Greece decides to wake up. Is it too late?

In a cabinet meeting full of the usual Greek drama, the finance minister and deputy Prime Minister Mr Venizelos announced the capitulation of the Greek government to the Troika’s demands (salary review, privatisations, closing of state enterprises, opening of closed professions etc) . For the past 2 year the government of Mr Papandreou is playing the game of chicken with the EU creditor-partners. i.e. committing to changes outside and implementing nothing (or at least watering down reforms) inside.

This policy was successful initially in scaring/tricking the EU politicians and the markets but it now seems to have reached the sell by date and the EU now clearly demands action and deeds and not just the usually empty promises. In fact, the EU politicians are more scared that Italy may follow on the path taught by the Greeks rather than Greece itself. It is no secret that Greece is being used as a laboratory monkey, to test economic policies, European public opinion and political careers (Merkel, DSK, Lagarde, Regling and many more).

Is this time different though? Are the Greeks paying the usual tricks once more? Well, maybe, but there is something different this time.

First, is the timing. It is only 4 days before the annual exhibition in Thessalonica where traditionally the PM announces the future economic policy. In the past it was always been used as a platform of populist measures and tax amnesties or fiscal easing. The fact that Venizelos comes with hard talk only days before, points towards a fundamental shift and it may be a prelude to PM Papandreou change of tactics.  

Secondly, we have detected a genuine reluctance by EU policy makers to deal with the Greeks again. They suffer from Greek fatigue and Italian awe. EU politicians are dealing hard now with Greece in order to show Mr Berlusconi what is coming if he does not conform. European public opinion seems to be shifting again away from saving Greece or even the Euro as a project. This has been noted by the German and French politicians who are beginning to harden their stance towards Greece. Then there is the IMF, which suffers from the internal opposition to the European involvement. Thus, IMF needs to prove that the Greek project is working otherwise they need to manufacture an exit strategy.

We therefore believe that Greece would finally embark on the changes needed and demanded by the Troika. However, the political will to make the changes in Greece is necessary but unfortunately not sufficient. The whole state bureaucracy apparatus is grossly incompetent and inefficient both to transmit the policy within the state’s mandarins and in implement the policy. Then there is the customary opposition, which in Greece takes a more dynamic form with riots and civil unrest. Political risk is very high and in the end it might negate the reforms.

So, is it going to be a question of too little too late for Greece? I think not. They are most probably going to do just the bare minimum in order to scrape through few more months and bailout instalments and to appease the EU creditors/partners. Greece does not seem to be on the way out of the Eurozone yet. These exit scenarios are the financial equivalent of the tabloid press stories.

In conclusion, we should expect more fancy rumours, more Greek drama and more volatility while the Greeks are readjusted to reality. But now the game is shifting to Italy.