Guest Contribution: ‘Only Tsipras Can “Go to China”’

Today we are fortunate to have a guest contribution written by Jeffrey Frankel, Harpel Professor of Capital Formation and Growth at Harvard University, and former Member of the Council of Economic Advisers, 1997-99. An earlier version was published in Project Syndicate.

Alexis Tsipras, the Greek prime minister, has the chance to play a role for his country analogous to the roles played by Korean President Kim Dae Jung in 1997 and Brazilian President Luiz Inácio Lula da Silva in 2002. Both of those presidential candidates had been long-time men of the left, with strong ties to labor, and were believed to place little priority on fiscal responsibility or free markets. Both were elected at a time of economic crisis in their respective countries. Both confronted financial and international constraints in office that had not been especially salient in their minds when they were opposition politicians. Both were able soon to make the mental and political adjustment to the realities faced by debtor economies. This flexibility helped both to lead their countries more effectively.

The two new presidents launched needed reforms. Some of these were “conservative” reforms (or “neo-liberal”) that might not have been possible under more mainstream or conservative politicians.

But Kim and Lula were also able to implement other reforms consistent with their lifetime commitment to reducing income inequality. South Korea under Kim began to rein in the chaebols, the country’s huge family-owned conglomerates. Brazil under Lula expanded Bolsa Familia, a system of direct cash payments to households that is credited with lifting millions out of poverty.

Mr. Tsipras and his Syriza party, by contrast, spent their first six months in office still mentally blinkered against financial and international realities. A career as a political party apparatchik is probably not the best training for being able to see things from the perspective of other points on the political spectrum, other segments of the economy, or other countries. This is true of a career in any political party in any country but especially one on the far left or far right.

The Greek Prime Minister seemed to think that calling the July 5 referendum on whether to accept terms that had been demanded previously by Germany and the other creditor countries would strengthen his bargaining position. If he were reading from a normal script, he would logically have been asking the Greek people to vote “yes” on the referendum. But he was asking them to vote “no”, of course, which they did in surprisingly large numbers. As a result – and contrary to his apparent expectations — the only people’s whose bargaining position was strengthened by this referendum were those Germans who felt the time had come to let Greece drop out of the euro.

The Greek leadership discovered that its euro partners, predictably, are not prepared to offer easier terms than they had been in June, and in fact are asking for more extensive concessions as the price of a third bailout. Only then, a week after the referendum, did Mr. Tsipras finally begin to face up to reality.

The only possible silver lining to this sorry history is that some of his supporters at home may – paradoxically – now be willing to swallow the bitter medicine that they had opposed in the referendum. One should not underestimate the opposition that reforms will continue to face among Greeks, in light of the economic hardship already suffered. But like Kim dae Jung and Lula, he may be able to bring political support of some on the left who figure, “If my leader now says these unpalatable measures are necessary, then it must be true”. As they say, Only Nixon can go to China.

None of this is to say that the financial and international realities are necessarily always reasonable. Sometimes global financial markets indulge in unreasonable booms in their eagerness to lend, followed by abrupt reversals. That describes the large capital inflows into Greece and other European periphery countries in the first ten years after the euro’s 1999 birth. It also describes the sudden stop in lending to Korea and other emerging market countries in the late 1990s.

Foreign creditor governments can be unreasonable as well. The misperceptions and errors on the part of leaders in Germany and other creditor countries have been as bad as the misperceptions and errors on the part of the less-experienced Greek leaders. For example the belief that fiscal austerity raises income rather than lowering it, even in the short run, was a mistaken perception. The refusal to write down the debt especially in 2010, when most of it was still in the hands of private creditors, was a mistaken policy. These mistakes explain why the Greek debt/GDP ratio is so much higher today than in 2010 — much higher than was forecast.

A stubborn clinging to wrong propositions on each side has reinforced the stubbornness on the other side. The Germans would have done better to understand and admit explicitly that fiscal austerity is contractionary in the short run. The Greeks would have done better to understand and admit explicitly that the preeminence of democracy does not mean that one country’s people can democratically vote for other countries to give them money.

