The Greek Vote and the EU Miscalculation

"The Greek Vote and the EU Miscalculation is republished with permission of Stratfor."

By George Friedman

In a result that should surprise no one, the Greeks voted to reject European demands for additional austerity measures as the price for providing funds to allow Greek banks to operate. There are three reasons this should have been no surprise. First, the ruling Coalition of the Radical Left, or Syriza party, is ruling because it has an understanding of the Greek mood. Second, the constant scorn and contempt that the European leadership heaped on the prime minister and finance minister convinced the Greeks not only that the scorn was meant for them as well but also that anyone so despised by the European leadership wasn't all bad. Finally, and most important, the European leadership put the Greek voters in a position in which they had nothing to lose. The Greeks were left to choose between two forms of devastation — one that was immediate but possible to recover from, and one that was a longer-term strangulation with no exit.

The Europeans' Mistaken Reasoning

As the International Monetary Fund noted (while maintaining a very hard line on Greece), the Greeks cannot repay their loans or escape from their economic nightmare without a substantial restructuring of the Greek debt, including significant debt forgiveness and a willingness to create a multidecade solution. The IMF also made clear that increased austerity, apart from posing an impossible burden for the Greeks, will actually retard either a Greek recovery or debt repayment.

The Greeks knew this as well. What was obvious is that austerity without radical restructuring would inevitably lead to default, if not now, then somewhere not too far down the line. Focusing on pensions made the Europeans appear tough but was actually quite foolish. All of the austerity measures demanded would not have provided nearly enough money to repay debts without restructuring. In due course, Greece would default, or the debt would be restructured.

Since Europe's leaders are not stupid, it is important to understand the game they were playing. They knew perfectly well the austerity measures were between irrelevant and damaging to debt repayment. They insisted on this battle at this time because they thought they would win it, and it was important for them to get Greece to capitulate for broader reasons.

No other EU country is in a condition as bad as Greece's. However, a number of EU countries, particularly in Southern Europe, carry a debt burden they would like to renegotiate. They are doing better than Greece this year, but with persistent high unemployment — for example, 22.5 percent in Spain as of May — two things are not clear: first, what shape these countries will be in next year or the year after that, and second, what governments would come into office, and what the new governments' positions would be. Greece accounts for less than 2 percent of the European Union's gross domestic product. Italy and Spain are far more important. The problem of restructuring debt is once it is done for one country, others will want to restructure as well. The European Union did not want to set any precedents for future crises or anti-EU governments.

In Greece, Europe's leaders had a crisis and a hostile government. It was the perfect place to take a stand, they thought. They became inflexible on debt restructuring, demanding prior increased austerity measures in a country where unemployment exceeded 25 percent and youth unemployment was over 50 percent. The EU strategy in the past had been psychological: spreading fear about what default might mean, spreading fear of the consequences of leaving the eurozone and arguing that it was the European Union that lacked the ability to make concessions. In the past, the EU strategy had been to make agreements that it never thought the Greeks would be able to keep in order to kick the problem down the road. Europe's leaders demanded austerity measures but tied them to postponing repayments. They expected Greece to continue playing the game. They did not realize, for some reason, that Syriza came to power on a pledge to end the game. They thought that under pressure, the party would fold.

But Syriza couldn't fold, and not just for political reasons. If Syriza betrayed its election pledge, as the European leadership was sure it would, the party would split and a new anti-European party would form in Greece. But on a deeper level, the Greeks simply could not give any more. With their economy in shambles and Europe insisting that the solution was not stimulus but austerity — an increasingly dubious claim — the Greeks were at the point where default, and the short-term wrenching crisis that would ensue, would be worth the price.

The European leaders miscalculated. They thought Greece could be more flexible, and they wanted to demonstrate to any other country or party that might consider a similar maneuver in the future just what the cost would be. The Europeans feared the moral risk of compromising with the Greeks. They created a more dangerous situation for themselves.

