Greek referendum: Decisions in the face of radical uncertainty

2015-07-04

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I have already expressed my view of casting a NO vote in the forthcoming referendum (please read my article as to why). What I wish to address in this analysis is a range of core issues specific to the uncertainty surrounding the outcome of the referendum.

Before propounding my arguments on the individual topics, I wish to express my gratitude to @MonicaTiberi, a fellow pro-european, for raising some sincere concerns regarding the prospect of a “no” win at the referendum. Her pointed remarks provided the inspiration for this article.

Liquidity crunch: When will banks open?

The liquidity of the Greek banking system depends on the decisions of the European Central Bank (ECB). For quite some time now, Greek banks have been getting liquidity through the Emergency Liquidity Assistance (ELA) mechanism. The ELA is not the ordinary procedure for liquidity operations. It is, as its name suggests, the plan B of the Eurosystem for those cases where the bank(s) in question fail to meet the rigorous criteria of the ECB for receiving liquidity at the key interest rate via the Main Refinancing Operations (MRO).

The penalty for resorting to the ELA is basically two-fold: (i) private banks have to pay a higher interest rate on their liquidity operations, effectively rendering their business less profitable, and (ii) the potential loses that may be incurred in the process will count on the books of the National Central Bank, as was the case in Cyprus, meaning that the corresponding sovereign will eventually have to foot the bill.

The position of the ECB vis-à-vis Greece’s banks can be outlined as follows:

• Greek banks are solvent as per the Asset Quality Review (pdf), yet their position is fragile. Thus the activation of ELA.
• The solvency of systemically-important Greek banks is contingent on the solvency of the Greek sovereign, not least because their core capital partly consists of the latter’s bonds. Put simply, if the Greek state is considered insolvent, Greek banks holding sovereign debt will follow suit. A vicious cycle.
• The Greek state has been—or rather was—at the receiving end of financial support from its European partners as well as the International Monetary Fund (IMF). Though the last payment from the second bailout programme was about a year ago, the ECB’s assumption is that the Greek state does _in principle _have access to that money. This assumption may no longer hold, given the expiry of the second bailout programme.

Couched in those terms, the factor that will determine the final stance of the ECB is the _political reaction _to the referendum in Greece. In particular, the ECB will need to have in place some sort of agreement on the future financing of Greece’s debt obligations.

The predicament of the ECB is difficult regardless of the outcome of the referendum. What the ECB wants to ensure is that it does not get trapped in a situation where it either has to suffer losses that will be transmitted across the Eurosystem, or involuntary enter into the grey zone of having to decide on implicit fiscal transfers. Both fall outside its mandate.

The ECB needs Europe’s leaders to take a decision that will succeed in lifting this unbearable burden of responsibility from its shoulders. It cannot, nevertheless, just make a narrowly focused assessment of the conditions peculiar to the ELA, without factoring in the political-economic milieu. The ECB, despite its well-known limitations, has exhibited prudence in dealing with very difficult, multi-faceted issues, encompassing politics, economics and legal complexity. It will not opt to simply cut off Greece and let all hell break loose.

This expectation is not mere wishful thinking. Under Article 2 of its statute (pdf) the ECB—and the European System of Central Banks—is obliged to, inter alia, pursue the general interests of the Union:

[…] Without prejudice to the objective of price stability, it shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. […]

To the point: _when will the capital restrictions be lifted? _As soon as a breakthrough is achieved to Greece’s and the EU’s present stalemate, which will enable the ECB to increase the cap on the ELA or, more generally, provide assent to a working arrangement for easing liquidity conditions.

At any rate, the key factor is—I repeat—the _political reaction _to the referendum. Even a YES vote does not automatically unlock oodles of fresh money, given the expiry of the second bailout programme. There will still need to be a thorough assessment of the prevailing conditions, while everything will be kept in limbo until the political climate within Greece is clear (assuming the implosion of Mr. Tsipras’ government).

Can Europeans agree with Tsipras?

European citizens in the countries that have been contributing to Greece’s bailout(s) are running out of patience. Some of them perceive of this saga as a modern realisation of the Myth of Sisyphus. Among them, there are voices who place the brunt of the blame on Greece.

The Greek crisis has been a persistent problem for two main reasons: (a) the structural flaws of the Greek economy are anchored in historical-cultural path dependencies and are deeper than what was the case in other parts of the Euro Area that experienced asymmetric shocks, and (b) the ad hoc response to the Greek crisis—by virtue of being ad hoc, self-contradicting and inefficient—has undoubtedly contributed to the downturn.

Greece has already been bailed out twice and could need a third bailout without accounting for the events that took place in the last months. Mr. Tsipras’ government is in power since late January 2015. The Greek crisis goes back to 2010 or even earlier.

An agreement engendering a genuine solution has a very specific set of prerequisites, which hold regardless of the Greek government’s composition and outlook:

1. Greece’s public debt is unsustainable. A regime of partial defaults and debt re-profiling is inevitable.
2. The “kick the can down the road” approach has failed miserably and has to be abandoned. No thoroughgoing reform process can occur under extreme duress and against the backdrop of financial asphyxiation. For change to be enacted, a reasonable time horizon is needed.
3. Ownership of any reform programme needs to be explicit and de-politicised. All packages hitherto have committed the cardinal mistake of failing to specify the decision-making process in a manner that preempts internal antinomies. The cacophony of the troika—where the IMF holds a different view than the European Commission, which in its own turn disagrees with the ECB and the Eurogroup—hampers the materialisation of optimal results.

