Bluffed

Obviously, my analysis of the Greek debt crisis was wrong. My crucial error was the assumption that, having held the referendum and being faced with an unacceptable offer, Tsipras would choose exit from the euro rather than capitulation. Judging by this interview with Varoufakis (H/T Chris), that’s what Tsipras thought too, until, too late, Varoufakis told him it couldn’t be done. Certainly Tsipras’ actions were consistent with that interpretation.

Syriza has clearly been beaten. But I doubt that the outcome will work well for the other side in the long run. (Nearly) everyone understands that the debt can’t ultimately be repaid. But the German voting public hasn’t been told that. A deal that had some kind of quasi-automatic mechanism for writing down the outstanding balance (for example, by multiplying up the proceeds from asset sales) might have got around this problem. As it is, an explicit writedown will be needed at some point, presumably after Syriza has been forced out of office. That will be incredibly unpopular in Germany, while making clear to everyone else the locus of sovereignty in the post-crisis EU.

Update Commenters generally disagree with my take on the Varoufakis interview. I’m not wedded to it. The crucial point is that exit from the euro is extremely difficult, and that this fact will be used to punish any eurozone country that tries to resist the controlling powers.