New Threats to the European Union

First, in its treatment of Greece, the European Union has driven home — particularly to rising Euroskeptic parties — that it is merely a treaty organization and in no way a confederation, let alone a federation. Europe was a union so long as a member didn't get into trouble. As I have said, the Greeks were irresponsible borrowing money. But the rest of Europe was irresponsible in lending it. Indeed, the banks that lent the money knew perfectly well the condition Greece was in. The idea that the Greeks pulled the wool over the bankers' eyes is nonsense. The bankers wanted to make the loans because they made money off of transactions. Plus, European institutions that bought the loans from them bailed out those that made the loans. The people who made the loans sold them to third parties, and the third parties sold them to EU institutions. As for the Greeks, it was not the current government or the public that borrowed the money. And so the tale will help parties like Podemos in Spain and UKIP in the United Kingdom make the case against the European Union. The European Union appears both protective of banks and predatory to those who didn't actually borrow.

Second, having played hardball, the Europeans must either continue the game, incurring the criticism discussed above, or offer a compromise they wouldn't offer prior to the Greek vote. One would lead to a view of the European Union as a potential enemy of nations that fall on hard times, while the latter would cost the bloc credibility in showdowns to come. It is likely that the Europeans will continue discussions with Greece, but they will be playing with a much weaker hand. The Greek voters have, in effect, called their bluff.

It is interesting how the European leaders maneuvered themselves into this position. Part of it was that they could not imagine the Greek government not yielding to the European Union, Germany and the rest. Part of it was that they could not imagine the Greeks not understanding what default would mean to them.

The European leaders did not take the Greeks' considerations seriously. For the Greeks, there were two issues. The first issue was how they would be more likely to get the deal they needed. It was not by begging but by convincing the Europeans they were ready to walk — a tactic anyone who has bargained in the eastern Mediterranean knows. Second, as any good bargainer knows, it is necessary to be prepared to walk and not simply bluff it. Syriza campaigned on the idea that Greece would not leave the eurozone but that the government would use a "no" vote on the referendum to negotiate a better deal with EU leaders. However, all political campaigns are subject to geopolitical realities, and
Syriza needed all options on the table.

The EU leadership was convinced that the Greeks were bluffing, while the Greeks knew that with the stakes this high, they could not afford to bluff. But the Greeks also knew, from watching other countries, that while default would create a massive short-term liquidity crisis in Greece, with currency controls and a new currency under the control of the Greek government, it would be possible to move beyond the crisis before the sense of embattlement dissolves. Many countries do better in short, intense crises than they do in ordinary times. The Greeks repelled an Italian invasion in October 1940, and the Germans didn't complete their conquest until May 1941. I have no idea what Greece's short-term ability to rally is today, but Syriza is willing to bet on it.

Greece's Options in Case of a Grexit

If Greece withdraws from the European Union, its impact on the euro will be trivial. There are those who claim that it would be catastrophic to the euro, but I don't see why. What might be extremely dangerous is leaving the euro and surviving, if not flourishing. The Greeks are currently fixated on the European Union as a source of money, and there is an assumption that they will be forced out of the global financial markets if they default. But that isn't obvious.

Greece has three alternative sources of money. The first is Russia. The Greeks and the Russians have had a relationship going back to at least the 1970s. It was quite irritating for the United States and Europe. It was quite real. Now the Russians are looking for leverage to use against the Europeans and Americans. The Russians are having hard times but not as hard as a couple of months ago, and Greece is a strategic prize. The Greeks and the Russians have talked and the results of the talks are murky. The BRICS (Brazil, Russia, India, China and South Africa) summit began July 6 in Russia, and the Greeks are sitting in as observers — and possibly angling for some sort of deal. Publicly, Russia has said it will not give a direct loan to Greece but will take advantage of the crisis to acquire hard assets in Greece and a commitment on the Turkish Stream pipeline project. However, bailing out Greece would give Russia a golden opportunity to put a spoke in NATO operations and reassert itself somewhere other than Ukraine. In Central Europe, the view is that Russia and Greece have had an understanding for several months about a bailout, which could be why the Greeks have acted with such bravado.