In terms of game theory, the fact that the Greeks and Germans have different economic interests is not enough to explain the very poor outcome of negotiations to date. The difference in perceptions has been central. “Getting to yes” in a bargaining situation requires not just that the negotiators have a clear idea of their own top priorities, but also a good idea of what is the top priority of the other side. We may now be facing a “bad bargain” in which each side is called upon to give up its top priorities. On one side, Greece shouldn’t expect the ECB and the IMF to be willing explicitly to write down the debt they hold. On the other side, the creditors shouldn’t expect Greece to run a substantial primary budget surplus. A “good bargain” would have the creditors stretch out lending terms even further so that Greece doesn’t have to pay over the next few years and would have the Greeks committing to structural reforms that would raise growth.

One hopes that the awful experience of the recent past has led both sides to clearer perceptions of economic realities and of top priorities. Such evolution is necessary if the two sides are to arrive at a good bargain rather than either a bad bargain or a failure of cooperation altogether. The non-cooperative equilibrium is that Greek banks fail and Greece effectively drops out of the euro. This may be even worse than a bad bargain, although I am not sure.

Admittedly, both Kim and Lula had their flaws. Moreover, Korea and Brazil had some advantages that Greece lacks, beyond Syriza’s delay in adapting to realities. They had their own currencies. They were able to boost exports in the years following their currency crises.

But a recurrent theme of the Greek crisis ever since it erupted in late 2009 is that both the Greeks and the Euro creditor countries have been reluctant to realize that lessons from previous emerging market crises might apply to their situation. After all, they said, Greece was not a developing country but rather a member of the euro. (This is the reason, for example, why Frankfurt and Brussels at first did not want Greece to go to the IMF and did not want to write down the Greek debt.) But the emerging market crises do have useful lessons for Europe. If Tsipras were able to shift gears in the way that Kim dae Jung did in Korea and Lula did in Brazil, he would better serve his country.

This post written by Jeffrey Frankel.

21 thoughts on “Guest Contribution: ‘Only Tsipras Can “Go to China”’

  1. Patrick VB

    In his contribution, Prof Frankel compares Greece to S. Korea and Brazil, but fails to discuss the crucial fact that Greece has no independent monetary policy and a fixed exchange rate w.r.t. its main EU trading partners (the euro’s 1/1 conversion rate). This is where the explanation of Tsipras’ behavior lies; persons involved in the negotiations between Tsipras and the Institutions (Troika) have explained that Tsipras was unwilling to take Greece out of the euro area (since the majority of Greeks still want to remain in the euro area) and also unwilling to impose new austerity (since the majority of Greeks wanted a stop to increasing austerity). He proposed the referendum expecting that the “Yes” would prevail (Yes to more austerity, so as to remain in the euro area), as Greeks feared that a “No” vote would lead to leaving the euro. A “Yes” vote would have forced him to reach an agreement for more austerity and then resign, leaving the implementation and inevitable further economic contraction in the hands of a new center right government. He was wrong-footed by the massive “No” vote, but recognized that refusing an agreement with the Troika would imply leaving the euro area, which he refused to do. He chose to accept to continue “kicking the can down the road”, in order for Greece to remain in the euro area. Tsipras does not expect this renewed austerity to resolve Greece’s economic problems or reduce its debt burden. Don’t be surprised if he resigns or calls an early election right after signing the new MoU (or “Programme”) with the Troika and receiving new loans from the ESM, as he does not believe in this policy. Basically, he has accepted total surrender, just to keep Greece in the euro area.

    1. Jeffrey Frankel

      To Patrick VB:
      Evidently you missed my 2nd-to-last paragraph: “Korea and Brazil had some advantages that Greece lacks, beyond Syriza’s delay in adapting to realities. They had their own currencies.”

      1. Patrick VB

        Indeed, but I find that this crucial element would have deserved more discussion and a more prominent place in the text. But, point taken.

