Greece at a decision point

The story so far: Greece is in negotiations to get the latest 8bn euros of bailout money agreed in May 2010. It has enough money to last until about 10 October 2011, then civil servants and pensioners do not get paid.

Image copyright Reuters
Image caption There were protests in Athens at the weekend calling for a boycott of banks

On Friday/Saturday, European finance ministers meet and tell Greece they cannot have any money until they come up with a better austerity plan and better assurances that they will do it.

This just seven days after the Greeks slapped a ludicrously ambitious 2bn euros a year emergency poll tax on every householder, collected via the electricity bills, and the electricity workers said they would refuse to collect it.

Then on Sunday, the Greek Prime Minister George Papandreou turns back in mid-Atlantic from a trip to the United States (I always wanted to see a passenger jet do an Immelmann) and convenes an emergency cabinet which decides… what? (We find out later on Monday, after 15:00 GMT when Papandreou teleconferences with the Troika.)

However, while he is in the air, the European Central Bank (ECB) briefs that it will not allow Greece to default and stay in the eurozone, directly contradicting the implicit agreement of Wednesday last. And a couple of German central bankers tell US Treasury Secretary Tim Geithner to, basically, "naff off" after he warns Europe's political indecision is threatening the world economy with "catastrophic risk".

Meanwhile, the Pasok government is feeling embattled. Finance Minister Evangelos Venizelos said on Sunday:

"What many question abroad, what stands as a negative stereotype for Greece, is the ability of the country - not the government… Unfortunately, this stereotype is constantly fuelled by many who, easily and without second thoughts, raise their voice in public, undermining thus the country's credibility.

"This cannot go on. Those of us with a public standing, whether they are politicians, journalists, analysts, entrepreneurs, academicians, must have in mind that what they say can be used as arguments against the country."

Such is the world we live in, and it reminds me of George Orwell's famous diary entry during the Norway-Dunkirk crisis that "on any given day I wake up with the feeling that I can predict what's going to happen better than any member of the government".

Europe is being governed by people whose world view is shattered.

So, what next?

From a political economy stance, there are a series of binary outcomes which lock together into a decision path. Central to the outcomes are what the actual peoples of Europe decide to do, from one day to the next, but I have noticed that politicians display a marked reluctance to communicate to them.

Austerity package

I find myself, on Newsnight, doing nightly summaries of "this is what this means; this is the possible outcome of that", but do not hear any politician trying to do this, or central banker. Central banks simply act. Like anti-capitalist protesters they adopt the stance of not explaining, of forcing reaction with action, of "propaganda of the deed".

Short term - either Greece comes up with an austerity package that satisfies the Troika or it does not. If it does not, it faces a cash crisis and possible default. If it does, it gets the 8bn euros and survives until December.

What are the variables?

A) Greek organised labour, which torpedoed the property tax

B) Greek disorganised masses, who could at any point start taking their money out of the banks

C) Germany's fractured elite, which cannot agree to do anything and may therefore torpedo a Troika agreement inside the ECB

D) The Pasok government, which is facing growing parliamentary dissent from MPs who lost their political futures once, on 24 June, to vote through emergency austerity and are now beginning to feel a little bit Oscar Wilde about losing them twice.

If Greece defaults, a limited shockwave goes through the European banking system. Socgen, Credit Agricole, Commerzbank and Dexia have to be recapitalised; and the ECB has to provide much more liquidity.

If Greece does not default, the way is open for the medium term crisis, between now and December.

Mid-term - On 21 July 2011 the EU agreed a second bailout for Greece, expanding the European Financial Stability Facility (EFSF) mechanism to 440bn euros, with matched funding from the IMF promised, and changing the rules so that the fund can bail out banks as well as countries, and buy bonds in the secondary markets, making it more like a makeshift European IMF.

However, this has to be ratified in several parliaments. It has been delayed till mid-October in Austria, in Germany it is causing splits in the ruling coalition, in Finland it has prompted the demand for separate collateral from Greece.

Potential outcome - if the EFSF is safely ratified by mid-October then it paves the way for managing a controlled Greek debt default, with the EFSF money being used to shore up the banks.

Controlled default

However, financial sector sources are worried about the German vote. The importance of the EFSF is that it places an anchor point around which the ECB and IMF can co-ordinate action. It is real money and can attract-in real money from the Qataris, Russians, China and other noble democracies who are buying themselves diplomatic good will as they save Europe's banking sector.

With the EFSF, Europe, it is argued, can go on the front foot, with the ECB then moving to massive bond purchases (its 150bn euros so far could, as Wolfgang Munchau points out in today's FT, go as high as a trillion).

Once the ECB is heavily exposed, and the north-European governments inside the EFSF also, you could argue there is momentum towards fiscal union. Because, as Munchau also perceptively points out, unlimited ECB bond-buying is effectively a eurobond.

Long-term (i.e. after December) - if you get to a position where there is a workable EFSF, a massively expanded ECB bond operation and a controlled Greek default you could claim successful cauterisation of the crisis.

You would have to prevent the ECB hardliners expelling Greece from the euro, and indeed prevent the ECB from becoming a cockpit of international rivalries. You would have to prevent the breakup of the CDU-CSU coalition, but even if it fell, the SPD/Greens are pro-eurobond.

However, to move towards fiscal union you would need a treaty change. It is hard to see north-European countries voting for this while Greece is still inside the eurozone.

And then there is the final wildcard - economic growth. This is set to flat line across the eurozone in the second half, because the south is adopting austerity measures in a recession (as per the US 1929-33) and the north has run out of steam.

The eurozone countries cannot do true Quantitative Easing and political orthodoxy says they cannot do fiscal stimulus either because that exacerbates the sovereign debt crisis, by pushing solvent countries towards the high-deficit zone.

If growth carries on flat lining, then the strategically troubled lynchpin economies of Spain and Italy will slip further into the crisis zone. But that is a 2012 problem, not a 2011 one.

This is the situation as I write on the plane to Athens. I will post this on arrival.

But I am struck by one thing, in this crisis, the great power politics of the late-21st Century are beginning to creep into the early century economics. Brazil, China and Russia have promised funds to bail out the euro.

China stands ready to make insignificant but symbolic purchases of Italian and Spanish debt, and has already bought up parts of Greek infrastructure. Russia, from where men with large suitcases arrived in Cyprus as Cypriot banks joined the euro, has promised to bail out the Cypriot banks. The US has banged the table but nobody has listened.

There, in a single weekend of ink-dark economic diplomacy, you have the world in 2050, or maybe 2030, showing its face.

We have saved your banks, what was that place called again? Georgia, Chechnya? Oh and that blogger, that artist - Liu what's-his-name, Ai-wei-who? And the Arab Spring…