Is the EU working for regime change in Athens?

The great Troika-Syriza dance seems to go on forever, every deadline is reached and then extended. The most common interpretation of this dance of financial tension is that it is one long exercise of brinkmanship by both sides who are both trying to squeeze out maximum advantage by being the last to blink. The most common narrative in the media is that the Germans and their allies are pushing for “reforms” that the Syriza government in Greece doesn’t want to adopt. Most of the media seems more sympathetic to the European officials and more sceptical about the Greek position. But even among observers who are more neutral or sympathetic to Greece, it is still a story about hardline European officials threatening to use their control over funding to the Greek government and banking system in order to make the government in Athens agree to its demands. But there may be another dynamic going on here, the dynamic of regime change.

The simple balance of power is that the Greek government cannot do anything to replace the people has to negotiate with, it can’t change the team on the other side of the table. But the European officials seem to believe they can do exactly that by replacing (or at least seriously re-engineering) the government in Athens.

By being intransigent in the negotiations the EU side of the table thinks it is in a win-win situation. Consider the possible outcomes, from the EU viewpoint, of taking an obstructive position in the negotiations. The worst outcome might be Grexit, but many EU representatives, particularly the Germans, have more or less said to the Greeks ‘go ahead and jump the eurozone can cope with your departure’. That may or may not turn out to be the case but quite a few influential people on the EU side seem to think that the eurozone could cope with the financial repercussions of Grexit. The EU also know that the Greek people don’t want Grexit and think that the Syriza government would fall before a Grexit actually happened.

In reality the two options the EU side seem to be working towards both involve a form of regime change. The EU calculation seems to be that intense financial pressure on Greece will either cause the Syriza government’s position to unravel so much that it becomes an entirely different sort of government or the Syriza government collapses and loses power. Both would be seen as very positive outcomes from the EU point of view. Remember that in 2011 the EU institutions, accompanied by threats from the European Central Bank, removed two democratically elected government, in Greece and Italy, through applying financial pressure to get new governments that were more to their liking.

The destabilisation actually began before the January election, when officials from the then-ruling New Democracy Party announced that if Syriza won the election, Greece would leave the euro and people would not be able to get money from their bank accounts. In a nasty breach of protocol, they were supported by important European officials. The result was predictable, capital flight from Greece and an intensification of liquidity problems for Greek banks.

Then on February 4th, just nine days after the election the European Central Bank cut off the main line of credit to the Greek government, this was followed by the ECB setting new limits on the amount that Greek banks could lend to the Greek government government, limits that the ECB did not impose on the previous government. This manoeuvre by the ECB was partially obscured by the rush events surrounding the Syriza victory and in retrospect it is worth noting how shocking it is that the ECB took it upon itself to respond to a democratic election in this way. The ECB’s constitution says its prime task is price stability, it says nothing about policing fiscal policies of member states, or undermining democratically elected governments. The ECBs actions are clearly, and overtly, political.

Remember that it is Greeks banks, which by buying Greek Treasury Bills, supply much of the short term cash that the Greek government needs in order it function, so if you squeeze the banks you also squeeze the Greek Government.

These moves and repeated destabilising statements from European officials (and the International Monetary Fund) have had an enormous impact on the Greek economy. Bank deposits have fled the country, they hit a 10-year low in February, with about 24 billion euros having left since early December. As Greek finance minister Yanis Varoufakis pointed out last week during a visit to Washington during the IMF/World Bank spring meetings, the ECB is cutting off liquidity to the banking system at the same time that they are increasing demand for liquidity by encouraging people to sell off domestic assets and take their money out of the banking system. On Monday some Greek sovereign bonds hit record yields and the government ordered local governments to place their cash reserves at the central bank so the government in Athens could use it to pay pensions and salaries. The financial turmoil is also affecting the real economy, and could push the economy back into recession this year if it continues.

Whatever anyone might say about the responsibility of prior governments for the initial recession (one that the United States and almost all of Europe shared), it was the Troika (the ECB, European Commission, and IMF) that turned it into a Great Depression for Greece. Greece has already lost a quarter of its national income over the past six years and more than 25 percent of its labor force and the majority of its youth have been put out of work. The Troika really should accept some responsibility for the current situation instead of simply insisting that the Greek government continue with a failed program as if there had been no election.

As the table below shows the existing program has consistently failed to achieve its stated goals by a very wide margin, the decline of the GDP and the rise of unemployment has been much worse than all IMF projections. It seems to me perfectly reasonable for the Greeks to say its time for a change and wholly wrong for the EU institutions to react with horror and alarm. Albert Einstein said that the definition of insanity was doing the same thing over and over again and expecting different results. Whats needed is an acknowledgment by the EU institutions that things did not turn out as planned, to say the least, and that a rethink, in partnership with the Greek government, is necessary.

IMF Greek GDP Projections

IMF Greek Unemployment Projections (%)

A wide range of source, leaks, research papers, statements by ex-employees, all suggest strongly that the IMF does not to really believe in the Greek plan anymore. At the Washington meetings this past week they declined to send anyone to a panel discussion. It seems no IMF economist would want to defend the 4.5 percent of GDP primary budget surpluses, to be run indefinitely, that are part of the IMF’s agreement with the prior Greek government. And as Reza Moghadam, the former head of the IMF European department wrote in the Financial Times two weeks ago, “Europe is demanding implementation, in the next few weeks, of a long and comprehensive list of actions that previous governments were unable to deliver in the space of a few years.”

Are European leaders making impossible demands of the current Greek government as part of a strategy to get rid of it? Leaks to the press from the EU side of the negations this week in Riga spread the story that Varoufakis came under sustained fire behind the closed-doors meeting and was being labelled “a time-waster, a gambler and an amateur” by the EU team. This sort of leak is not an accident and is all about undermining a key member of the Syriza government.

Varoufakis met with President Barack Obama last week and there were press reports that he asked the president to encourage European officials to negotiate in good faith. In early February President Obama appeared to be doing this, stating that “You cannot keep on squeezing countries that are in the midst of depression.” But he has not said anything similar since then.

Obama very much does not want Greece to leave the euro, and neither apparently does German Chancellor Angela Merkel. So despite a number of catastrophic predictions this week, many of them probably politically motivated, Grexit probably won’t happen unless it does so through miscalculation and mistakes. The main strategy of the Troika, a strategy which is pushed primarilly by the EU institutions, is to try to destabilise the Greek economy and government without forcing Greece out of the euro. In a Europe where anti-democratic and extremist politics seem to be on the rise that is a dangerously anti-democratic strategy.