The new German power in Europe is not based, as in former times, on force as the ultima ratio. It has no need of weapons to impose its will on other states. If only for this reason, all talk of the ‘Fourth Reich’ is absurd…The pressure it can exert arises not from the logic of war but from the logic of risk – more exactly, that of the threat of immanent collapse…It is the threat of withdrawal, delay, and the refusal of credit. If Germany withholds its consent, the ruin of the debtor nations is inevitable.
Ulrich Beck, German Europe
Reading the full transcript of the New Statesman’s interview with Yanis Varoufakis two distinct stories emerge. The first is the one that the magazine went with in their print edition – his inside account of the negotiations between Greece and its creditors. This makes sense given the rather shocking end to these negotiations, where the German government in a very public fashion used their position of financial dominance within the EU to force the Syriza government into complete capitulation. The purpose of this humiliation was not merely to placate conservative voters back home but was also about making it clear to the Greek left and other anti-austerity forces across the continent that, in Fintan O’Toole’s words, “we are in a new EU now, one that has a dominant power at its centre and a single acceptable ideology.” In this respect the Varoufakis interview offers us an insight into how the eurogroup meetings operated throughout the negotiations. On the one hand, the French and Italian finance ministers were seemingly unable operate as an effective counterbalance to Schäuble, continually choosing to fold instead of confronting his intransience, while on the other, the strategy of Jeroen Dijsselbloem, the group’s chairman, was to repeatedly delay the negotiations, drawing the process out by forcing the Greek government to engage with the Troika’s endless technical queries, all the while as the Greek economy was slowly strangled by capital flight and public funds were depleted from successive loan repayments.
Yet the full interview on the New Statesman’s website also offers an interesting explanation of the events surrounding Varoufakis’ departure as finance minister on the morning after the referendum victory, a point which gets passed over in the print article. At the time, most of the media accepted the Greek line that his resignation was primarily due to the break-down in his relations with the other European finance ministers, with Tsipris asking him to stand aside for the good of the negotiations. However in the interview Varoufakis points to another reason. There was, he claims, a dispute among the inner cabinet over how to respond to the ECB’s tightening of liquidity within the Greek banking sector, which was aimed at forcing the Syriza government to accept the punitive proposals put forward by the creditors on June 25th. With the ECB having effectively shut down the Greek banks, Varoufakis believed it was necessary to take a number of extraordinary measures to counter this aggression, recommending to the cabinet that the government should take control of the Bank of Greece, begin issuing their own euro-denominated liquidity and announce their intention to unilaterally impose a hair-cut on Greek bonds held by the ECB. These proposed measures were designed to protect Greece from any threat by European authorities to outright collapse the banking system through pulling all emergency lending and so reduce the leverage the creditors held over the Greek economy. But Tsipras, somewhat understandably, blinked at the thought of a further escalation, presumably believing it would precipitate a disorganized Grexit.
While careful not to criticise Tsipras himself, Varoufakis is scathing of this decision to reject his proposals, which were definitively voted down by the inner cabinet 4-2 on the night of the referendum result. For him such caution merely wasted the opportunity to keep the momentum going after the strong ‘no’ vote, which could have been used by the government to justify a more robust and “energetic response” to EU financial pressure. The surge in popular support generated for the government’s position in the referendum campaign did give them a mandate to fight for a better deal, however rather than confront the EU’s aggression head on, Tsipras seems to have believed that it would be more effective to work with the country’s main opposition parties so as to create a united front in parliament behind his negotiating position, thus putting an end to the EU’s hopes of forcing Syriza from office. With the firm support of the electorate behind them and no possibility of an alternative government to negotiate with, the idea here was that Germany and the European institutions, who were under diplomatic pressure from Washington to do a deal so as to avoid further market unrest, would have to accept the need to find a solution that was acceptable to both sides and thus would ultimately relax their terms. Greece and their lenders had been close to a deal less than two weeks before the referendum when the government had put forward proposals in which they conceded on the level of required austerity but proposed it take a more ‘left-wing’ and redistributive form as well as insisting on commitments on debt relief – only to see the deal unravel throughout the week as the creditors repeatedly added new conditionalities. Yet as Syriza re-entered negotiations after the referendum, Tsipras’ believed that Merkel and Draghi would in the end have to concede on some of the points that had sunk the previous deal as they couldn’t actually take the risk of allowing Greece to crash out of the euro for both material and normative reasons. As Channel Four’s economic correspondent Paul Mason wrote at the time:
Materially, a Greek collapse now comes on top of a Chinese stock market crash, Puerto Rico’s $72bn default and warning signs of a downturn in the USA. If Greece is “let go” it could trigger the final market rout the pessimists have expected ever since the 2008 crash. Morally, leave aside all the national stereotyping and bitterness, if the EU allows one of its member states to become a failed state – and I am not exaggerating when I say that is possible – every small country in the union would sensibly begin behaving as if it were the next Greece.