Another, though less likely, source of funds for Greece is China and some of its partners. The Chinese are trying to position themselves as a genuine global power, without a global military and with a weakening economy. Working alone or with others to help the Greeks would not be a foolish move on their part, given that it would certainly create regional influence at a relative low cost — mere tens of billions. However, it could come with the political cost of alienating a large portion of the European Union, making Chinese assistance a slight possibility.

Finally, there are American hedge funds and private equity firms. They are cash-rich because of European, Chinese and Middle Eastern money searching for safety and are facing near-zero percent interest rates. Many of them have taken wilder risks than this. The U.S. government might not discourage them, either, because it would be far more concerned about Russian or Chinese influence — and navies — in the eastern Mediterranean.

Having shed its debt to Europe and weathered the genuinely difficult months after default, Greece might be an interesting investment opportunity. We know from Argentina that when a country defaults, a wall is not created around it. Greece has value and, absent the debt, it is a high-risk but attractive investment.

The European leaders have therefore backed themselves into the corner they didn't want. If they hold their position, then they open the door to the idea that there is life after the European Union, and that is the one thought the EU leaders do not want validated. Therefore, it is likely that the Europeans, having discovered that Syriza is not prepared to submit to European diktat, will now negotiate a deal Greece can accept. But then that is another precedent the European Union didn't want to set.

Behind all this, the Germans are considering the future of the European Union. They are less concerned about the euro or Greek debt than they are about the free trade zone that absorbs part of their massive exports. With credit controls and default, Greece is one tiny market they lose. The last thing they want is for this to spread, or for Germany to be forced to pay for the privilege of saving it. In many ways, therefore, our eyes should shift from Greece to Germany. It is at the heart of the EU leadership, and it is going to be calling the next shot — not for the good of the bloc, but for the good of Germany, which is backed into the same corner as the rest of the European Union.

Cyber bank robbers steal $1bn, says Kaspersky report

From BBC Business News –

“Up to 100 banks and financial institutions worldwide have been attacked in an "unprecedented cyber robbery", claims a new report.

Computer security firm Kaspersky Lab estimates $1bn (£648m) has been stolen in the attacks, which it says started in 2013 and are still ongoing.

A cybercriminal gang with members from Russia, Ukraine and China is responsible, it said.

Kaspersky said it worked with Interpol and Europol on the investigation.

It said the attacks had taken place in 30 countries including financial firms in Russia, US, Germany, China, Ukraine and Canada.

"These attacks again underline the fact that criminals will exploit any vulnerability in any system," said Sanjay Virmani, director of Interpol's digital crime centre.”

Read more>>

The Top Five Events in 2014

"The Top Five Events in 2014 is republished with permission of Stratfor."

By George Friedman

'Tis the season to make lists, and a list shall be made. We tend to see each year as extraordinary, and in some senses, each year is. But in a broader sense, 2014 was merely another year in a long chain of human triumph and misery. Wars have been waged, marvelous things have been invented, disease has broken out, and people have fallen in love. Nonetheless, lists are called for, and this is my list of the five most important events of 2014.

1: Europe's Persistent Decline

The single most important event in 2014 was one that did not occur: Europe did not solve its longstanding economic, political and social problems. I place this as number one because regardless of its decline, Europe remains a central figure in the global system. The European Union's economy is the largest in the world, taken collectively, and the Continent remains a center of global commerce, science and culture. Europe's inability to solve its problems, or really to make any significant progress, may not involve armies and explosions, but it can disrupt the global system more than any other factor present in 2014.

