By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Originally posted at MacroBusiness

The weekend’s European news could not be more extraordinary. A superb opinion piece by Yanis Varafoukas in The Guardian brought everything to a head:

In 2010, the Greek state became insolvent. Two options consistent with continuing membership of the eurozone presented themselves: the sensible one, that any decent banker would recommend – restructuring the debt and reforming the economy; and the toxic option – extending new loans to a bankrupt entity while pretending that it remains solvent. Official Europe chose the second option, putting the bailing out of French and German banks exposed to Greek public debt above Greece’s socioeconomic viability. …Our government was elected on a mandate to end this doom loop; to demand debt restructuring and an end to crippling austerity. Negotiations have reached their much publicised impasse for a simple reason: our creditors continue to rule out any tangible debt restructuring while insisting that our unpayable debt be repaid “parametrically” by the weakest of Greeks, their children and their grandchildren. …Greeks, rightly, shiver at the thought of amputation from monetary union…To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available. …After the crisis of 2008/9, Europe didn’t know how to respond. Should it prepare the ground for at least one expulsion (that is, Grexit) to strengthen discipline? Or move to a federation? So far it has done neither, its existentialist angst forever rising. Schäuble is convinced that as things stand, he needs a Grexit to clear the air, one way or another. What do I mean by that? Based on months of negotiation, my conviction is that the German finance minister wants Greece to be pushed out of the single currency to put the fear of God into the French and have them accept his model of a disciplinarian eurozone.

This is a truly bizarre confession. Yanis can see with razor sharp clarity the economics and politics at play. But at the same time he sees them as somehow new, as if Schäuble and German position has “suddenly” altered in some way in recent days. This is plain wrong, as MB’s own Delusional Economics pointed out five months ago when Yanis was first elected, he displayed an impressive grasp of economics and political naivete in equal measure.

Germany has not changed its position recently, if at all throughout the four year crisis. For Germany the euro is a simple national interest weapon. It allows it to dominate Europe and global trade by artificially suppressing its real exchange rate. For it to sustain that position it cannot allow peripheral nations to successfully drop out of the currency. They’d flood out and the more that left the higher the euro would rise as the German weighting in the currency increased. Anyone staying must adhere to German rules and anyone leaving must be destroyed to deter others from doing do. The euro and Europe are irrelevant to German real politik. They are in it for the Germans.

Yanis appears to have assumed that he could grasp the European light on the hill and persuade with elegant reason all of Europe to embrace enlightened super-national consciousness. He’s been genteelly sipping lattes at a gunfight and by doing so has played right into realist German hands by destroying his country’s economy as an example to all other European ‘dead beats’.

There is nothing new here. Yanis has simply been outplayed. When it was elected, Syriza either had to sign up to new terms of austerity or immediately leave the euro. It’s stylish five month congress with Europe has ruined its economy to no purpose of its own given it will either now buckle under to even deeper austerity or will still be forced out of the euro, taking its economy from wrecked to destroyed. By misreading power politics from the outset, Syriza has allowed Greece to be turned into an open-necked sacrificial goat gutted to keep the rest of Europe bowed to German will. That Yanis can see it now changes nothing for the forgotten Greek national interest.

By Saturday the German game of cat mouse reached laughable proportions, from Reuters:

Germany’s Finance Ministry believes Greece’s latest reform proposals do not go far enough and has suggested two alternative courses for Athens including a “timeout” from the euro zone, the Frankfurter Allgemeine Sonntagszeitung (FAS) reported. “These proposals miss out important central reform areas to modernise the country and to bring economic growth and sustainable development over the long term,” the FAS quoted the ministry as writing in a position paper. Instead, the ministry set out two alternative courses for Greece. Under the first, Athens would improve its proposals quickly and transfer assets worth 50 billion euros ($56 billion) to a fund in order to pay down its debt. Under the second scenario, Greece would take a “timeout” from the euro zone of at least five years and restructure its debt, while remaining a member of the European Union.

Schäuble must be choking with laughter behind closed doors; playing the good guy with a sympathetic Greek “timeout”. Using what currency? The proposal also included the generous offer of “growth-enhancing, humanitarian and technical assistance”. Food stamps for German exports, no doubt.

Finally, when the Eurogroup did meet it was a mess with Finland leading a Teutonic rebellion against even the bailout, let alone any notion of debt forgiveness. By Sunday talks resumed and what surely began as Schäuble sniggering suddenly became reality as the terms of the Greek bailout that were counter-offered by Eurogroup suddenly became significantly more harsh that either the offer of two weeks ago or the Greek’s bizarre referendum-betraying counter proposal. The list included the politically impossible demand that Greece transfer $50 billion euros of state assets to a Luxembourg company so that the Eurogroup can sell ‘em when it pleases.

The offer was surely only made tongue in cheek as it came with what appears to be the real idea, that Greece take a five year holiday from Eurozone membership. Greece must enact key reforms this week before any talks on any new financial rescue and the Greek parliament will need to approve legislation by July 15. Once done, funds can be released to avert Greek bankruptcy. An absurd timetable for ludicrous demands.

So Greece will now walk, obviously. Except for this from the BBC:

So the first rather chilling thing I’ve learned, from well-placed bankers, is there have been no conversations between the Bank of Greece, the government or regulators and Greece’s commercial banks about the technicalities of leaving the euro and adopting a new currency. This is astonishing – and some would say pretty close to criminal – given that on Wednesday night the president of the European Union, former Polish prime minister Donald Tusk, was explicit that this weekend’s negotiations were all about whether Greece would stay in the eurozone.

Greece has not even been negotiating with an armed latte.

And so, by burning its political capital with Brussels over five months of polished debate, convincing the Greek people of the righteousness of their cause of staying in the Euro but paying no German price for doing so, and then flipping to outright panic as their banking system collapsed, Greece has destroyed itself so that Germany can rule the zone.

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