If ever there was a sadder manifestation of the old saying that, even in despair, hope springs eternal, it was the ecstatic Greeks on the streets of Athens last Sunday night, celebrating the election of the motor-cycling Marxist, Alexis Tsipras, as their Prime Minister. He should enjoy his moment in the sun while he can, for it is unlikely to last.
There are only three possible outcomes to the confrontation he promises with the hated “Troika”, the combination of European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB) policymakers blamed for years of crippling Greek austerity. One is that Tsipras compromises and further moderates his demands for debt forgiveness and an end to EU-imposed structural reform. Another is that he holds his ground and is therefore forced to go through with unilateral default, thereby putting Greece on the path to eventual exit from the euro. And the third is that Berlin and Brussels roll over and let their tummies be tickled and, by giving in to Tsipras, effectively agree to a Europe-wide programme of debt forgiveness and to a reversal in the “cruel” austerity policies of the past five years. It scarcely needs saying that the third of these scenarios is the least likely.
Indeed, it is so unlikely as to be a virtual non-starter. One can only admire Tsipras for the tenacity with which he is taking on the Eurozone high command, yet there cannot be much doubt about the ultimate outcome. As it currently stands, European monetary union is incapable of giving him the outcome he demands — both the advantages of a German-style hard currency, and the freedom and fiscal flexibility of a conventional sovereign state.
The moment Greece signed up to the former, it surrendered the right to the latter. The promise on which Tsipras has been elected is therefore little short of a lie. There may admittedly be room for a little tweaking around the edges, just to show willing, but as for the main proposal — a further write-off of up to half of Greece’s 317 billion euros (Dh1.31 trillion) national debt — the chances are close to zero. Popular anger in Germany over the ground already ceded last week in agreeing to the ECB printing money will have further hardened attitudes in Berlin against additional concessions.
Underpinning this intransigence is an obvious question: If Greece, why not Ireland and Portugal, which have already had considerably less favourable debt relief than Greece, or the much more heavily indebted Spain and Italy? Where would it stop? What Tsipras’s party, Syriza, is demanding is regarded in much of Northern Europe as a form of blackmail; give us what we want or we will blow up the euro. Increasingly, Greeks are met with a blanket answer: Never mind that the cost of Greek debt forgiveness is a pittance compared to the likely bill for the rest of the Eurozone of a Greek exit, the response is “do your worst”.
For Tsipras, the other two outcomes scarcely look any better. If he compromises, and in essence carries on much as before, beneath the boot of the ‘Troika’, he dashes the hopes of the alliance of discontents who make up his support. If he turns out to be all talk and no action, what is the point of him? Politically he would soon be as dead as his predecessor, Antonis Samaras. Simply buckling under may in any case not be an option, given the nature of the coalition formed with the “Independent Greeks”, a hardline Right-wing nationalist party of anti-Semitic, anti-immigrant leanings whose only apparent point of agreement with Tsipras is its demands for debt forbearance. If these fail to make headway, the new government would soon collapse. This leaves the option of un-negotiated, unilateral default, a course of action which would soon lead to Greek departure from the euro. The sequence of events would unfold much like this.
As things stand, the ECB is forced to provide lots of liquidity support to the beleaguered Greek banking system — some 50 billion euros at the last count, a sum amounting to nearly a third of annual Greek GDP. This money is provided against collateral that the ECB will not normally accept under a dispensation to bailed-out countries. The moment Greece repudiates the conditions of the programme, the assets provided would cease to be legal collateral. Some kind of fudge might be found to deal with these faintly technical impediments, but the bottom line is that without access to ‘Troika’ funding, Greece would pretty soon run up against problems meeting debt redemptions.
Tax receipts have further slumped since polls began to signal a Syriza victory, making it more difficult still. Greece has also seen a renewed surge in capital flight, with some 20 billion euros — more than 10 per cent of GDP — leaving the country since December. Just lately, Greece had shown tentative signs of starting to grow again. Now it is all too likely to slump back into recession.
In any case, the moment Greece starts to default, it will be denied further ‘Troika’ support and, perhaps more importantly, ECB funding for its banking sector. Some two thirds of Greece’s national debt is in the hands of other Eurozone nations and the IMF, either directly or indirectly. If Tsipras defaults, he will be cut off without a cent. Denied euro funding, Greece would at this point be forced to print drachmas to fund both the banks and continued government spending. To all intents and purposes, Greece would be out of the euro.
However it was done, the value of everything would plummet. It would be financial carnage, which is why Greeks are as keen to stay in the euro as they are to escape their debts. Why would they be otherwise? Whatever its destructive capacity, the single currency offers something that would otherwise be unobtainable — a relatively strong currency without having to bother to earn it. It may take some time to reach the final denouement.
There have been so many such moments in the Eurozone’s apparently never-ending crisis that it may again be premature to talk of endgames. A short-term extension of the Troika programme might be possible while Tsipras attempts to negotiate a meaningful debt restructuring.
However, an eventual impasse looks all but inevitable. Whether the glide path is steep or gentle, it points unambiguously towards exit. Tsipras must choose; capitulate or exit. Either way, he’s toast politically.
Whatever happens, the rise and now electoral victory of Mr Tsipras raises a much wider question about the future of the eurozone. The fiscal and monetary austerity of the past five years has not worked. Europe seems trapped in a deflationary spiral of political alienation, rising debt burdens, crushing unemployment and slow growth. The inevitable upshot is the emergence of political radicals such as Tsipras. In Spain, it is Pablo Iglesias of Podemos, a pop-up party that stands for much the same things as Greece’s Syriza and didn’t even exist a year ago.
In France, it is Marine Le Pen, a very different type of politician, but one whose surge in the opinion polls is based on much the same groundswell of discontent. Europe has despaired of austerity and wants a different narrative. That is why Tsipras has won — he offers hope, however ultimately delusional. And up to a point, it seems to be working. After years of battling German opposition, Mario Draghi, the president of the ECB, last week managed finally to follow the US Federal Reserve and Bank of England into quantitative easing. It was an important moment. No longer did Germany seem the master of Europe’s destiny.
Southern Europe’s voice had been heard and it had triumphed. This has led many to believe that fiscal austerity, too, can be banished, with debts mutualised or forgiven. Sorry to spoil the party atmosphere, but however theoretically desirable, this is not about to happen in a monetary union of 19 politically proud and fiscally independent sovereign nations. Blank cheques are not things that governments pass willingly from one to another. Even if Greece were thought a special case, Northern Europeans will struggle with the idea that they should forgive debts to a country that refuses to be bound by the usual conditions of credit provision.
Unlike the US, Europe is not a single nation, however much the single currency conspires to make it thus. Tsipras is a skilful and obviously inspiring politician, but even he cannot magic away the basic contradictions that lie at the heart of Europe’s disastrous experiment in monetary union.
— The Telegraph Group Limited, London, 2015