Up at Crooked Timber there’s a neat game of political simulation: you are a politician with all the power required and have to solve the Greek debt problem, through a dialogue with your civil service adviser on the choices to make; it is pretty neat.
I ended up with some default with EIB investment support within the eurozone at the end of the game, which would be a passable solution, even though my preferred solution remains the Icelandic route, which isn’t offered in the game. Fair enough, as it’s a bit unlikely to happen unless forced on by events: for it to be taken it would take circumstances that make it obviously the least worst of the remaining options, and we’re quite some distance from this so far.
What I’d want to do today is not find a solution but try to guess, as a passive observer, what will happen. I believe lots of what happened in this crisis, and many others, can be largely explained by the structure of the institutions involved. To a significant extent, politicians have limited leeway: what they can do is constrained, by the internal logic and inertia of the institutions they are part of, and by the limits of realpolitik — many things are just not acceptable to their constituency and a politician moving too far away, even if within their constitutional role, would not last long, and they know it.
I certainly don’t believe there is a superior intelligence ordering everything in a logical way, nor that the conspiracy theories have much ground in reality, for instance the neoliberal cabal popular among some supposedly enlightened thinkers. There are neoliberals in Europe, and elsewhere, certainly, but they are not so organised as to agree with each other precisely on everything, let alone be in control of politicians, or anything much. The world is chaotic and probably doesn’t have the reasoned order people like to see in it — everything would be so much simpler if it did. It’s a natural human instinct to try and find order and logic in the world, to make sense of it; but I believe there’s many cases where there just isn’t that much to find out, disappointingly.
So, let’s make a few predictions. I have weighted them with odds. The horizon is about two years.
- In 18 months time, Greece will not be in the news anymore (odds: 90%). This is an easy one: the media, and that includes the blogosphere, doesn’t have that long an attention span, and there’s so much news that can come from Greece: either it blows up, and that’s rather narrow in time, or it doesn’t and muddles along, and it is not interesting any more.
- The EU as a whole will service all of Greece’s government bond portfolio in some way or other (odds: 80%). Many pundits have commented that the official sector (EU and IMF) share of debt left by last week deal is unsustainable and should have been reduced with a more comprehensive default. That it isn’t sustainable is probably right, but there are few reasons to cancel the debt now. Operationally the EU is going to send enough funds Greece’s way so that the Greek government will probably operate close to a balanced budget for the next few years, same result as they would have achieved with a full blunt default. Notionally the debt servicing is funded by further loans, which, notionally again, makes the problem worse, but in practice they’re more like a call option on Greece’s recovery: if it goes better than expected, or just merely as well, the creditors may get some money back, and if it doesn’t, they can always cancel the notional loans later on when repayment comes due and is unrealistic. This has two great advantages politically: first, it gives the rest of Europe time to get used to the idea of de-facto fiscal transfers, and secondly, it gives the European authorities a bargaining chip with future Greek governments, who have something to gain from renegotiating the terms of the call option. With a full default, they could go back to the old ways undisturbed. This is consistent with the general nature of European construction: it is built semi-chaotically, in small incremental steps that are not always fully consistent with each other in their details, but where the broad direction, towards further integration, is clear.
- Greece may or may not leave the eurozone, but if so it will be the only country to do so (odds: 90%). I think there’s a good chance it won’t leave, because of both public opposition within Greece itself (for better or worse) and the fear the governments of the rest of the Eurozone have of the collateral damage of a disorderly exit. If there is an exit, the collateral damage is likely to be both big enough to convince everybody not to try again but not so big as to create a proper Armageddon.
In other words, I think the most important determinants of the crisis is institutions as they are now, what is politically acceptable now, and what financial flows are happening in the next few months, and how the now will evolve. Part of political action is to talk about twenty years or further horizons, but action remains pragmatic as it is much easier to actually do something in the short term. Paradoxically I think a failing of many observers is to discount the short term, and its dynamic nature, too much — and that despite their own very short attention span!