Debt, dignity, and defiance: why Greece went to the brink

Abstract

Early in 2015, the new Greek government, led by the left-wing SYRIZA party, refused to complete the second bailout program and insisted on further debt relief. This defiant stance entails a puzzle for rational-choice explanations that focus on expected economic utility: when SYRIZA came to power, the Greek economy had resumed modest growth, while its foreign creditors had extended debt maturities and hinted at the possibility of more debt restructuring in the future. Hence, there seemed no immediate need to force the issue. Furthermore, it appeared very likely that the incoming administration's demands would be rejected by some of the creditors, each of whom wielded effective veto power. In fact, weeks before the final showdown, George Tsebelis, a leading expert in the field of EU governance, had correctly predicted that Athens was set for a dramatic climb-down. This article argues that the Greek government's bargaining tactics were neither a rational answer to the country's economic predicament nor a necessary response to domestic constraints. Instead, moral emotions and status sentiments played a decisive role. The administration's overconfident defiance was strongly influenced by anger at Greece's alleged humiliation at the hand of its creditors.

Keywords:

• bargaining
• conditionality
• debt restructuring
• emotion
• Greece
• humiliation
• international debt
• justice
• ownership
• status

Notes

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Of course, officials and publics on the creditor side had already been upset by earlier events, above all by the incoming government’s vow to terminate the second programme. Obviously, emotions ran high on both sides. Unfortunately, this article can only assess the influence emotions had on Greek policies.

2 On the ‘emotional turn’ in IR, see Bleiker and Hutchison (2008), Crawford (2000), Hall and Ross (2015), Lebow (2005), Markwica (2018), Mercer (2014), Ross (2014), and Sasley (2011). On economists’ growing interest in the impact of emotions, see Akerlof and Shiller (2009), Frank (1986), Rick and Loewenstein (2008), and Shiller (2000). For formal models which include identities and dignity, see Akerlof and Kranton, (2010) and Bénabou and Tirole (2009).

3 The figure was later corrected to 15.4%. See Papaconstantinou (2016, p. 25, 170). For a timeline of the crisis see http://crisisobs.gr/en/cisis-timeline/. For a useful overview see Blustein (2016). Insider accounts are given by Douzinas (2017), Galbraith (2016), Papaconstantinou (2016) and Varoufakis (2017).

4 The IMF (2013, pp. 21–22) later officially conceded that it had underestimated the size of fiscal multipliers and overestimated prospective productivity growth.

5 This discussion will focus on SYRIZA leaders because ANEL supported its partner’s policies and did not interfere in talks with the creditors. See Varoufakis (2017, p. 142).

6 According to the most recent government figures, real growth in 2014 was actually higher than this contemporary estimate. The volume change for 2014 is now given as 0.7%, after –3.2% in 2013, –7.3% in 2012, and –9.1% in 2011. See Hellenic Statistical Authority (2017, p. 4). Varoufakis (2017, p. 125) claims that in 2014 the economy contracted at a rate of 3.3%. Unfortunately, he neither provides a source for this figure nor explains why it should be considered more accurate than data provided by the IMF, Eurostat, and the Greek authorities.

7 Note that this paper is agnostic as to whether Greece urgently needed debt relief in early 2015. Its focus is, rather, on the question if, given the international political setting, insisting on that concession was rational in terms of expected utility.

8 Tsebelis (2015b) had predicted this outcome already by early June 2015.

9 Greece would have embarked on Grexit with a badly divided government and an untested alternative payment system. According to Varoufakis, disagreements and distrust thrived within the government, especially within his own finance ministry, but also in its relations with Greece’s central bank. The new payment system was to be based on citizens’ tax accounts. It had never been tested before and had been prepared by a ‘tiny team’ which avoided contact with both the department’s tax division and the central bank, for fear that they would leak information or otherwise sabotage the effort (Varoufakis, 2017, pp. 95–98, 304, 323–324, 455; see also Galbraith 2016, pp. 17, 155–58).

10 Some argue that Tsipras intended to lose the referendum, hoping that a ‘Yes’ to the creditors’ demands would give him a mandate to implement their austerity programme (Varoufakis, 2017, pp. 458–459). However, such an outcome would have severely damaged his domestic standing (Daley, 2015a). Moreover, had Tsipras secretly preferred a majority for ‘Yes’, he would have campaigned rather differently: he would not have made such passionate appeals to Greek patriotism (see below). And he would not have assured his compatriots time and again that they could reject the creditors’ demands and keep the Euro. Instead he insisted that defiance would not lead to Grexit.

11 Note that this reading is well in line with the administration’s later pronouncements which readily conceded its overconfidence rather than stressing domestic constraints.