Ukraine and Greece, Two Fronts of Europe

08.02.15 Publication:

Europe is witnessing two important but dangerous negotiations: one, between Russia, Germany and France over Ukraine, the other, between Greece and Germany over the future of the euro. Which is likelier to succeed? Well, it is hard to say. But the two negotiations share a common characteristic that may offer a clue.

That characteristic is that in both cases the opposing sides in the negotiations have begun with completely different analyses of the problem about which they are negotiating. When you analyse a problem, or diagnose a sickness, differently from one another, it is very hard to agree upon a solution or a cure.

In Ukraine, Russia’s Vladimir Putin sees a country that historically and culturally was long part of Russia, and he sees the rebellion that he is supporting in the country’s east as a legitimate effort to keep Ukraine and Russia close to one another. Germany’s Angela Merkel and France’s Francois Hollande, in common with most of their European Union colleagues, instead see a sovereign country that is being violated by its mighty neighbour, following the earlier seizure of Crimea.

There can really be no common ground between these positions. A ceasefire in eastern Ukraine might hold things for a while, but the fact is that either Ukraine is independent or it isn’t. The alternative, of America supplying the Ukrainian government with better equipment so as to equalise their capabilities with those of the Russian-supplied rebels might convince Mr Putin that the battle is not winnable – but it might also convince him to call America’s bluff and escalate the conflict.

So let us concentrate on a happier issue: the confrontation between Greece’s new government and Mrs Merkel’s Germany. For that negotiation offers a bit more hope.

It is true that the basic analyses of the two sides about Greece’s economic problems, and indeed those of the Eurozone as a whole, are completely different. Germany sees a sickness caused by Greek debt and for which austerity is the main cure. Greece sees a debt caused by reckless German lending, sees past bailout packages as having mainly helped German banks, and sees austerity causing only poverty and not recovery.

As in the case of Ukraine, there can be no middle ground between a lender who insists that all debts must be paid in full, for to forgive debts would be immoral, and a borrower who says that the burden of those debts must be reduced, for otherwise the consequences will themselves be immoral.

The tour of European capitals, including Berlin, by Greece’s rather cool new finance minister, Yanis Varoufakis, over the past week made clear how wide is the gap between the two sides.

That said, there is a crucial difference between the nationalist politics seen in the Ukraine conflict and the nationalist economics of the Greek case. It is that in economics, and especially in financial transactions, there is more room for creativity. If the two sides want a peaceful settlement, there are enough variables and dimensions in an economic negotiation to make such a deal possible.

For Greece, two dimensions of that negotiation could offer a way out – and a way even to allow the different analyses of Germany and Greece to converge.

The first lies in the way to deal with Greece’s burden of sovereign debt. A further write-off is unacceptable. A special deal for Greece would be unsustainable among other Eurozone members. So what is needed is to convert Greece’s opening proposal, of a swap of part of its debt into new bonds linked to its economic growth, into a rule that can apply not just to Greece but to all Eurozone members, now and into the future.

Such a rule needs to leave governments with the obligation to repay their debts, but the opportunity to reduce the annual interest burden and risk in return for agreed conditions about domestic economic reform. Those domestic economic reforms can be put into the context of a Europe-wide drive to extend and complete the single market, along the lines proposed several years ago by Mario Monti, before he became President of the Council.

Those domestic reforms are also where the second hopeful dimension arises. Here, there is already some common ground in the German and Greek analyses. Far-left the new Greek governing party Syriza may be, but they say they want to end the crony capitalism dominated by Greece’s billionaire oligarchs and to attack corruption and tax evasion. That should be music to German ears. The best way to achieve both is competition and transparency. In other words, a liberalised single market.

So a wise route to an agreement would be with that common ground. If reforms can be agreed upon, then working out ways to make the debt affordable would become easier. And it can be done so as a European project not just a Greek one. A show of European solidarity is exactly what the European Union needs.

For here is the final reason to be more hopeful about Greece than about Ukraine. The existence of the clear and present danger of a widening war on the EU’s borders in Ukraine must make all member states, but especially Germany, anxious to maintain unity and solidarity, and thus keen on a true European solution to the Greek issue.

Thus, the intractable nature of the Ukraine situation ought to make the intractable nature of the Greek situation easier to deal with. Syriza is a bit too friendly with Russia for German comfort. But surely dropping that friendship would be a price worth paying.