Greece’s membership of the euro hangs by a gossamer thread after the victory for the no side in the country’s referendum. The cash machines are running out of money and the economy is in freefall.
The fate of the home of democracy is not in its own hands. If it chooses to do so, the European Central Bank (ECB) could force Athens to default on its debts and issue its own currency by withdrawing emergency support for the Greek banking system.
That looks unlikely. The ECB has so far avoided taking overtly political decisions during this crisis, so it will avoid pulling the plug while talks are still going on between Greece and its creditors, and Athens wants talks to resume immediately.
There are, though, a number of ways events could play out. Almost every European leader of note sought last week to put the frighteners on the Greek people, warning them that a victory for “no” meant leaving the single currency. German Chancellor Angela Merkel, French President Francois Hollande, Italian Prime Minister Matteo Renzi and the rest now have to put up or shut up.
More than likely they will shut up, at least for now. Emergency assistance for Greece will continue while the troika of the European Commission, the ECB and the IMF sees how events in Greece unfold. Despite the decisive result, Greece’s eurozone partners will not offer notably softer terms than those that were on the table when Greek Prime Minister Alexis Tsipras walked out of negotiations just over a week ago. Merkel, for one, would be in serious political trouble if she did.
The temptation for the creditors could be to let the Greeks sweat a bit, to see if a couple of weeks of a cashless economy can do what the referendum could not: effect regime change. Tsipras would be under pressure to resign and call fresh elections if the economic news worsens, and that might result in the election of a government more amenable to the rest of Europe.
However, playing it long is risky. Greece might be forced out of the euro before Tsipras gets round to resigning, so desperate is its economic plight. What the creditors should do is to respect the result of the referendum, realize that they have to give Greece something in order to prevent the crisis escalating out of control, and recognize that debt relief must be an explicit part of a funding package that will see the eurozone’s weakest member through the next couple of years.
Put simply, they should try a bit less stick and a bit more carrot.
Whether they will do so remains to be seen. Indeed, the relentless mishandling of Greece ever since the crisis first flared up in 2010 suggests that blunder will follow blunder. It does not help that relations between Greece and the other 18 members of the eurozone are now so sour. The chances of Greece leaving the euro by mistake, just as Lehman Brothers went bust by mistake in 2008, are reasonably high.
All options currently remain open. Greece could do what Cyprus did: Default on some of its debts while staying in the euro. Tsipras could decide to accept the tax increases and the pension cuts demanded by the creditors while receiving only minor and vague concessions on debt relief. Greece could have run out of money and be out of the euro within 24 hours.
Some things, though, are clear. First, the Greeks have said no to austerity rather than to membership of the euro. Tsipras does not have a mandate to bring back the drachma, even if that is where this all ends.
Second, the referendum result means both economic and political chaos. As Joan Hoey of the Economist Intelligence Unit put it even before the vote: “Greece is angry and fearful; divided and conflicted.”
Inevitably, Greece faces a fresh period of acute economic pain. It will take months, if not years, to recover from the events of the past week, even if there is a speedy resolution to the crisis. The Greek economy has already shrunk by a quarter in the past five years.
Third, it is no longer possible to kick the can down the road. Any solution to the Greek crisis that involves more austerity without measures designed to get the economy growing again and to make the country’s debt sustainable will be a pyrrhic victory. The upshot would be a period of feeble growth and mounting indebtedness that would bring the possibility of Grexit back on the agenda. Sooner rather than later, in all likelihood.
Fourth, this is the most serious crisis in the euro’s relatively short history. There have been confident pronouncements that Greece has been quarantined so that there will be no knock-on effects on the rest of the eurozone. Such sentiments will be tested to the full if there is a Grexit. Share prices will inevitably tumble, but more attention should be paid to the bond yields — or interest rates — on the sovereign debt of other eurozone members seen as vulnerable.
The short-term problem for Merkel and Hollande is obvious. If they take a tough line in talks with Athens, they will get the blame for Greece’s departure from the single currency.
The longer-term problem is perhaps even more serious. Greece has highlighted the structural weaknesses of the euro, a one-size-fits-all approach that does not suit such a diverse set of countries. One solution would be to create a fiscal union to run alongside monetary union, with one eurozone finance minister deciding tax and spending decisions for all 19 nations. This, though, requires the sort of solidarity notable by its absence in recent weeks. The European project has stalled.
So, this story is not over. In Homer’s epic tale, it took Odysseus 10 years to return to his Ithaca home from the Trojan War, losing all his men along the way.
Greece’s modern odyssey, similarly, is only half over. The next chapter has begun.
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