Greece can either exit the eurozone, surrender to the troika’s demands or the EU can dream up a classic fudge and play for time
Late-night mini summits in Berlin.
A no-surrender stance in Athens. A deadline to meet in Washington DC by
the end of the week. The Greek crisis is coming nicely to the boil,
with three possible outcomes.
Option one is that Greece leaves the euro, either by accident or design. Despite the often spiky negotiations, the assumption has been that a deal will be done between Greece and its creditors to keep the single currency intact. That assumption could prove to be as erroneous as the assumption that a buyer would be found for the ailing US investment bank, Lehman Brothers, in September 2008. Greece could decide that the terms being demanded by the European commission, the European Central Bank and the International Monetary Fund are too harsh. The so-called troika could lose patience and throw Greece out.
Euro exit could prove the least bad economic choice for Greece, which would then devalue and write off a large chunk of its unpayable debt. Life would still be tough, but life will be tough anyway if Greece – after a recession that has already led to the economy shrinking by a quarter – agrees to more austerity.
A Grexit now would probably cause fewer economic shockwaves than it would have done two or three years ago, but there would still be knock-on effects on Europe and the wider global community. The political ramifications would be more serious. Greek departure would embolden anti-austerity parties across Europe, most notably Podemos in Spain. It would be the first setback to ever-closer European integration over six decades and would cast a shadow over David Cameron’s renegotiation of Britain’s EU membership ahead of a referendum.
Option two is that the Greeks cave in. Alexis Tsipras has been gamely trying to ride two horses at once since he became prime minister in January: the desire of Greek voters to both end austerity and stay in the euro. The moment is rapidly arriving when Tsipras has to decide which of the two policy goals is the more important, because it looks as if he can’t achieve both. Far from being the prelude to exit, the ratcheting up of the rhetoric in recent days might be the government’s attempt to show the Greek people that it has gone as far as it can to resist the demands of the troika for further wage and pension cuts but continued euro membership means there is now no choice but to surrender on the best possible terms available. This would involve slightly easier debt repayment terms and less onerous budget targets to meet. But if Tsipras is going to capitulate, he is showing little sign of it. The late-night meeting in Berlin, attended by Christine Lagarde, the managing director of the IMF and the president of the ECB, Mario Draghi, suggests the troika is worried. Angela Merkel hosts a meeting of the G7 in Bavaria this weekend and does not want it to be overshadowed by Greece.
All that points to option three, a good old-fashioned euro fudge. Greece does not want to leave the euro. Merkel does not want to be the politician held responsible for derailing the European project. So there is a temptation to do what Europe has done throughout its six-year sovereign debt crisis: play for time. This would involve Greece’s creditors providing bridging finance that would allow Tsipras to meet the series of debt repayments due this summer and for a referendum to be held on whether the Greeks believe yet more austerity is a price worth paying for staying in the euro. Athens would give a solemn commitment to step up the pace of economic reform; the troika would say that any backsliding will result in the money being cut off.
So which of the three options is it going to be? Kicking the can down the road looks the most likely, but the risk of something nasty and messy is rising all the time.
Option one is that Greece leaves the euro, either by accident or design. Despite the often spiky negotiations, the assumption has been that a deal will be done between Greece and its creditors to keep the single currency intact. That assumption could prove to be as erroneous as the assumption that a buyer would be found for the ailing US investment bank, Lehman Brothers, in September 2008. Greece could decide that the terms being demanded by the European commission, the European Central Bank and the International Monetary Fund are too harsh. The so-called troika could lose patience and throw Greece out.
Euro exit could prove the least bad economic choice for Greece, which would then devalue and write off a large chunk of its unpayable debt. Life would still be tough, but life will be tough anyway if Greece – after a recession that has already led to the economy shrinking by a quarter – agrees to more austerity.
A Grexit now would probably cause fewer economic shockwaves than it would have done two or three years ago, but there would still be knock-on effects on Europe and the wider global community. The political ramifications would be more serious. Greek departure would embolden anti-austerity parties across Europe, most notably Podemos in Spain. It would be the first setback to ever-closer European integration over six decades and would cast a shadow over David Cameron’s renegotiation of Britain’s EU membership ahead of a referendum.
Option two is that the Greeks cave in. Alexis Tsipras has been gamely trying to ride two horses at once since he became prime minister in January: the desire of Greek voters to both end austerity and stay in the euro. The moment is rapidly arriving when Tsipras has to decide which of the two policy goals is the more important, because it looks as if he can’t achieve both. Far from being the prelude to exit, the ratcheting up of the rhetoric in recent days might be the government’s attempt to show the Greek people that it has gone as far as it can to resist the demands of the troika for further wage and pension cuts but continued euro membership means there is now no choice but to surrender on the best possible terms available. This would involve slightly easier debt repayment terms and less onerous budget targets to meet. But if Tsipras is going to capitulate, he is showing little sign of it. The late-night meeting in Berlin, attended by Christine Lagarde, the managing director of the IMF and the president of the ECB, Mario Draghi, suggests the troika is worried. Angela Merkel hosts a meeting of the G7 in Bavaria this weekend and does not want it to be overshadowed by Greece.
All that points to option three, a good old-fashioned euro fudge. Greece does not want to leave the euro. Merkel does not want to be the politician held responsible for derailing the European project. So there is a temptation to do what Europe has done throughout its six-year sovereign debt crisis: play for time. This would involve Greece’s creditors providing bridging finance that would allow Tsipras to meet the series of debt repayments due this summer and for a referendum to be held on whether the Greeks believe yet more austerity is a price worth paying for staying in the euro. Athens would give a solemn commitment to step up the pace of economic reform; the troika would say that any backsliding will result in the money being cut off.
So which of the three options is it going to be? Kicking the can down the road looks the most likely, but the risk of something nasty and messy is rising all the time.
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