. So long as this remains an arrangement destined for instability, European governments will be bailing out banks directly or indirectly.
WHAT OUGHT TO BE DONE?
While it is fine to talk about the Eurozone as a flawed system and multinational corporations as the primary actors in world politics, these insights do little to inform the interests of policymakers. An effective policy prescription is one that attempts to balance the short-term concerns of policymakers with the long-term insights that a longue durée approach to the crisis offers.
Two things, I think, are clear.
First, the European Union will not develop – at least not rapidly enough – into a stronger political union that matches the strength of its monetary union under the Euro.
Second, Greece will likely not leave the Eurozone anytime soon, particularly after the sunk costs its political and economic system has endured to comply with Germany’s demands.
So, in a currency crisis, when you cannot change the polity, you change the money. I would suggest that the least painful and most efficient method of addressing the structural deficiencies of the European Monetary Union to split the euro into different tranches that allows monetary policy to vary across member states. In essence, this would allow a harmonization of each member state’s monetary policy with its macroeconomic fundamentals. Interest rates could vary across tranches. While I developed this suggestion in isolation, I was pleasantly surprised to find out that I am not the only one with this idea. Having a lower tranche Euro would actually allow smoother expansion of the European Union to new candidate countries, some of which exhibit macroeconomic fundamentals even weaker than Greece.
If there is anything we have learned from the global financial crisis it is that central bankers have much more flexibility than politicians. Time to use this flexibility and some creativity to further the goal of an ever closer union… lest an ever closed union crop up in its place.