varoufakis’s great game by hans-werner sinn - project syndicate
DESCRIPTION
Project Syndicate article on the Greek diplomatic bluff.TRANSCRIPT
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6/1/2015 VaroufakissGreatGamebyHansWernerSinnProjectSyndicate
http://www.projectsyndicate.org/print/varoufakisecbgrexitthreatbyhanswernersinn201505 1/3
ECONOMICS
HANSWERNERSINNHansWernerSinn,ProfessorofEconomicsandPublicFinanceattheUniversityofMunich,isPresidentoftheIfoInstituteforEconomicResearchandservesontheGermaneconomyministrysAdvisoryCouncil.Heistheauthor,mostrecently,ofTheEuroTrap:OnBurstingBubbles,Budgets,andBeliefs.
MAY29,2015
VaroufakissGreatGameMUNICHGametheoristsknowthataPlanAisneverenough.OnemustalsodevelopandputforwardacrediblePlanBtheimpliedthreatthatdrivesforwardnegotiationsonPlanA.Greecesfinanceminister,YanisVaroufakis,knowsthisverywell.AstheGreekgovernmentsanointedheavy,heisworkingPlanB(apotentialexitfromtheeurozone),whilePrimeMinisterAlexisTsiprasmakeshimselfavailableforPlanA(anextensiononGreecesloanagreement,andarenegotiationofthetermsofitsbailout).Inasense,theyareplayingtheclassicgameofgoodcop/badcopand,sofar,togreateffect.
PlanBcomprisestwokeyelements.First,thereissimpleprovocation,aimedatrilingupGreekcitizensandthusescalatingtensionsbetweenthecountryanditscreditors.Greecescitizensmustbelievethattheyareescapinggraveinjusticeiftheyaretocontinuetotrusttheirgovernmentduringthedifficultperiodthatwouldfollowanexitfromtheeurozone.
Second,theGreekgovernmentisdrivingupthecostsofPlanBfortheotherside,byallowingcapitalflightbyitscitizens.Ifitsochose,thegovernmentcouldcontainthistrendwithamoreconciliatoryapproach,orstopitoutrightwiththeintroductionofcapitalcontrols.Butdoingsowouldweakenitsnegotiatingposition,andthatisnotan
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6/1/2015 VaroufakissGreatGamebyHansWernerSinnProjectSyndicate
http://www.projectsyndicate.org/print/varoufakisecbgrexitthreatbyhanswernersinn201505 2/3
option.
Capitalflightdoesnotmeanthatcapitalismovingabroadinnetterms,butratherthatprivatecapitalisbeingturnedintopubliccapital.Basically,Greekcitizenstakeoutloansfromlocalbanks,fundedlargelybytheGreekcentralbank,whichacquiresfundsthroughtheEuropeanCentralBanksemergencyliquidityassistance(ELA)scheme.Theythentransferthemoneytoothercountriestopurchaseforeignassets(orredeemtheirdebts),drainingliquidityfromtheircountrysbanks.
OthereurozonecentralbanksarethusforcedtocreatenewmoneytofulfillthepaymentordersfortheGreekcitizens,effectivelygivingtheGreekcentralbankanoverdraftcredit,asmeasuredbythesocalledTARGETliabilities.InJanuaryandFebruary,GreecesTARGETdebtsincreasedbyalmost1billion($1.1billion)perday,owingtocapitalflightbyGreekcitizensandforeigninvestors.AttheendofApril,thosedebtsamountedto99billion.
AGreekexitwouldnotdamagetheaccountsthatitscitizenshavesetupinothereurozonecountriesletalonecauseGreekstolosetheassetstheyhavepurchasedwiththoseaccounts.ButitwouldleavethosecountriescentralbanksstuckwithGreekcitizenseurodenominatedTARGETclaimsvisvisGreecescentralbank,whichwouldhaveassetsdenominatedonlyinarestoreddrachma.Giventhenewcurrencysinevitabledevaluation,togetherwiththefactthattheGreekgovernmentdoesnothavetobackstopitscentralbanksdebt,adefaultdeprivingtheothercentralbanksoftheirclaimswouldbeallbutcertain.
AsimilarsituationariseswhenGreekcitizenswithdrawcashfromtheiraccountsandhoarditinsuitcasesortakeitabroad.IfGreeceabandonedtheeuro,asubstantialshareofthesefundswhichtotaled43billionattheendofAprilwouldflowintotherestoftheeurozone,bothtopurchasegoodsandassetsandtopayoffdebts,resultinginanetlossforthemonetaryunionsremainingmembers.
AllofthisstrengthenstheGreekgovernmentsnegotiatingpositionconsiderably.Smallwonder,then,thatVaroufakisandTsiprasareplayingfortime,refusingtosubmitalistofmeaningfulreformproposals.
TheECBbearsconsiderableresponsibilityforthissituation.Byfailingtoproducethe
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6/1/2015 VaroufakissGreatGamebyHansWernerSinnProjectSyndicate
http://www.projectsyndicate.org/print/varoufakisecbgrexitthreatbyhanswernersinn201505 3/3
twothirdsmajorityintheECBCouncilneededtolimittheGreekcentralbanksselfservingstrategy,ithasallowedthecreationofmorethan80billioninemergencyliquidity,whichexceedstheGreekcentralbanks41billioninrecoverableassets.WithGreecesbanksguaranteedtheneededfunds,thegovernmenthasbeensparedfromhavingtointroducecapitalcontrols.
RumorhasitthattheECBispoisedtoadjustitsapproachandsoon.ItknowsthatitsargumentthattheELAloansarecollateralizediswearingthin,giventhat,inmanycases,thecollateralhasaratingbelowBBB,thusfallingshortofinvestmentgrade.
IftheECBfinallyacknowledgesthatthiswillnotdo,andremovesGreecesliquiditysafetynet,theGreekgovernmentwouldbeforcedtostartnegotiatingseriously,becausewaitingwouldnolongerdoitanygood.But,withthestockofmoneysentabroadandheldincashhavingalreadyballoonedto79%ofGDP,itspositionwouldremainverystrong.
Inotherwords,thankslargelytotheECB,theGreekgovernmentwouldbeabletosecureafarmorefavorableoutcomeincludingincreasedfinancialassistanceandreducedreformrequirementsthanitcouldhavegainedatanypointinthepast.AlargeshareoftheacquiredresourcesmeasuredbytheTARGETbalancesandthecashthathasbeenprintedwouldturnintoanendowmentgiftforanindependentfuture.
ManypeopleinEuropeseemtobelievethatVaroufakis,anexperiencedgametheoristbutapoliticalneophyte,doesnotknowhowtoplaythecardsthatGreecehasbeendealt.TheyshouldthinkagainbeforeGreecewalksawaywiththepot.
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