  2. Hugo André

    As someone who pays a lot of attention to politics in most countries I don’t think the comparison is very relevant. Both da Silva and Dae Jung came from large established left-wing parties and came to power in fairly normal ways, in large part because of personal popularity. Syriza, by contrast, is a far left party with little or no previous experience of being in government that got elected because of an unprecedented economic collapse that discredited mainstream parties.

    The idea of combining right- and left-wing policies also appears to have been a very deliberate and carefully considered policy choice in the two former cases while Syriza is being forced into adopting policies which they clearly (and openly) disagree with. Basically the Greek reforms lack credibility since even the government doesn’t believe in them (will they be reversed as soon as pressure from the institutions lessens?) and probably aren’t the right ones because the troika has limited knowledge about the unique challenges faced by Greece.

  3. John Cummings

    Country’s like Greece can’t grow their way to prosperity. Never have and never will.

  4. Joseph

    “Greece shouldn’t expect the ECB and the IMF to be willing explicitly to write down the debt they hold.”

    Why not? When corporations go into bankruptcy their debts are written down. Why not Greece? What about the moral hazard in which stupid or greedy lenders are always bailed out by the public? Stupidity and greed seem to always pay off so you can expect more of it.

  5. PeakTrader

    The assumption seems to be if Greece went bankrupt, the E.U. economy would collapse.

    However, if a U.S. city went bankrupt, will that state’s economy collapse?

    Or, if a state went bankrupt, particularly a small state, will the U.S. economy collapse?

    There’s a difference between the entire financial system of a country collapsing and a country’s economy collapsing.

    Of course, people who invested in and lent to Greece would lose.

    It seems, the damage would be much more limited.

  6. genauer

    @ Menzie, somewhat off topic,

    Remember, when you brought last September the link to the IISS, with some Russian T-72 BM, unknown time and location, but alleged proof of direct Russian army involvement in the Donbass, “because Ukraine doesnt posess this type”. Now look at at

    The same v-shape active armour for the turret, and the Ukraine flag
    Still the old large infrared lighter to the right of the cannon, but above the new IR sight system, on the old T-72M further behind, without the active armour, like the piece in my local war museum

  7. Steven Kopits

    1. Align incentives
    2. Create growth
    3. Repay debt.

    Item no. 1 is aligning incentives, Jeffrey. Let’s talk about how we do that.

  8. genauer

    While I am still trying to find proper words for Prof. Frankel ,

    maybe it helps the audience to get a better grasp of the situation by providing the following links:

    The lunatic Tsipras regime not only wasted 3 months trying to do some academic lecturing from left lunatic fringe (Varoufakis, austin, Texas) on the rest of the Euro finance ministers, default on the IMF, provoke capital controls on their banks , trying to bluff folks like Draghi, Schäuble, Merkel, without having a plan B

    They actively started to destroy their only valuable source of income, tourism:
    katherimini is a “conservative” Greek news outlet, often aligned to the ND party, just to give US folks some perspective

    If you want to read the more left side: (like Lenin’s newspaper)

    often interesting

    but they do censor remorselessly comments, when they are exposed to provide false stories like the

    the Deiseroth hoax (“Top German judge says Greece has valid claim over WWII forced loan”) in
    can not be found in the alleged Spiegel print edition of 16.05.2015 nor anywhere else on the Internet

    Just the typical Syriza desinformation

    That Greece is now taking significant steps , is certainly not because Tsipras is some kind of Nixon, but because the rest of the EuroArea has shown them the alternative , Grexit, and Greece turning into some kind of Somalia in the Balkans , with European food aid supplied with US Apache Gunships hovering above

  9. 2slugbaits

    genauer My understanding is that the tourism VAT was the Troika’s idea, not the Greek governments. And BTW, Apache helicopters don’t hover, they stand off at a distance…that’s why they have Longbow radars and the new AH-64E version links to unmanned droids.

