Who's Extorting Whom in Europe? It's All About Coercion

The Economist's February 6 cover displayed the Venus de Milo statue pointing a revolver, with the headline "Go ahead, Angela, make my day." In the editors' upside-down world, Greece is threatening Europe, or at least Germany. Really?

On Monday, February 16, European officials "handed Athens an ultimatum: Agree by Friday to continue with a bailout program or risk the funding that the country needs to avoid a default," the New York Times reported.

Then there is Wolfgang Schauble, Germany's finance minister and die-hard supporter of the failed austerity policies that brought Greece six years of depression. On February 11, according to the Financial Times, he "hinted darkly that a Greek plan to leave the bailout at the end of the month could draw a harsh reaction from financial markets."

"I wouldn't know how financial markets will handle it, without a programme -- but maybe he [Greek Prime Minister Alexis Tsipras] knows better."

Schauble knows very well that it is not "the markets" who will decide how much capital flows out of the Greek banking system if it fails to renew the troika program that expires on February 28. He knows that it is the actions of the European Central Bank (ECB) that will determine how the markets will react. His transparent threat is like that of a gangster shaking down a store owner, pretending not to know who is responsible for the vandalism that happens to afflict businesses who don't make their payments to the mob.

And it's not just payments that he is shaking down Greece for, but a commitment to transform the Greek economy into something that voters never wanted. Among the "reforms" that Schauble is insisting upon are measures that will further weaken the bargaining power of labor. These include moving away from industry-wide collective bargaining to negotiation at the firm level, making collective dismissals easier, and legalizing employer lockouts (currently illegal in Greece).

Many observers don't seem to get it, but this is all about the European authorities using coercion to accomplish political as well as economic goals. That's why these people have not been content to just rely on their enormous bargaining power and the threat of economic dislocation that would ensue if Greece is forced out of the euro. Instead, they have been pro-active: on February 4 the ECB announced that it would no longer accept Greek government bonds as collateral. This was a deliberate effort to crash Greek financial markets and increase capital flight so as to force Syriza to capitulate as soon as possible.

There appear to be important divisions within the troika. According to press reports, European Commission President Jean-Claude Juncker has been challenging German Chancellor Angela Merkel on the issue of austerity.

In short, Syriza, having chosen to stay within the eurozone, has had little choice but to try and make its struggle Europe's struggle, in order to force a change in eurozone-wide policies. Since austerity has failed miserably not only in Greece but in almost all of the eurozone, this is possible - and is some European authorities' greatest fear at the moment.

Their other fear, of course, is that Greece will be forced out of the euro. It is commonly stated that this could cause some kind of European financial collapse, but that appears unlikely. Much more likely is that Greece, after an initial financial crisis, would recover much faster than its neighbors, and others would also want to leave.

That is another reason that coercion is such an important element here. To be effective, coercion must go beyond the present crisis and present the threat of chaos even after the (presently still unlikely) event that Greece would leave the euro. (The mafia is threatening not only you, but your family after you are killed.) That was part of the threat to Argentina in 2001 and into 2002, even after its default and devaluation. The consensus opinion, which included virtually all of the major media, was that Argentina's troubles were just beginning, and there would be years of suffering ahead. As it turned out, Argentina suffered a severe financial crisis and recession, but only for three months. Freed from the IMF's austerity policies, it then began a robust recovery in which GDP grew by 63 percent over the next six years.

Greece would appear to be much better situated for an economic recovery outside the eurozone than Argentina was after its devaluation and default. Argentina got no outside help; on the contrary, multilateral institutions drained money from the economy in 2002. Greece might not need any outside help, since it is running a current account surplus. But if it did, according to press reports, Russia (with $380 billion in reserves) and China (with $3.9 trillion) have offered assistance. The amounts of money that Greece might need to borrow would be trivial for China, and pretty small for Russia too.

So European coercion would come into play in the event of an exit too. The European authorities could try to block trade credits (this was another threat to Argentina) and otherwise injure the Greek financial system. They could try to pressure China and other countries not to provide loans. But it is unlikely that they would succeed in isolating Greece, and it is not clear that they could get political support in Europe for this kind of vindictiveness.

For now, at least, the coercion does not seem to be intimidating the Greeks. Finance Minister Yanis Varoufakis made it clear on Monday that ultimatums would not be accepted. Tsipras' approval rating is running at 75 percent, including 42 percent of those who voted for the then-ruling party in the January election. This is a triumph of democracy for Greece, and for Europe.