Belying the official line of Greek prime minister Alexis Tsipras that a “no” vote in Sunday’s referendum about the latest bailout offer from the nation’s creditors was not a vote on whether or not to stay in the euro, political and economic realities now point inexorably toward a “Grexit”.
Although a conciliatory tone was struck by the eurozone’s laggards Italy and Spain, the main anchors of the currency bloc are losing patience.
In Germany, the rhetoric of Chancellor Angela Merkel’s Christian Democrat grassroots has hardened substantially. One leading member of the Christian Social Union in Bavaria openly stated that Athens “chose a path of isolation” by rejecting what Merkel effectively presented as the final offer on the table. Even her Social Democratic partners admit they cannot see a path forward from here and that Greece must show greater flexibility than it has up to this point.
Dutch prime minister Mark Rutte echoed the language of Berlin’s hardliners after the referendum results were announced, saying if Tsipras arrived at an emergency summit with proposals not closely resembling those its creditors put forward a week ago, the eurozone would be at an impasse. “There is no other choice,” he maintained. Greece “must be ready to accept deep reforms.”
Finally, French president François Hollande, terrified of strengthening Marine Le Pen’s Euroskeptic forces but simultaneously concerned about giving a resurgent Nicolas Sarkozy too much political ammunition, abandoned his media-constructed role as a sympathetic go-between and issued a joint statement with Merkel demanding that Greece put out its own proposals to stay in the euro within two days.
Putting aside the political realities of the multilevel shadow boxing match between Greece and its creditors, Sunday’s “no” vote represented a triumph of democracy over technocratic bullying.
The temperature prior to the poll, on both sides, reached a level that some would mistake for war fever.
European Parliament chief Martin Schulz, a German socialist and European federalist, warned Greece of Armageddon if it did not accept the terms presented by the so-called “troika” of the European Central Bank, European Commission and International Monetary Fund. Underscoring the misery of strict capital controls and an impending cash shortage, Schulz warned Greeks that “salaries won’t be paid, the health system will stop functioning, the power network and public transport will break down.”
European Commission president Jean-Claude Juncker was even more colorful. “You shouldn’t commit suicide out of fear of death,” he implored the Greeks.
For his part, the combative Greek finance minister, Yanis Varoufakis, called the actions and long-term demands of Greece’s creditors terrorism and an attempt at national humiliation.
It is difficult to discern how many of those who voted really understood the political realities of the various players or Greece’s dwindling economic options.
Many, particularly young workers and students, wanted to send a signal of defiance to a Brussels bureaucracy that has consistently tried to ignore Greek democracy.
When Prime Minister George Papandreou decided to call his own referendum on Greece’s bailout terms in 2011, he was politically thwarted by the creditors and forced out of office. His elected successor, New Democracy’s Antonis Samaras, was subsequently crushed by Alexis Tspiras’ far-left coalition in an election earlier this year.
There was speculation that the troika sought to do to Tsipras what was done to Papandreou, particularly given the eagerness of many in the Greek political establishment to be rid of him and his party. Schulz openly wished for Tsipras to be replaced by a technocrat and one European finance minister went so far as to denounce national referendums as leaving complicated questions in the hands of “common people.”
This echoed what former European Council president Herman Van Rompuy said in the wake of a similar technocratic “coup” in Italy — where Silvio Berlusoni was replaced by technocrat Mario Monti — about the country needing “reforms, not elections.”
The campaign of Greece’s creditors and European leaders in the run-up to Sunday’s referendum highlighted the extent to which democratic choice, as unpopular or controversial as it tends to be, poses a problem for those who seek deeper economic and political integration.
Bluff and counterbluff
With a fiscal union out of the question in the eurozone’s present configuration, it was hypothesized that functionally the same result could be achieved by tying stringent fiscal reform to continued access to European credit markets via bond-buying by individual European Union states and the ECB. The result of the Greek referendum put that hypothesis to rest and the rhetoric emanating from Berlin and Paris reinforces the point.
In essence, the poker game between Athens and its creditors has shifted from one of bluff and counterbluff to one of “finger the aggressor.”
Merkel hoped that standing her ground last week would force Tsipras’ hand and take further debt relief off the table. Tsipras responded by calling and then following through with the referendum, while falsely proclaiming that the outcome would strengthen his government’s negotiating position rather than force Greece out of the euro. Now Merkel, while leaving the door to emergency discussions ajar on the one hand and making clear on the other that no better terms for Greece can be expected, is essentially baiting Tsipras to force Grexit on himself and suffer the consequences.
Unless one falls into the admittedly small, but credible, group of European powerbrokers who believe Greece might be able to return to the eurozone after a temporary exit, the road ahead looks long, bleak and very painful for Greece’s middle class, what is left of its manufacturing base and its consumer economy.
Although he comes into the emergency Brussels summit with a statement of support from all major Greek parties and moved the deck chairs by dismissing the reviled Varoufakis, Tsipras continues to publicly pretend that a Greek exit can somehow be staved off with an eleventh-hour deal that would (ideally) include some writeoffs of existing debt.
As mentioned, it is politically improbable for Merkel to give anything less than a few meaningless concessions (not materially altering the pre-referendum package) and a good word from Spain will not get Greece’s team very far.
Worse, the markets have reacted more calmly than expected to the referendum result and fears in some financial quarters that a Greek exit from the euro is now a 70-80 percent certainty. Yields on Spanish and Portuguese ten-year bonds rose to 3.2 and 2.4 percent, respectively, versus approximately 13 and 7 percent at the height of the 2011 eurozone crisis.
