Greek Prime Minister George Papandreou’s decision to call off the referendum on the EU-brokered rescue plan may look like a sign of weakness. Not so. The wily Socialist has forced the opposition to get off the fence and declare its support for his policies. He has seriously scared, rather than merely “infuriated,” his European partners. Papandreou’s decision was a classic jiu-jitsu gambit, using own weakness to sap opponents’ strength. It illustrates a national talent for nifty ploys that comes with many centuries of playing political games with powerful foreigners—from Romans, Latins and Turks to the EU leaders of our own time.
First a disclaimer: I do not like George Papandreou any more than I ever liked the rest of the clan. His late father Andreas—a redistributionist demagogue leading a scandalous private life—presided over Greece’s descent into public indebtedness, from 20% of the GNP when he took office in 1980 to over 80% when he completed his second term in 1989. By the time he died in 1996 after a third term of office, the country was irredeemably weaned off the steady diet of fiscal responsibility bequeathed by the Colonels.
Secondly, what Papandreou has achieved—a temporary stabilization of his domestic position and a stronger hand to seek an even better deal from his ruffled northern creditors—is not necessarily in the Greek interest. On balance Greece would be better off leaving the eurozone, reintroducing the drachma, defaulting, devaluing, and pulling herself by her bootstraps in the years to come. Argentina suffered capital flight just before her 2002 default and some trouble attracting foreign investment in its immediate aftermath, but in the long term the devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports and producing a hefty trade surplus. An aggressive revenue-collecting program (of the kind Greece can and should emulate) further helped keep the books well balanced. By January 2006 Argentine foreign currency reserves had reached $28 billion.
Being an Euro-socialist at heart, Papandreou preferred a tactical coup de main that strengthens his hand while changing nothing in Greece’s unenviable strategic position. But at a tactical level he did well. As I wrote on Tuesday, on the domestic front Papandreou’s gamble made sense:
The center-right opposition has withheld support from the austerity plan forced upon Papandreou by Brussels, but it has no alternative strategy of its own. He does not want to be the sole villain of the piece, and the debate preceding the referendum would force his opponents to declare what they would do differently. Judging by the change of government in Lisbon earlier this year, after the Portuguese government lost the austerity vote, the answer is—nothing much. Papandreou does not want a repeat performance in Athens, and his decision presents the New Democracy with a dilemma. As The Economist blog points out, “The hope is that the opposition, recognising that there is little choice but to implement agreed upon policies and understanding that the public is likely to reject the deal, will be forced to support the government’s austerity measures, thereby making the referendum unnecessary.
Well, this is exactly what happened. Well done Papandreou! Alas, poor Greece …
On the foreign front I still suspect that Germany (but not France) may have been briefed in advance of Papandreou’s referendum gambit, and that he will use the aftermath of the scare to exact an even greater “haircut” in the weeks to come—primarily to the detriment of the three big French banks. If he survives the no-confidence vote tomorrow—as I expect he will—be ready for another Danaian gift or two to Brussels in the weeks to come. And sell your euros, fast.