It’s up to Germany to end the game of chicken with Greece

Pride and prejudice is driving the rift. Reason must kick in before Grexit devastates Europe.

At the heart of the rift that runs through Europe at the moment lies a technocratic debate drowned in emotion. Germany has rejected Greece’s bailout request  on the basis of the semantic difference between a programme extension (acceptable) and a loan extension (unacceptable).

True, words are substance. But when the German finance minister, Wolfgang Schäuble, or his allies take the floor to explain their critical stance, the underlying reasons become evident: they quickly shift to moral and emotional grounds, invoking trust, values and cultural differences.

The Greek side of the debate is not better. Opening the negotiations with a ridiculous request for war reparations, tolerating for several days caricatures of Schäuble as a Nazi in government-friendly newspapers, and comparing Eurogroup methods with waterboarding, the new Greek government went for a strategy of emotional alienation, rather than trust-building.

In a game of chicken, stubbornness leads to catastrophe. And stubbornness based on pride and prejudice is hard to abandon. This is why I have started to get seriously worried about where these negotiations are heading. We urgently need to bring back in some simple economic and political considerations to show that a compromise is not only a good solution;it’s the only solution.

First, we need to make it absolutely clear that Grexit would be devastating for Greece, for Europe and for Germany. For Greece, because it would cause the banking system to collapse, import prices to skyrocket and growth prospects to disappear for several years, with horrifying prospects for the Greek population. For Europe because the euro area would be turned from an “irrevocable” currency union into some kind of fixed-exchange rate regime where countries can leave as soon as they come under market pressure. It is hard to imagine how Ireland, Portugal, Spain or even Italy could have stayed in the euro area in 2011-2012 had there been a worked-out exit route.

Finally, it would be devastating for Germany, not only because it would lose billions of euros from a Greek devaluation but even more so because it would put at risk Germany’s recent prosperity: a currency union is to the benefit of the largest export nation in Europe.

Secondly, we need to remember that some of the Greek requests are economically reasonable. The country urgently needs to shift from a contractionary to a more neutral fiscal stance. Structural reforms were necessary but put additional pressure on domestic demand.

The bailout money hasn’t benefitted the Greek population, but in its largest parts has gone straight from European bank accounts, through Athens, and back to the European Central Bank or the International Monetary Fund

The Greek debt burden is excessive and will hamper Greek market access for decades to come. Swapping it into GDP-indexed, zero-coupon bonds with a long duration could increase transparency of the repayment plan.

Thirdly, we need to remember that some of the German requests are economically reasonable too. Greece needs to continue with its reform efforts. Tax collection needs to be improved. Taxing highest incomes and wealth could be a good way to increase government income. Reforms in the labour market need to continue, to prevent the excessive wage inflation that took place in the first decade of monetary union.

So can there be a deal? In an environment of trust, even a game of chicken can be solved. The problem is that German public opinion currently doesn’t want to listen to any economic arguments as long as they support the position of the Greek government, which is considered chaotic and unreliable.

Greek public opinion doesn’t seem to remain willing to differentiate between the good and the bad in the Troika programme, to see where changes to its economy are needed and beneficial in the long run. Instead it unloads the understandable frustration of the crisis on the diktat from the Troika and from Germany.

In German, there is a well-known saying: “the wiser person gives in.” It’s a very German saying, in the sense that it puts moral pressure on those claiming to be morally superior to actually act in accordance with that supposed moral superiority.

Well, dear fellow Germans: if we are wise, then we should put reason before emotions. Put more simply, the proof of the right economic reasoning is the right economic compromise.

This text was first published by The Guardian on 20 February 2015.

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