Has Davos Man sold out Greece?
George Papandreou is Davos Man, literally: he’s been there for the past couple of years, and even if he steps down now I suspect we might see him up the alp in 2012, too. Matt Yglesias reckons this is bad for the Greeks:
At the end of the day, had Greece played chicken and insisted on a better deal, I think the Germans would ultimately have paid up…
That it’s playing out this way is, I think, an example of a benign consequence of the rise of the global ruling class. The leadership of a small upper-middle-income country is willing to do something unpopular and likely contrary to the interests of its population for the sake of the greater good. Still, as a structural matter I think it’s a fairly disturbing trend.
It’s definitely possible for national leaders to act in the best interests of Davos, rather than in the best interests of their own country. Or, rather, to kid themselves that what’s in the best interests of Davos is in the best interests of their own country. Exhibit A is probably the 2008 decision by Irish finance minister Brian Lenihan to guarantee all the debts of Ireland’s banks — although ultimately that decision hurt the entire Eurozone much more than it helped a relative handful of Irish bank creditors.
As for the decision by Greece’s leaders to close ranks and refuse to allow the Greek populace to throw a spanner in the works of a bailout, it’s certainly possible to see this — as Yglesias does — as a capitulation to Germany and the international community. On the other hand, it’s easier to see it as a way of cutting off some very nasty tail risk. Even if Yglesias is right and the Germans would ultimately have paid up, there’s a significant non-zero possibility that they wouldn’t have done, and the whole situation would have ended up collapsing, with Greece getting nothing. And that would have been disastrous, not only for the eurozone but especially for Greece.
More generally, it’s really hard for a country to play chicken with its lenders when it’s running a massive primary deficit. In fact, I can’t think of a single case where that ever happened. Greece needs Germany more than Germany needs Greece, both of them know it, and Germany is looking increasingly willing to cut Greece off if it refuses to cooperate.
The only way for Greece to get real negotiating leverage over Germany would be to start running a primary surplus, thereby giving itself a credible threat in terms of simply repudiating its sovereign debt. But of course running a primary surplus would require significantly more austerity than even the riot-inducing policies currently in place. For the time being, Greece finds itself in the same position as most distressed debtors — ceding control and authority to its creditors. That might not sit well with Greece’s proud citizens. But it’s a natural consequence of borrowing so much money from other European countries and international banks.