The vast divergence of the European experience is as troubling as the general economic malaise. Experience is affected by many things, but certainly the inability to find gainful employment is a central feature of it. The huge unemployment rates in Spain, Greece and southern Europe in general profoundly affect large numbers of people. The relative prosperity of Germany and Austria diverges vastly from that of southern Europe, so much so that it calls into question the European Union's viability.

Indeed, we have seen a rise of anti-EU parties not only in southern Europe but also in the rest of Europe as well. None have crossed the threshold to power, but many are strengthening along with the idea that the benefits of membership in a united Europe, constituted as it is, are outweighed by the costs. Greece will have an election in the coming months, and it is possible that a party favoring withdrawal from the eurozone will become a leading power. The United Kingdom's UKIP favors withdrawal from the European Union altogether.

There is significant and growing risk that either the European Union will have to be revised dramatically to survive or it will simply fragment. The fragmentation of the European Union would shift authority formally back to myriad nation states. Europe's experience with nationalism has been troubling, to say the least — certainly in the first part of the 20th century. And when a region as important as Europe redefines itself, the entire world will be affected.

Therefore, Europe's failure to make meaningful progress in finding a definitive solution to a problem that began to emerge six years ago has overwhelming global significance. It also raises serious questions about whether the problem is soluble. It seems to me that if it were, it would have been solved, given the threat it poses. With each year that passes, we must be open to the possibility that this is no longer a crisis that will pass, but a new, permanent European reality. This is something we have been pointing to for years, and we see the situation as increasingly ominous because it shows no signs of improving.

2: Ukrainian and Russian Crises

Historically, tensions between Russia and the European Peninsula and the United States have generated both wars and near wars and the redrawing of the borders of both the peninsula and Russia. The Napoleonic Wars, World War I, World War II and the Cold War all ended in dramatic redefinitions of Europe's balance of power and its map. Following from our first major event of the year, the events in Ukraine and the Russian economic crisis must rank as the second most important event.

Stratfor forecast several years ago that there would be a defining crisis in Ukraine that would be the opening to a new and extended confrontation between the European Peninsula and the United States on one side and Russia on the other. We have also forecast that while Russia has regional power, its long-term sustainability is dubious. The same internal factors that brought the Soviet Union crashing down haunt the Russian Federation. We assumed that the "little Cold War" would begin in the mid-2010s, but that Russian decline would not begin until about 2020.

We have seen the first act, and we continue to believe that the final act isn't imminent, but it is noteworthy that Russia is reeling internally at the same time that it is trying to cope with events in Ukraine. We do not expect Russia to collapse, nor do we expect the Ukrainian crisis to evolve into a broader war. Nevertheless, it seems to me that with this crisis we have entered into a new historical phase in which a confrontation with significant historical precedents is re-emerging. The possibility of conflict is not insignificant; the possibility that the pressures on Russia, internally and externally, might not speed up the country's own crisis cannot be discounted. Certainly the consequences of oil prices, internal economic dislocation, the volatility of the ruble and sanctions all must give us pause.

The Russians think of this as an event triggered by the United States. In the newspaper Kommersant, I was quoted as saying that the American coup in Ukraine was the most blatant in history. What I actually said was that if this was a coup, it was the most blatant in history, since the United States openly supported the demonstrators and provided aid for the various groups, and it was quite open in supporting a change in government. The fact that what I said was carefully edited is of no importance, as I am not important in this equation. It is important in that it reveals a Russian mindset that assumes that covert forces are operating against Russia. There are forces operating against it, but there is nothing particularly covert about them.

The failures of Russian intelligence services to manage the Ukrainian crisis and the weakening of the Russian economy raise serious questions about the future of Russia, since the Russian Federal Security Service is a foundation of the Russian state. And if Russia destabilizes, it is the destabilization of a nation with a massive nuclear capability. Thus, this is our second most important event.

