The United States Government is the only entity powerful enough to push and support the IMF and moderate EU leaders – like France and Italy – to confront Germany for a compromise with Greece on debt restructuring.
July 6, 2015
The EU summit on July 7 will be the first since the shockingly strong EU-defying Όχι vote by the Greeks. It will be missing the one entity that holds the key for Greece to get some sort of promise for a debt restructuring deal to go along with the demands for more austerity.
And that is the United States Government.
But the USG will be sure to be exerting its considerable influence behind the scenes.
Why the U.S.G. Wants to Resolve the Issue
There are at least three reasons that the USG would like to see this crisis resolved with Greece in the Eurozone rather than a messy Grexit with Greece falling apart which may be inevitable if Germany (and its bloc of allies) don’t give on debt restructuring.
Geopolitics is a very strong motivating force for the USG in a manner that few Central Europeans understand. Indeed it’s an obsession and even an addiction and is part of the ethos of being in the USG. Indeed to Americans talk of a Grexit is an admission of failure by Europe that would simply be unacceptable if it happened with the U.S.
Greece is geopolitically very important to the USG (more so than to the EU which has little geopolitical ambitions). It’s a NATO ally. It can potentially block oil and gas imports into Europe from countries the USG sees as hostile (cough – Russia). Its geographical location near a potentially revanchist Turkey and the Eastern Meditteanean is advantageous.
While Europe seems blithely taking about firewalls containing ill effects of a Grexit, Americans are not sure. The scale of complex bets and the 280 trillion in derivative exposure that US banks have that no one is quite sure what can set off is much too risky for Obama – who at least wants to point to economic recovery post-Great Recession as an achievement – to take a gamble on. They simply don’t trust that the Europeans have the sophistication to understand the implications.
3. Keynesian Economic Strategy
The current U.S. administration’s economic recovery strategy has been unabashedly Keynesian with debt ballooning up to 101% of the GDP to spur higher growth and employment. Contrast with the austerity-heavy policies in the German led EU (which have demonstrably failed across much of Eurozone) that require debt levels of less than 60% of GDP. Indeed this difference in strategies has been a point of discussion for the past few years between the Americans and the Germans.
Most American and other economists that the Obama administration listens to are anti-austerity and in favor of Greek debt reduction as part of the overall package. So there is a level of agreement with what Syriza – Tsipras and Varoufakis – have been saying all along: to talk of more reforms without debt restructuring is useless and kicking the can down on the road (or “extend and pretend” as the former Greek Finance Minister liked to say).
How the U.S.G. Can Help
The key party that needs convincing to accept debt restructuring is Germany – its other Northern European allies (and Spain, Portugal who oppose debt restructuring for domestic political reasons where they fear the Left will exploit this in upcoming elections) will quickly fall into place. Meanwhile France, Italy are already sympathetic to Greece.
Over the past week the United States already “helped” by twisting the arm of its Global Financial arm, the IMF to publish the debt sustainability report – which essentially bolstered Syriza’s case that the debt was unsustainable without haircuts – without a vote under protest from the Europeans, right before the refrendum. (And leaking this information about Europeans trying to block it as well).
In addition it put PR pressure on Germany via favorable coverage to Syriza’s position from news outlets like the New York Times and the Washington Post which reflect USG Foreign Policy aims and align quite closely with the prevailing State Department and/or Intelligence view. (Pro-tip: if ever in doubt about the thrust of US foreign policy towards a situation, follow these two media outlets to see how they cover it to find out).
Indeed the Washington Post widely disseminated an interview by economist Tomas Pikett who blasted Germany for being hypocritical about its own debt restructuring in 1953 which was directly responsible for its post-war “miracle” rather than still paying off debts 60 years later.
So it’s already using its considerable power: diplomatic, economic, intellectual, informational. It also knows where all the bodies are buried thanks to its unparalleled global spying network – (“Hey Wolfgang, do you really want those pictures to come out?”)- though this crisis may not warrant that “ultimate trump card” option.
In particular it can ally with the IMF, France and Italy to come up with a debt restructuring plan that would back-load the debt with some haircuts that are palatable to the majority of the EU, with some inside quid-pro-quo deals to sweeten the deal for the Germans in particular.
Limits of USG Power
The Ukrainian crisis showed that the EU would bow to USG diktats to follow policies not in their best economic interests. In particular Germany caved much more than anyone realized it would (perhaps an “ultimate trump card” option was used)
However that was major Geopolitics, something that the USG could not give on – given its nature. The USG made an unprecented all court push to make that happen.
In this case, the Geopolitical case is not as strong. And moreover Germany has its red lines too: Merkel can give foreign (outside EU) policy wise, but this is a domestic (inside EU) matter. Both as the informal head of the EU as well as being answerable to local German politics which is very uncompromising on the topic of debt restructuring to the point that any mention of it is seen as provocative.
The USG is in the position of a Godfather of a set of Mafia families. No matter how powerful the Godfather is, interfering in the internal matters of one of the families is tricky.
Which is why the USG is relying on its capo Christine Lagarde, and some insiders like Hollande and Renzi to carry the message.
The USG cannot sit and idly watch a Grexit happen without doing something – it’s just not in its nature as the self appointed guardian of the West. For geopolitical, financial and economic strategy reasons, it will use all the arsenal at its disposal – diplomatic, economic, informational – to try and make Germany compromise on debt restructuring and easing austerity while taking care not to alienate or humiliate the German establishment for whom this issue is quite sensitive.
Whether it succeeds will be seen shortly.
Post Script: What About Russia?
Commentators on both sides – those who loathe Putin and those who like him – have raised the issue of Putin “taking advantage” of the situation.
They misread Putin, who above all is a pragmatist and while he can be decisive, doesn’t jump into an issue just to spite someone. There has to be a clear gain for Russia – not just a loss for someone else. And at a time when Russia itself is going through a recession, offering a pittance is not only useless but a waste of money.
Greece is currently at a very unstable point and is going to default one way or the other. To buy debt or offer any financial aid will yield little benefits, while not only assuming risks of non-payment but unnecessarily antagonizing the EU and really getting nothing definite in return that it already doesn’t have (Tsipras’s goodwill.). And Tsipras whose foreign minister voted with the other EU members to extend sanctions on Russia just a while ago, would understand that, just as Putin understood what Tsipras had to do then.
So Russia will play sympathetic and offer any help it can in conjunction with the IMF/EU but not stalk out an independent path of the Trokia at this juncture. So beyond working on existing business deals that won’t yield immediate relief or solve the crisis at this point, expect nothing concrete from Russia.