In a similar vein Larry Elliot, The Guardian’s economic editor, emphasised the normative implications for the euro as a monetary union if a Grexit occurred:
If Greece leaves, the idea that the euro is irrevocable is broken. Any government that runs into difficulties in the future will have the Greek option of devaluation as an alternative to endless austerity. Just as importantly, the financial markets will know that, and will pile pressure on countries that look vulnerable. That’s why Greece represents an existential crisis for the eurozone.
Within Syriza, the exploitation of this potential existential crisis to strengthen their bargaining position was known as the ‘Samson Strategy’ because by keeping open the option of a Grexit and a default on their loans if no concessions were forthcoming, the government was also playing on the widely held concerns that this would pull down “the columns of the whole building” as well. Yet by not taking the additional measures proposed by Varoufakis to cut the Greek banking system’s dependence on the ECB, Tsipras seems to have underestimated the ability and willingness of the state’s creditors to inflict economic chaos on the country, which resulted in making it impossible to refuse to do a deal or realistically threaten to default.
The late German intellectual Ulrich Beck has analysed how financial power is able to operate as a means of coercion not through the threat of decisive action and invasion (as with military power) but rather through targeted inaction, hesitation and ultimately the threat of withdrawal. By using such tactics in the two week period between the end of June and mid-July, the ECB deployed their financial might to great effect, slowly ratcheting up the pressure on Greece. Firstly it refused to further increase emergency liquidity assistance to Greece’s financial system on the 28th despite the quickening pace of the run on Greek banks, thus forcing the government to shut down the banks and hold the referendum under emergency conditions; secondly the day after the referendum, they increased the levels of collateral required for the banks to access ELA funds, ensuring banks would run out of cash quicker and so putting further strain on an economy that was slowly coming to a standstill (with shortages of medicine and basic foodstuffs widely reported); thirdly on July 8th the ECB, along with the other European institutions, issued their the final ultimatum – the Syriza government must come to an agreement on the basis of a deal with their creditors by July the 12th or all emergency lending would be withdrawn and the Greek economy would collapse. In the days between the referendum result on Sunday 5th and the announcement that Greece would yield to creditor demands on the Thursday, it must have become evident to Tsipras and his cabinet that their bargaining power had been more or less neutralized due to the disparity in the risk that the two sides were exposed to. European leaders were openly discussing plans of having to fly in emergency humanitarian aid to Athens if talks broke down without an agreement and Greece ‘had to be let go’. Such extreme consequences were on a different level to the dangers facing the European authorities from any Grexit and no responsible political leader could be expected to hold out and run the risk of such an economic catastrophe engulfing their country. Both sides knew this and modified their negotiating stances appropriately. On one hand, having failed to take bolder action the week before, the Greek government had run out of moves and, as Varoufakis writes, now had no choice but to “cease to negotiate”; while on the other, the creditors could afford to harden their position and push for further concessions.
In the New Statesman interview, Varoufakis claims that his colleagues in the cabinet didn’t believe that the EU would actually deliberately crash the Greek economy and ignored his warnings to the contrary throughout June. While his account here can hardly be seen as definitive, it does seem pretty clear that the Greek government fatally underestimated the lengths to which their creditors were willing to go to ensure their compliance, leading in turn to their miscalculation that the referendum outcome and cross-party domestic support would offer further leverage going into the final negotiations. Here it is not a question of Tsipras and the leadership of Syriza betraying their party’s left wing principles, that old cliché of selling out once you are in power, but rather they were outmanoeuvred by their ruthless political adversaries who thought nothing of humiliating them – making an example of them as a warning to other political forces around the EU’s periphery who would wish to contest the stringent neo-liberal policy obligations that their governments have also signed up to.