    Prof Frankel You’re too hard on the Greeks. The Nixon goes to China analogy doesn’t quite work because all of the policy options for the Greeks lead to no win situations. Accepting the Troika’s demands will further tank the economy. Exiting the euro will also be a disaster. The only actor capable of ameliorating the Greek condition is Germany, and by now it’s quite clear that Germany does not want the Greek economy to recover; does not want Greece in the Eurozone; does not want to help a left-leaning government; and does not want to face the embarrassment of having to admit that they got it all wrong. Germany is more interested in making an example of the Greeks than they are in actually solving the problem. The argument for reforms and restructuring appeal to the VSP crowd, but those plans don’t address the immediate problem. And if Merkel honestly believed that structural reforms would allow the Greeks to repay their debt, then why isn’t Merkel willing to restructure the debt over the 2 or 3 generations it will take before structural reforms kick in?

    And why should Greece’s creditors be entitled to a risk premium on Greek bonds if those creditors insist on removing the possibility of default? This is a case of wanting to have your cake and eating it too.

    1. PeakTrader

      2slugbaits, you can blame Germany for ignorance of Greek politics and economics.

      However, it’s ridiculous to blame Germany for trying to help Greece and improve conditions in Europe.

      And, it isn’t just a German problem. Other Eurozone countries, the IMF, and the ECB also lent money to Greece.

      They should’ve limited their help to financial aid and relief, rather than loans. Greece needs to solve its own problems.

  10. Tom Warner

    Tsipras is certainly willing to carry out austerity. He fiscally tightened to around a 2.5% of GDP primary surplus in the first half, in a very ad hoc way, by not making budgeted payments and running up arrears. Then he gave banks “capital control” protections from their depositors.

    But he wasn’t motivated to do those things by help-the-people ideals, or by negotiating strategy. He knew the referendum would hurt not help his negotiating position with Europe. He did them for political theater and galvanization reasons, at the expense of negotiating strategy. He got a much worse deal from Europe than he could have if that were his priority.

    The questions now are: is Tsipras strong enough to hang on for long despite delivering the opposite of what he promised, and if so what will he try to do. Both are hard to answer. I think he’s in a bind. If he becomes a reformer, as this suggests, he won’t get much credit for it anytime soon – instead they’ll say, ha, those Troika guys had some good reform ideas after all. If he goes back to his recent role as a defiant populist, the deal will fall apart and Greece will be pushed towards some kind of de facto Grexit.

    1. Tom Warner

      Re Tsipras’ background, he is a party front-man, public speaker and television personality, by no means a “political party apparatchik.” He’s a former student communist leader who became a youth leader for the main far-left group of the 1990s. He has never been a policy person. The big question for the role you’re suggesting is: who would he draw on, other than the Troika, for reform ideas?

  11. Joseph

    “And why should Greece’s creditors be entitled to a risk premium on Greek bonds if those creditors insist on removing the possibility of default? This is a case of wanting to have your cake and eating it too.”

    It’s more akin to fraud, in which the ECB and the bankers in Germany and France conspired to overcharge Greece for loans. If there is no possibility of default, as Frankel declares, then the loans shouldn’t have had higher interest rates than German bonds.

    Or perhaps a better analogy is a mafia extortion racket. The bankers went to the their ECB godfather and hired the ECB and their enforcers to break some legs. At least with the bankers, Greece had some leverage for a haircut. Not so once the ECB mafia thugs took over the debt from the bankers.

    It’s the same old story for Wall Street. The bankers can never be allowed to lose. Socialize the risk and privatize the profits.

  12. genauer

    I think a lot of people in the US are still pretty naive about the nature of the Tsipras regime.
    These guys thought they could get away with some lip service only and continue to live of the new credits of the Rest of the Eurogroup.
    Against the February 2015 memorandum, they rehired the cleaning ladies in the finance ministery, the 2100 laid off public radio ERT, to continue early retirement for special groups at 51, and then obviously having not one cent to pay down at least a little of their public debt.

    I did provide my debt sustainability analysis here with numbers and links ) on 2nd of July , the one I forgot is the EU subsidy for Greece, expected to hit 3% of Greek GDP from 2015 on.

