Game Theory

It is received wisdom that a punitive attitude towards German debt at the end of WW1 hamstrung the German economy, as JM Keynes foretold in The Economic Consequences of the Peace, thereby producing the hyperinflation of the early 1920s, and that the 1953 write-off of German debt after WW2 led to the economic miracle, or Wirtschaftswunder. Surely these facts should encourage the Germans to write-off Greece's debt now, given that it is widely regarded as unpayable and the country has achieved a primary surplus and is thus unlikely to need further bailouts?

This is naive. The French did not insist on punitive reparations under the Treaty of Versailles because they were too stupid to understand Keynes's warning. They wanted compensation for the damage done to them (the war was fought on French and Belgian territory while Germany was largely unscathed), hence their occupation of the Ruhr and Saarland as well as the recovery of Alsace and Lorraine, but they also needed to satisfy popular demands for emblematic revenge. The problem was that Germany was unable to offer enough to satisfy this demand, ironically because its limited colonial expansion before 1914 did not leave it with sufficient bargaining chips in the way of marginal assets. Cameroon and Togo were not much of a prize for France.

In contrast, the 1953 London Agreement balanced the write-off of German debt against the need to shore up the Federal Republic as the frontline in the Cold War following the end of the Marshall Plan. It is worth noting that Germany formally joined NATO in 1955, an event promptly followed by the creation of the Warsaw Pact. In other words, Germany was able to offer a significant quid pro quo, both in terms of its contribution to NATO and its willingness to act as a shop-window for Western capitalism and liberal democracy. With this in mind, we should think about the current negotiations between Greece and Germany in terms of political power rather than the intricacies of debt rescheduling. It is also worth noting that Greece's main negotiator, the economist and now Finance Minister Yanis Varoufakis, is an expert in game theory.

We should also avoid the caricature of innate Greek corruption (the real tax-dodgers are not marching on the streets of Athens, they are shopping in London), but likewise we should ignore the caricature of a German obsession with sound money (the recent British Museum exhibition on Germany was typical in this regard, with the profusion of coinage under the Holy Roman Empire leading inexorably to the Euro). Germany is no different to any other country in its willingness to damage its own economy for political reasons, from printing banknotes during WW1 to fund its military expenditure (in preference to foreign loans), which started the process of devaluation that would lead to hyperinflation, to converting Ostmarks to Deutschmarks at parity in 1990 for wages and prices, which decimated the less competitive industry of East Germany. Political economy trumps macroeconomics.

According to Daniel Davies, Greek debt is "part of the means by which control is exercised over the Greek budget by the Eurosystem ... [A]lthough Germany got massive debt relief in the twentieth century, it got it in the context of an equally massive national admission that the entire political system was rotten and needed to be totally restructured with foreign help". The Troika has always been concerned primarily with reform rather than repayment, so it may be persuaded to trade one for the other. The restructuring of Greece is less about Jean-Claude Juncker clamping down on corporate tax avoidance and more about "de-oligarchising" the economy, a task beyond the compromised parties of the centre. In other words, replacing a backward form of capital with a more progressive form, in keeping with the rest of the EU (a similar process is at work in Ukraine, where oligarchism is even more entrenched).

The Eurozone crisis has often been characterised in terms of North versus South or core versus periphery, with membership of these blocs varying as individual economies fluctuate (something that causes much angst in France). This binary paradigm has been a feature of European politics since the Treaty of Paris in 1951, and is most familiar to the UK in terms of "in/out" and the concept of a "two-speed" Europe. Amidst this familiar scene, some observers think they can spot the recrudescence of an older geopolitical pattern, namely a German fear of encirclement by hostile powers. According to Hans Kundnani, "Germany now fears the emergence of a coalition of weak economies rather than strong armies".

I doubt it. Germany weakened its own economy when it absorbed the DDR in 1990, and it was the driving force behind the expansion of the periphery in Eastern Europe thereafter. Despite the retrospective claims of "cheating" by Greece and others, Germany has never put its foot down to limit either EU expansion or Eurozone membership (though it has been cautious on NATO expansion). Though it is understandably wary of advertising the fact, many in Germany's political establishment feel they have a soft-power mission to promote bourgeois sobriety across the continent. Far from fearing encirclement by a hostile or importunate "periphery", they wish to hug the rest of Europe more closely to Germania's ample bosom.

Syriza is already being cast in the role of a stalking horse for those governments, such as France and Italy, that are privately sceptical about further austerity. The recent EC initiative on infrastructure investment and the ECB decision on QE indicate that establishment support for reflation is about to break cover. In the worst case scenario, Greece could be isolated and a Grexit accommodated by the ECB, but the political impact on the EU of a failure to cut a deal might well be profound, starting with the Spanish elections in December. All the signs suggest the establishment knows that austerity has passed its sell-by-date (the lesson of Osborne's disguised U-turn has been noted), even if it has enabled pro-capital "reforms" such as privatisation and welfare cuts. An easing-up is now widely expected (and priced in) and it would be politically convenient for all parties to cast this as the product of hard but fair negotiations, with Germany in particular receiving praise for compromising in the interests of solidarity.

Syriza's coalition with the Independent Greeks (ANEL) ensures there is a clear mandate for rejecting austerity domestically, so the EU cannot question Tsipras's democratic legitimacy. Assuming the rescheduling of debt, the EU will want Syriza to enact structural reforms as the quid pro quo. Some of these will be no contest (e.g. rooting our corruption, getting serious about tax etc). Others will be more problematic for Syriza (privatisation, labour market deregulation etc). One chip that Tsipras can use to offset some of these demands will be the replacement of ANEL, once the deal is done, by To Potami or even the rump PASOK. The substitute would not only be a "moderating influence" in public discourse, but would effectively act as the EU Commission's watchdog within the Greek government.

ANEL is being characterised as "a far-right nationalist, homophobic, anti-Semitic, hard-core Christian orthodox party". In fact, they are part of the European Conservative and Reformist bloc in the EU Parliament and thus aligned with our very own Tories. Most of the members are Eurosceptic refugees from Nea Demokratia, so the nearest ideological equivalent over here would be UKIP and the bigoted fringe of the Conservative Party. Despite the antisemitic rants by the party leader, Panos Kammenos, this is not the "far-right" - that's Golden Dawn - any more than Syriza's electoral base is "radical left" (most are ex-PASOK voters).

Tsipras's decision to give ANEL the defence ministry is also significant. Kammenos had wanted the shipping ministry, by all accounts, which would have reinforced the oligarchs and called into question the government's commitment to rooting our corruption (of the "wrong" sort). Given the hand he has to play, I think Tsipras's decision to enter coalition with ANEL is probably the optimal move. By the same token, any friendly gestures towards China or Russia should be seen less as residual "leftism" or historic Balkan sympathy and more as the creation of further bargaining chips. China isn't going to underwrite a new Drachma and Russian oligarchs aren't going to swap Mayfair for Kolonaki.

Considering that Greece has various debt repayments scheduled for the end of February, and given the apparent appetite for a deal by key Eurozone players, it is likely that negotiations will proceed fairly quickly. If the pincer-like advance of Podemos in Spain and the Front National in France is to be halted and reversed, the EU establishment needs to deliver a new economic programme that can be credibly cast as pro-growth with top-notes of "hope" and "dignity". A deal can be done, and one that will be genuinely progressive for Greece, hence the focus on building up bargaining chips now. For Germany, the outcome will mix compromise (which will boost bourgeois self-esteem) with structural reform (which will boost German soft-power). Bild will bleat, but Mutti will have strengthened the apron-strings.