Has Greek brinkmanship in debt negotiations damaged its position in the single currency?

Reform proposal discussions are continuing (Source: Getty)

Konstantinos Venetis, an economist at Lombard Street Research, says Yes

Taking negotiations down to the wire in the hope of preventing a “Gr-accident” has actually brought one closer. Greece’s state coffers dried up, the banking system suffered severe strain, and the economy relapsed into recession. Confidence is low and elevated uncertainty has increased the risk of further budgetary derailment.

This year’s positive primary budget balance effectively masks a domestic default of rising state arrears and a virtual expenditure freeze. Investor sentiment is extremely low, preserving the large risk premium built into domestic financial assets.

Greece’s strategy of brinkmanship via self-harm has effectively piled a liquidity crisis on top of the existing solvency problem. And it has failed to address the new administration’s credibility deficit, leaving little room for delaying decisions on the more contentious aspects of reform. Even if these negotiating tactics eventually work, they have left deep scars on the Greek economy.

Dr Remy Davison, Jean Monnet chair in politics and economics at Monash University, and a global expert for the United Nations, says No

Eurogroup ministers reportedly call Yanis Varoufakis an amateur and a gambler. Both are correct, but this is a high-stakes poker game and he has nothing to lose. The vulnerable Eurozone economy means that Varoufakis’s objective of softening the harsh austerity medicine prescribed by the Troika could see a compromise reached. If Eurogroup ministers don’t soften their stance, Greece will be unable to repay the next tranche of its bailout, rendering it ineligible for £5.2bn in loans.

All economics is politics, and politics is the art of compromise. Neither the Eurogroup nor Athens has any interest in a Greek default and a messy exit. Consequently, Varoufakis will get some of the welfarism he seeks, but the EU will demand assurances that Athens commits to structural reform, while maintaining fiscal surpluses. Neither side will walk away happy.

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