    Another version of this is, putting the effective NPV value of the Greek public debt at 69 – 93% GDP, substantially lower than the US with 105% (IMF April 2015 WEO)

    The endless misleading comparisons of present performance to a hyped by 35% peak “GDP” in 2008, 1/ (1- 0.26 ) fueled by 26% debt, spent on useless government employees, nevertheless counted as GDP, or real estate brokers , BMW car salesmen, …, fake GDP, when the deficits is turned off
    even in the total boom year 2008: Government deficit 13.9% (IMF WEO) and private 12.5% (

    That was detected only until end of 2009, because the Greek government systematically fudged the numbers, Government debt to the tune of 25% in 2007, I have brought that here repeatedly.

    But somehow this habitual Greek cheating should be the fault of Germany

    The former PASOK and ND governments cheated and obstructed all the way too. There are no illusions, that Greece will ever change, unless there is real fear of a real Grexit Armageddon.–business.html

    And things changed only from the point on, Schäuble made the BATNA (best alternative to no argeement), Grexit, public. The rest of the Euro would not loose much with that, but a notorious liar and troublemaker.

    The position of the other 18 Euro members (ex-Greece) was and is very clear, to get at least some of the money back, and that requires Greece now finally getting serious with structural reforms (just 5 years after being in an IMF program).

    That makes it pretty simple: Whatever structural reform is not getting done the next few weeks, will not happen at all. The whole program must be forced through now, or else, Grexit. Before the bulk of the next 86 billion has flown.

  13. genauer

    you just have to wait for 3 days, until the communist criminals in Athens government already try to renege on agreements:

    the latest from the athens regime

    “But three senior officials from Greece’s bailout monitors said Athens has
    instead demanded restrictions on negotiators, including on who creditors
    can meet with and what topics are discussed in the talks.

    Two of the officials said Greek authorities have also insisted negotiators
    no longer use the Athens Hilton as their base, a hotel that is close to
    central Syntagma Square and a short drive to the finance ministry,
    instead proposing hotels far from the capital’s government quarter.

    “It is fundamentally more of the same,” said a senior official from
    one of the of bailout monitors, colloquially known as the “troika” after
    the three institutions originally involved in the talks. “They don’t
    want to engage with the troika.”

  14. 2slugbaits

    Poster genauer continues to demonstrate that he cannot distinguish between macroeconomics and morality plays. But if he wants to talk morality plays, why doesn’t he mention Germany’s predatory actions? Team Merkel is not interested in helping the Greeks. They just aren’t. And her team has said as much when she admitted that the latest Troika plan would not solve Greece’s debt problems, but Team Merkel felt that they needed to go ahead without for political reasons. And there you have it.

    Meanwhile posters Steven Kopits and Peak Trader continue to believe that structural reforms on the supply side will solve the aggregate demand problem. Ugh. Do they not understand that structural reforms take decades to have any effect. How do those reforms help solve the immediate problem of meeting interest payments? Answer: they don’t. It’s a sideshow discussion, but it makes you sound like a VSP.

  15. Charlie Heath

    Merkel, also, could go to China in accepting what the Greeks have said all along, and the IMF said : Greece can’t recover without a debt haircut. The required primary surplus is too big and will simply explode the debt to GDP level. The euro lenders can squeeze the most out of the Greek economy by accepting that reality.

  16. genauer

    It is very easy to be generous with the money of other people and throw around wild and completely unspecific claims “Germany’s predatory actions? Team Merkel is not interested in helping the Greeks.”

    Greece has been notorious with not keeping to commitments, over 5 years every quarter the same drama with the Troika review. Just look at the long list of things still to be done, more than 5 years later

    The rest of the EuroGroup (of which Germany is just 27%) is now providing another 8000 Euros loan per Greek citizen, at ridiculously generous conditions, and still just get blame for it.

    As I said and linked above, the NPV of the Greek debt is just 69%, lower than Germany this year, already stretched out over dozens of years. That is payable. This is a question of “want not”, not “can not”.

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