The Greek tragedy is quickly becoming a farce

We're now into the second act of the Greek story, and the clarity of Germany’s message on debt has forced Varoufakis into a hurried rewrite of the script.

Yanis Varoufakis, the new Greek finance minister, describes himself as “an erratic Marxist”. He will be familiar with his master’s assertion that history repeats itself, the first time as tragedy, the second as farce. For Varoufakis, the tragedy is that the cost of avoiding bankruptcy has been too harsh. Debts amounted to €315 billion, the economy has shrunk by 25 per cent and youth unemployment now stands at 50 per cent.

With the election of the radical new Syriza party on February 1, the curtain rose on the second act of this story, as farce. Varoufakis, entering from stage left, has a leading role. His costume was especially striking for a man playing the part of finance minister. He arrived at 11 Downing Street for an appointment with George Osborne, the British Chancellor of the Exchequer, wearing a leather jacket and a purple shirt open at the neck.

Varoufakis speaks the fluent English you would expect of a man who taught at Sydney University, but this creates a problem: he can never argue that mistranslation from the Greek has garbled his message.

During the election campaign, Varoufakis and his leader Alexis Tsipras made blood curdling noises about the debt crisis. For a start, they threatened to stop talking to the troika of creditors: the EU, the IMF and the European Central Bank. Then Syriza demanded immediate negotiation to reduce Greece’s debt -- known as a haircut. It took precisely 24 hours after Syriza’s victory for Angela Merkel, the commanding German chancellor, to point out that Greece’s debts had already been reduced. Wolfgang Schäuble, Germany’s finance minister emphasised German intransigence when he met Varoufakis in Berlin on February 5.

The clarity of Germans’ message forced Varoufakis into a hurried rewrite of the script. By the time he met Osborne he had already begun to down play the rhetoric. Greece would repay the whole of its debt after all, he said; but he wanted a new deal, swapping the existing debt for a mix of bonds linked to domestic economic growth, and 'perpetual bonds' to replace loans from the ECB. Creditors would get their money, but they would wait longer for it. In the meantime, Greece hoped to borrow the money to repay loans due in May. Varioufakis said he would seek a €10 billion bridging loan from the ECB to give the negotiators more time.  

Enter, stage right, Mario Draghi, the ECB’s president. On February 4, the ECB toughened up the loans terms on any new credit for Greece, seemingly determined to force the Greeks to accept a new deal without delay. The following morning, Greek bank shares were down 25 per cent.

The bridging loan had become Varoufakis’s top priority, without it, there is a danger that Greek banks will run out of cash in the spring and, in the ensuing chaos, the climax of the farce could be a Greek exit from the euro -- in spite of the fact that everyone involved so far, from Merkel to Tsipras, say they want Greece to stay in the eurozone.

Presumably this is what Osborne was thinking about when he called the Greek debt crisis “the greatest risk to the global economy”.

But what is it really all about?

Austerity mainly; the Greek's attack on the hegemony of Germany inside the EU has won them allies in southern Europe. Merkel decided five years ago that austerity was the only way to manage Europe’s debt crisis.

The German economy may be strong enough to take the pain, but Italy and France are not. High and persistent unemployment in both countries makes a mockery of the original ambitions of the EU. Led by the Greeks, the Mediterranean members want a Keynesian solution that would end austerity by pouring fresh money into their economies.

But Merkel and her allies in northern Europe are standing firm. A condition of the loans made to Greece so far has been radical economic and institutional reform in the country. Experience tells her that this idea leaves Greeks cold. The IMF declared that the Greek government has failed to deliver on 13 of 14 reforms they had signed up for. Confirming their suspicions, the first acts of the Syriza government was to rehire 1,000 civil servants and curtail the privatisation program. These are the conditions for a stand-off.

From their position outside the eurozone, the British tend to take a non-ideological view. The governor of the Bank of England, Mark Carney, clearly thinks austerity is being applied too strictly. Speaking in Dublin recently, he said the problem is that 19 countries in one block are less decisive than just one acting alone. Carney thinks reform is necessary in the eurozone, but fears half measures. Further austerity, he implied, could lead to a lost decade in the European economy.

Consensus is hard to come by. This is why most disputes in Europe ignore the obvious conclusion dictated by rational analysis of the facts. Martin Taylor, a former banker, speaking in the House of Commons recently, suggested a suitably Greek way of bringing down the curtain. It’s time, he thinks, to cut the Gordian knot: “If the creditor nations really do believe they are going to get their money back, we’re in an even worse situation than I think we are.”  

This farce will run and run.

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