From Greece to Iran: the importance of credibility

Lord Palmerston, Britain’s 19th-century prime minister, was reputedly the first person to have coined the phrase that

Nations have no permanent friends or allies, they only have permanent interests.

Many statesman have staked their careers on that claim, none more famously than Ronald Reagan when he quoted an old Russian proverb in referring to his negotiations with then Soviet President Mikhail Gorbachev about an arms control treaty,

Trust, but verify.

The gist of both is that sometimes countries have to take a chance and make deals with people that they don’t trust because the possible benefits outweigh the obvious costs.

They have to put aside the historical track record – the facts – in order to try to create a new relationship beneficial to everyone. In effect, you need to stick to your interests and ignore everything else.

After many years of friction and negotiation, there is something deeply symbolic in the fact that a deal between Greece and the other members of the EU, and between Iran and the permanent members of UN’s Security Council plus Germany, was concluded in the same week.

In both cases, the critics can understandably point to the track record of failure and deceit. In both cases, the advocates can suggest that the terms of the final agreements take into account that distrust in building safeguards for implementation – the “verify” component.

But in the end, progress – in one case toward mutual prosperity and in the other toward nuclear stability – involves a substantial leap of faith where none appears justified.

So looking at both agreements, why did all sides reach an agreement?

And whose reputation has suffered in their aftermath?

Greece: whose reputation is really on the line?

Has he been humiliated?Alkis Konstantinidis/Reuters

Of the two, the outcome of the negotiations between Greece and its eurozone partners was perhaps more predictable – Greek defiance followed by capitulation.

The Greeks have stressed that they feel “humiliated.” But whose reputation has really suffered as a result of these events?

When the euro was created in 1999, strict laws were created about budgetary expenditures that all partners had to follow. Members of the eurozone have to respect the Stability and Growth Pact, which sets agreed limits on deficits and national debt. Each member country has to stay within the limits on government deficits (3% of GDP) and debt (60% of GDP). Eurozone member states face fines if they exceed these amounts. If a country broke the rules in three consecutive years, the European Commission could impose a hefty fine of up to 0.5% of its GDP.

Greece became a member in 2001 and inherited these rules. But it was an unspoken secret that Greece was unprepared to meet these requirements. Like other members, it routinely ignored them.

Indeed, proceedings were initiated against Greece as early as 2005 but were abandoned, largely for political reasons. If countries like France could flout the rules, then why not Greece, a country with a small economy that was far less important to the health of Europe’s economy? By 2006, even Germany’s debt exceeded the 60% limit.

The pact’s guidelines were reformed in 2011 to allow for greater flexibility. Nonetheless, everyone trundled along, pretending that Greece’s behavior was acceptable when it clearly wasn’t.

Yet German and French banks had spend years pouring tens of billions of euros into Greece in search of profit, ignoring the growing mountain of Greek debt.

Their investment behavior was reckless, similar to American banks before the Great Recession. But, like their American counterparts, they anticipated that they wouldn’t have to pay the bills if things didn’t work out. They would snare the benefits but avoid the costs – what economists call “moral hazard.”

The French and German bankers were right. In 2012 they faced oblivion under a mountain of Greek debt. By this year, all but a small fraction of the debt had been moved from their balance sheets to those of their national governments and to international creditors. The exposure of these banks has now been significantly reduced.

Greece may feel humiliated. Its reputation may have suffered to the point that many suspect that the final agreement can’t even – or simply won’t – be implemented by any Greek government.

But the agreement masks a challenge to the credibility of the French, the Germans and everyone else that ignored their own rules in search of profit – and then chastised the Greeks for their financial folly.

And ultimately, as was the case in the US in the first Obama administration, it is the taxpaying citizens of these countries who will foot the bill.

Which Iran negotiated the deal?

The deal with Iran is even more complex, in large part because it is hard for the Western powers to know who is in charge – and credible.

The representatives of supposedly moderate President Hassan Rouhani declared victory last week because the agreement allows Iran to escape from the crushing weight of UN and American sanctions and provided the opportunity for greater future collaboration with the West on a number of issues.

But, on July 18, Iran’s Supreme Leader Ayatollah Ali Khamenei undermined any spirit of detente by declaring Iran’s avowed opposition to the US and calling once again for the total destruction of Israel, which he described in his speech as a “terrorist, baby-killer government.”

While his speech may have been designed to appease hard-liners at home, the effect abroad will be to undermine President Obama’s efforts to convince the US Congress that it should verify the agreement and to reinforce Israeli Prime Minister Benjamin Netanyahu’s claim that it is a “historic mistake.”

Both Iran’s credibility as a member of the “community of nations” and the agreement’s credibility in portending a new collaboration with the West, was, I would argue, swiftly and brutally destroyed.

President Obama’s credibility also suffered a major setback, unless he can convince his Republican opponents that Iran can be boxed in by the terms of the agreement, despite its reinforced reputation as an ambitious and unrelenting threat to the US and its regional allies.

Verify – but trust?

So, as a new week starts, the question remains: will either the July 13 Greece agreement or July 14 Iran deal achieve its promise for, respectively, prosperity and greater policy coordination in Europe and nuclear stability in the Middle East?

One thing is clear: when it comes to statecraft, “trust” is just as important as “verify” when it comes to negotiating truly momentous agreements.

In its absence, the prospects for peace and prosperity look grim.