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Has Schäuble overplayed his hand?

It is too early to tell how problematic for the Germans the outrage over their attempted takeover of the Greek political system will be. (See #This is a coup.) But it is now clear that this is not only bad economics, but bad politics.

There should be no disagreement that it is bad economics. Five years of austerity in Greece broke the economy. The confidence fairy never showed up. Austerity – cutting everything except the sacred debt – has not worked, will not work, cannot work.

There is a reason he IMF and Neoliberalism were kicked out of Africa and Latin America. The radical free market economics caused the same damage there that it has in Greece. The same “shrink your way to growth” mandate led to the same results. And another lesson was taught again: The Neoliberal agenda is immune to logic, evidence and compassion. Its enforcers, the “technocrats” installed by the Institutions, are aptly described by Paul Krugman:

What Europe calls technocrats aren’t people who know how the world works; they’re people who subscribe to the approved fantasies, and never change their minds no matter how badly wrong things go. Despite the overwhelming evidence that austerity has exactly the dire effects basic textbook macro says it will, they cling to belief in the confidence fairy. Despite a striking lack of evidence that “structural reform” delivers much of a growth boost, especially in an economy suffering from a huge output gap, they continue to present structural reform — mainly in the form of disempowering workers — as a sovereign remedy for all ills. Despite a clear record of past failure, they continue to push for asset sales as a supposed answer to debt overhang.

In short, what Europe usually means by a “technocrat” is a Very Serious Person, someone distinguished by his faith in received orthodoxy no matter the evidence.

A raft of economics has lined up with the Greeks. The economics of the matter are not much different than a corporate bankruptcy, where debt is restructured to make operations viable and hence maximize returns for creditors.

But it is not just bad economics, it is bad politics

In Germany it is the politics of blame. The Greeks are the new Jews, morally deficient, culpable for crimes they never committed, deserving of punishment. Greece and Ireland absorbed the surpluses from Germany and France and took the hit when the crisis came down. As Yanis Varoufakis correctly says, “The Periphery’s exorbitant debts were essential for the industrial machinery and banking systems of Germany and France to prosper given the problematic bank-based recycling system.” (And be clear, it was not the German or French taxpayers that loaned money to the Greeks. It was their banks. The supposed bailout of Greece in 2012 was in fact a backdoor bailout of German banks.)

Now the politics has lined up so that the only successful path is for the Greeks to pay back unpayable debts. Schäuble and the Germans have forced the Eurozone into a dead end with their unwillingness to address reality. With five months to take a step-wise approach, they instead insisted on a “comprehensive conclusion,” which is now transparently revealed to be a demand for the Greeks to forfeit any control over domestic policy. The German negotiating strategy was bait and switch, and the last switch was the first proposal, delivered as “take it or leave it.”

The Greeks have now accepted a proposal that was likely designed to be unacceptable. If this clarifies the dynamics for the world, it may prove to be the undoing of Schäuble, Merkel and the Troika. It must now be evident that the Germans are ruling from power, not reason, and that they are perfectly willing to evict a member from the Eurozone in spite of all assurances it was not possible. Trust is broken. When this arrangement fails, as it must, and likely at a time when others are facing the same asphyxiation by debt, will it be the Greeks or the Germans who are lined up for blame.

Alan Harvey