3: The Desynchronization of the Global Economy

Europe is predicted to see little to no growth in 2015, with some areas in recession or even depression already. China has not been able to recover its growth rate since 2008 and is moving sideways at best. The United States announced a revision indicating that it grew at a rate of 5 percent in the third quarter of 2014. Japan is in deep recession. That the major economic centers of the world are completely out of synch with each other, not only statistically but also structurally, indicates that a major shift in how the world works may be underway.

The dire predictions for the U.S. economy that were floated in the wake of the 2008 crisis have not materialized. There has been neither hyperinflation nor deflation. The economy did not collapse. Rather, it has slowly but systematically climbed out of its hole in terms of both growth and unemployment. The forecast that China would shortly overtake the United States as the world's leading economy has been delayed at least. The forecast that Europe would demonstrate that the "Anglo-Saxon" economic model is inferior to Europe's more statist and socially sensitive approach has been disproven. And the assumption that Japan's dysfunction would lead to massive defaults also has not happened.

The desynchronization of the international system raises questions about what globalization means, and whether it has any meaning at all. But a major crisis is occurring in economic theory. The forecasts made by many leading economists in the wake of 2008 have not come to pass. Just as Milton Friedman replaced John Maynard Keynes as the defining theorist, we are awaiting a new comprehensive explanation for how the economic world is working today, since neither Keynes nor Friedman seem sufficient any longer. A crisis in economic theory is not merely an academic affair. Investment decisions, career choices and savings plans all pivot on how we understand the economic world. At the moment, the only thing that can be said is that the world is filled with things that need explaining.

4: The Disintegration of the Sykes-Picot World

Sir Mark Sykes and Francois Georges-Picot were British and French diplomats who redrew the map of the region between the Mediterranean Sea and Persia after World War I. They invented countries like Lebanon, Jordan, Syria and Iraq. Some of these nation-states are in turmoil. The events in Syria and Iraq resemble the events in Lebanon a generation ago: The central government collapses, and warlords representing various groups take control of fragments of the countries, with conflicts flowing across international boundaries. Thus the Iraqi crisis and the Syrian crisis have become hard to distinguish, and all of this is affecting internal Lebanese factions.

This is important in itself. The question is how far the collapse of the post-World War I system will go. Will the national governments reassert themselves in a decisive way, or will the fragmentation continue? Will this process of disintegration spread to other heirs of Sykes and Picot? This question is more important than the emergence of the Islamic State. Radical Islamism is a factor in the region, and it will assert itself in various organizational forms. What is significant is that while a force, the Islamic State is in no position to overwhelm other factions, just as they cannot overwhelm it. Thus it is not the Islamic State, but the fragmentation and the crippling of national governments, that matters. Syrian President Bashar al Assad is just a warlord now, and the government in Baghdad is struggling to be more than just another faction.

Were the dynamics of the oil markets today the same as they were in 1973, this would rank higher. But the decline in consumption by China and the rise of massive new sources of oil reduce the importance of what happens in this region. It still matters, but not nearly as much as it did. What is perhaps the most important question is whether this presages the rise of Turkey, which is the only force historically capable of stabilizing the region. I expect that to happen in due course. But it is not clear that Turkey can take this role yet, even if it wished to.

5: The Births of Asher and Mira

I was given two new grandchildren this year. For me, this must be listed as one of the five major events of 2014. I am aware that it is less significant to others, but I not only want to announce them, I also want to point out an important truth. The tree of life continues to grow new branches inexorably, even in the face of history, adversity and suffering. The broad forces of history and geopolitics shape our lives, but we live our lives in the small things. As much as I care about the other four matters — and I do — I care much more for the birth and lives of Asher and Mira and my other grandchild, Ari.

Life is experience in the context of history. It is lived in intimate contact with things that history would not notice and that geopolitics would not see as significant. "There are more things ... than are dreamt of in your philosophy," Hamlet said to his friend Horatio. Indeed, and their names are Asher, Mira and Ari. This must not be forgotten.

Have a happy New Year's, and may God grant you peace and joy in your lives, in spite of the hand of history and geopolitics.