Putting aside the accuracy of bank stress tests and market assumptions regarding the extent of other eurozone members’ structural economic problems, the market consensus appears to be that either Greece will somehow be saved (reinforcing Tsipras’ calculus) or that the ECB will stop any Grexit contagion in its tracks before the specter of systemic risk appears again (more likely).
As such, far from being Wellington at Waterloo anticipating a Prussian rescue from certain defeat, Tsipras finds himself in the position of Arthur Scargill’s National Union of Mineworkers in its famous confrontation with Margaret Thatcher’s Conservative government in 1984. Ten years prior, Scargill’s union had effectively brought down the British government after a national strike caused sporadic power blackouts and electricity rationing. Ted Heath, the prime minister at the time, did not anticipate the severity of the strike and made no contingency plans. Thatcher, recognizing that a second confrontation with the miners was inevitable, ordered significant amounts of coal to be held in emergency reserve and brought the matter to a head before Scargill could get a national ballot to strike.
Similarly, whereas the high risk of contagion and lack of preparedness of European institutions to handle the consequences of a Greek exit arguably strengthening the country’s position to call Brussels’ bluff in 2011, the same cannot be certain now. What is keeping European elites tethered to Greece today is less a fear of immediate structural collapse but the political precedent of fracturing a European Union meant to be permanent and indivisible.
Avoiding the worst
While the rest of the eurozone may avoid immediate breakdown should Greece exit the currency, what happens to Greece in isolation should not be discounted. The focus on avoiding contagion risks making the fate of Greece, its people, its governance and its civil society an afterthought. Between the grumblings of German taxpayers that Greece should sleep in the bed that it has made to petty press statements from the White House that the crisis “will be the responsibility of the Europeans to resolve,” those who see Grexit as an opportunity to be embraced rather than a necessity to be belatedly accepted are isolated.
Yet the people who wish for Grexit and want Tsipras to reinvent himself as the leader who gave Greece its independence back genuinely care about Greece’s long-term economic future, its democratic institutions and the welfare of its people. They also feel strongly about the notion that Greece is an integral part of the West and should not be condemned to insignificance and economic stagnation. Thus rhetoric along the lines of “Greece’s economy is the size of Connecticut and won’t harm us” or New York University professor Nicholas Economides’ assertion that Greece outside the Eurozone would be “a small country of the Middle East, subject to the whims of the bigger powers of the Middle East, such as Turkey,” does the Greeks and the wider Western world few favors.
Greece could leave the eurozone, default on its debt, devalue its currency in a competitive process and attempt to grow its way back to prosperity.
The task would be immense. Greece’s exports are poorly diversified, its debt-to-GDP ratio stands at over 177 percent, its private sector is plagued by cartelization, overregulation and excessive restrictions on labor mobility and 16 percent of its total economic output is spent on pension payments — with many public sector workers retiring early at 80 percent of working salary.
Beyond these inherent problems, a major challenge would be to incentivize the Greek government to choose the path of default and structural reform rather than further monetization of public debt or, worse, outright “repayment” of debt through direct inflation.
Once Greece reclaims the drachma and defaults, consumer prices will skyrocket, hundreds of thousands may lose their personal savings and pensions will be worthless. The temptation to “inflate away the debt,” nationalize banks and core industries and intervene further in the economy to prop up a collapsing public sector in this environment may be overpowering.
To avoid such a disastrous outcome, international financial institutions and the West’s largest economies (likely through the mechanism of the G-7) should simultaneously present Greece with a stick and a carrot. The former would be an unambiguous message that Greece would be blocked from international credit markets for a much longer period of time if it defaults and tries to print its obligations away rather than implement painful structural reforms. The latter would be a massive currency stabilization fund to arrest the drachma’s depreciation and halt rising consumer prices as quickly as possible.
Lessons from 1992
If the West only offered Greece the stick of credit market isolation without the commitment of a stabilization fund, it would risk seeing the country go the way of Russia in 1992 where liberal reformers under President Boris Yeltsin were abandoned.
As documented by, among others, economists Jeffrey Sachs and Anders Åslund, Russia’s reformers, led by Finance Minister Yegor Gaidar, asked the G-7 for a $25 billion aid package ($6 billion to go to a stabilization fund for the ruble after price liberalization). Gaidar and his colleagues confronted imminent bankruptcy, depleted grain reserves and entrenched opposition to their market reform program. The response they received from the George H.W. Bush Administration was to apply for emergency aid from the IMF and continue making payments toward Soviet debt. By the time the G-7 came up with anything like a serious proposal, domestic support for Yeltsin had plummeted, Gaidar’s position in the government had weakened and the public turned its back on continued reforms. Without any cushion, Yeltsin had no choice but to let price liberalization and currency devaluation run their natural course with all the associated pain. This incredible mistake by the United States contributed to the delegitimation not only of Russia’s liberal economic reformers, but of democratic institutions and liberal politics as a whole. This subsequently helped create the conditions, particularly after Russia’s default in August 1998, for the emergence of Vladimir Putin and his authoritarianism.
Modern Greece’s volatile political history and relatively brief experience with national democracy underscore the huge risk of leaving it to confront the consequences of default alone. Given that current socioeconomic conditions led to more than half of Greeks supporting extreme left or ultranationalist parties, there is a real danger of a “brown-red” authoritarian regime or some sort of junta emerging (democratically or as a result of a violent coup) if hyperinflation and a sustained credit crisis obliterate Greece’s middle class and leave the working poor utterly destitute. Such an outcome would be a tragedy for Greece, the rest of Europe and the Western world as a whole.
Putting aside machinations which Moscow or some other patron may have to take advantage of Greece’s falling out with Europe, it is in the narrow interest of Greece’s natural partners (including the United States) to see that Greece survives and ultimately thrives as a democratic and independent state outside the bureaucratic grip of Brussels.