Humiliation; Arrogance; Crucifixion; Demolition of Eurozone Project

As I further ponder on the Breathtaking Political Capitulation of Greek prime minister Alexis Tsipras, I still seek an explanation for his stunning reversal. Here is a short recap.

Shockingly Stupid Sequence of Events

I am seldom stunned by political stupidity. In fact, I am surprised when I don't see it.

Yet, I have never witnessed a political reversal so shockingly stupid as we saw tonight from Greek Prime minister Alexis Tsipras.

For months on end Tsipras claimed he would not accept blackmail by Germany. He rejected Germany's "final offer" in favor of a referendum.

He encouraged Greek citizens to vote "no" to the bailout referendum. Then they did, by an overwhelming majority.

Tsipras then reversed himself 180 degrees, and accepted the newest "final offer" that was far worse than the one he turned down a short while ago.

The deal was so harsh that I agreed with Paul Krugman's description of "grotesque".

I retyped most of the four-page proposal here because the document copied about one character at a time thanks to some weird PDF encoding: Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands.

Telegraph Explanation

Ambrose-Evans Pritchard explained in advance that Tsipras did not expect to win the yes-no referendum and had to change course when he did.

Six days ago, In Europe is blowing itself apart over Greece - and nobody seems able to stop it, Pritchard wrote "Prime Minister Alexis Tsipras never expected to win Sunday's referendum. He is now trapped and hurtling towards Grexit. He called the snap vote with the expectation - and intention - of losing it."

Pritchard's explanation makes for good copy, but does not pass the Mish "smell test". If Tsipras really wanted to lose, he would have made a lukewarm endorsement for 'no'. Instead, he threw every word in the book at Germany including a demand for Nazi war reparations while making overtures with Russia.

Arrogance

I don't accept Pritchard's explanation. To directly campaign, and campaign exceptionally hard, for an outcome one does not want makes no sense.

Instead, I offer a simpler explanation: Tsipras is an arrogant fool. He had far too much confidence in his own ability to make the world see things his way.

Stupidity alone does not provide the answer, but an amazing amount of arrogant belief in oneself to the bitter end, that Germany would eventually bow down and kiss his feet is the likely answer.

Humiliation

Tsipras has humiliated himself while destroying any hope Greeks had. He refused to resign and it's highly likely his coalition splinters to smithereens in short order.

It would be best for Greece if it splinters now, but the likeliest outcome is the coalition busts apart after the Greek parliament votes for servitude and pledges €50 billion in assets.

Tsipras should resign, but arrogant fools don't do that.

Pledged Assets

Inquiring minds may be wondering What Assets Will Greece Pledge?

The Wall Street Journal explains ...

The statement merely requires that they be “valuable.” After six years of recession and counting, Greek liquid assets are scarce; presumably hard assets like beautiful Islands and national treasures are off limits. One likely source of said assets are the new bank shares that the Greek government will acquire with the money it will borrow from the eurozone’s bailout fund to recapitalize the country’s banks.

Islands off limits? We will see. Greek banks are not worth €50 billion for sure. In fact, they are bankrupt, with negative worth. Ten years from now will they be worth something? What about airlines, airports, bus terminals, and electrical companies?

The Journal did not state so but any infrastructure assets owned by the government will surely be on the block.

Defeat Snatched From Jaws of Victory

The Financial Times reported the deal nearly fell through at 6:00AM this morning when after 14 hours of negotiation, when both Merkel and Tsipras headed for the door.

Donald Tusk, the president of the European Council snatched defeat from the jaws of victory with ‘Sorry, but there is no way you are leaving this room’. Next up ....

Crucifixion

“They crucified Tsipras in there,” a senior eurozone official who had attended the summit remarked. “Crucified.”

Demolition of Eurozone Project

With crucifixion of Tsipras, and more importantly of the Greek people, Wolfgang Münchau accurately assesses the developments this way: Greece’s Brutal Creditors Have Demolished the Eurozone Project.

A few things that many of us took for granted, and that some of us believed in, ended in a single weekend. By forcing Alexis Tsipras into a humiliating defeat, Greece’s creditors have done a lot more than bring about regime change in Greece or endanger its relations with the eurozone. They have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union.

In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order.

On Saturday, Wolfgang Schäuble, finance minister, insisted on a time-limited exit — a “timeout” as he called it.

I have heard quite a few crazy proposals in my time, and this one is right up there. A member state pushed for the expulsion of another. This was the real coup over the weekend: not only regime change in Greece, but also regime change in the eurozone.

The fact that a formal Grexit may have been avoided for the moment is immaterial. Grexit will be back on the table when you have the slightest political accident — and there are still many things that could go wrong, both in Greece and in other eurozone parliaments. Any other country that in future might challenge German economic orthodoxy will face similar problems.

This brings us back to a more toxic version of the old exchange-rate mechanism of the 1990s that left countries trapped in a system run primarily for the benefit of Germany, which led to the exit of the British pound and the temporary departure of the Italian lira.

What should the Greeks do now? Forget for a moment the economic debate of the past few months, over issues such as the impact of austerity or economic reforms on growth. Instead ask yourself this simple question: do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work?

Previously, the strongest argument against any forecasts of break-up has been the strong political commitment of all its members. If you ask Italians why they are in the eurozone, few have ever pointed to the economic benefits. They wanted to be part of the most ambitious project of European integration undertaken so far.

"We will soon be asking ourselves whether this new eurozone, in which the strong push around the weak, can be sustainable".

But if you take away the political aspiration, you may end up with a different judgment. From a pure economic point of view, we know that the euro has worked well for Germany. But for Italy, it has been an unmitigated economic disaster. The country has seen virtually no productivity growth since the start of the euro in 1999. If you want to blame the lack of structural reforms, then you have to explain how Italy managed decent growth rates before then. Can we be sure that a majority of Italians will support the single currency in three years’ time?

Once you strip the eurozone of any ambitions for a political and economic union, it changes into a utilitarian project in which member states will coldly weigh the benefits and costs, just as Britain is currently assessing the relative advantages or disadvantages of EU membership. In such a system, someone, somewhere, will want to leave sometime. And the strong political commitment to save it will no longer be there either.

Final Thoughts

In my opinion, that is the best article Wolfgang Münchau has ever written.

Like Economist Paul Krugman, and unlike myself, Münchau was a strong supporter of the eurozone "project".

I maintain that the eurozone has too many flaws to possibly work. That Tsipras caved in at the last moment changes nothing, and it even appears that Münchau has come to grips with that reality.

In Critics Flock to Site "ThisIsACoup"; Killing the European Project; Illusions; Who's Going to Pay?, I offered my take on why the eurozone would fail.

Prior to that, in From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece" and Gold? I explained in detail why blaming Greece alone was entirely wrong.

Crucifixion Does Not Change Reality

I still stand by my analysis. The eurozone remains fatally flawed. Humiliation, even crucifixion, does not change reality.

Indeed, it likely assures an even more violent eurozone breakup sometime down the road.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com