The above granted, European policy-makers require a Greek government that (i) is constructive, and (ii) is clear on its goals. It is here where the controversy arises.

I am of the opinion that Mr. Tsipras’ government is not the most constructive there is, nor does it always express its demands in an unambiguous and concrete fashion. Still, it is the democratically elected leadership of an EU member state and has to be respected as such. That will continue to be the case, even if it does not implode following a YES vote at the referendum, and especially if it emerges triumphant from a NO vote.

Given the fact that Mr. Tsipras’ government did make a counter-proposal to the troika’s advances during last week’s negotiations, proving its willingness to reach an agreement of some sort, and assuming the pressing need to conclude those efforts the soonest, also in light of the financial conditions outlined in the previous section, it is my expectation that the Greek government will be cooperative enough, without being slavishly obedient.

Let us be crystal clear. Even if Mr. Tsipras’ government resigns and is replaced by a conservative-led or outright technocratic regime, the afore-enumerated prerequisites to a genuine solution will still need to be met, otherwise this Greek crisis saga will persist for much longer than it has to.

The point is this: Mr. Tsipras might be a problem, at least in the eyes of some, but it certainly is not the case that he is the primary obstacle to a true solution.

What is the political cost of conceding to Tsipras?

The outspoken will claim that the cost of moral hazard is exorbitant. The surplus countries will have to bail out the deficit countries. This has been the conventional wisdom among the most conservative circles of the Union. Clinging on to it will do no good in preventing opposing views from coming to the fore. In fact, it can be proposed that by virtue of being an extreme position, it actually strengthens its detractors. It reinforces both the legitimate and the populist (or “populist”) views that stand against it.

The moral hazard theory is misguided, in that it oversimplifies a complex problem, bringing it down to pseudo-morality. Further, it ends up blaming the victims—those “lazy PIIGS”—in what is a hideously racist and totally divisive rhetoric.

In contrast, the more moderate and reserved will argue that the political cost of agreeing to grant [at least some of] Mr. Tsipras’ demands will be that of bringing into question a subset of the underlying assumptions of the broader EMU architecture. It will foster a debate on what needs to change, at least in a gradual way, to make the Euro’s policy-making system democratically and economically tolerable.

Some political families may not be prepared for that eventuality. They may want to buy some extra time, perhaps in hope of passing the responsibility to someone else. But even if they cannot avoid confronting reality, they can still gain more in an agreement than what they stand to lose in the absence of one.

Furthermore, there may indeed be governments in certain EU member states that wish to see Syriza fail, in order to indirectly consolidate their domestic power and, by that token, further justify their own austerity policies. Still, these governments must be pragmatic and contribute to a solution, otherwise they run a number of non-trivial risks:

• a unilateral suspension of debt obligations from the Greek government;
• a disorderly exit of Greece from the European Union;
• a realisation that reverse integration or dis-integration in the EU is a proximate possibility for any member state found in an extremely difficult position;
• a chaotic situation in the Euro Area, encompassing legal, economic, and perhaps political, uncertainty;
• political turmoil within Greece, with potential geopolitical implications that may cause fissures inside of NATO.

The political costs of failing to agree with Mr. Tsipras’ government, assuming a NO win at the referendum, far exceed any petty micro-political gains that may be secured from penalising Greece. A punitive stance towards the Greeks provides grist to the mill of anti-Europeanism, while it alienates even those who are European in their outlook while disagreeing with the monolithic austerity policies implemented hitherto.

Make no mistake, if a cosmopolite and pro-european such as myself has already reached the point of arguing for a negative vote at the referendum, conditions are definitely mature enough for far more malicious actors to spread their poison. I am referring to neo-nazis and extremists on either side of the political spectrum, in Greece and beyond. A [perceived] Europe of punishment will only contribute to the inexorable rise of the forces that labour for its undoing.

A citizen must decide

In my capacity as a philosopher I have wrestled with sceptical arguments, including those of Pyrrhonism. There is a certain view that if one commits to radical scepticism, they will be unable to proceed with the conduct of their life. Why choose action over inaction if you have no ultimate knowledge of your motives?

In philosophy we can go on arguing for an eternity. In contradistinction, real life imposes rigid time constraints and scenarios that differ from the neat, idealised parameters of philosophical dialectic and intuition. A citizen has to decide on what their vote will be, a “yes” or a “no”. This decision will need to be confirmed in a few hours from now and, given the prevailing conditions, it is impossible to achieve a state of certainty.

Though I could proceed to discuss some more topics in further detail, at the expense of becoming extremely tiring to the reader, I believe my position has been made clear. We are confronted with a binary of choices, none of which guarantee any truly desirable outcome. We can avoid the difficult questions or proceed to tackle them head on, in recognition of the fact that we are only human and may commit an error.

What I truly desire is that, no matter the result of the referendum, we Europeans finally have a serious discussion on the role of the EU in our life and its place in this world. Are we supposed to remain in captivity, limited to this clearly suboptimal state of affairs?

I continue to be of the opinion that this is a make or break moment. European leadership underpinned by a bigger-picture approach is an historical imperative. For me, that means laying the foundations—and providing the impetus—for a European Democracy, which for all intents and purposes, will have to be structured along federal lines. This holds whatever the Greek referendum will deliver. I firmly believe we must be pragmatic and robust to scaremongering, while not allowing uncertainty to be the cause of our powerlessness.