The Euro-Greece-Crisis: What Next?

Mainstream international media led by BBC and Der Spiegel have worked hard to give the impression that the crisis is all about profligacy and dishonesty on the part of Greece, which deserves stern punishment at the hands of the paragons of financial prudence and virtue led by Germany, Netherlands, Finland and others in the same virtuous category.

Such an impression is wrong on three counts. First, Germany itself benefitted significantly from a debt-write off in 1953. Second, the austerity medication administered by the creditor troika of Eurozone members led by Germany, the ECB (European Central Bank), and the IMF (International Monetary Fund) has proved poisonous. Greece’s economy shrank by 25 per cent in five years and the unemployment rate went up to 20 per cent, with 50 per cent of the youth being unemployed. And third, what Chancellor Merkel of Germany is doing is contrary to the European Union’s stated goals and norms.

The official European Union (EU) website states:

“The EU is based on the rule of law: everything that it does is founded on treaties, voluntarily and democratically agreed by all member countries. These binding agreements set out the EU’s goals in its many areas of activity.” (emphasis added.)

It was right on the part of the Greek Prime Minister to consult his people. It is difficult to understand why Germany is upset about the referendum. What is even more inexplicable is Merkel and others resenting the result of the referendum. If Prime Minister Tsipras had lost the referendum, his adversaries in Bonn, Brussels, and Frankfurt would have been very pleased. In that case, they would have been able to continue administering the same medication in bigger doses. They behave like a team of doctors who claimed that the operation was successful though the patient died.

To recapitulate the events of the last few days: Despite a huge disinformation campaign unleashed by the troika to frighten the Greek voter that a ‘no’ vote would take Greece out of Euro/EU, more than 61 per cent supported their government’s stand. After the referendum results were announced, former Prime Minister Antonis Samaras, whose government had meekly accepted the medication despite clear signs of its not working, has resigned from the leadership of his party. The Greek media controlled by the oligarchs had worked overtime for a ‘yes’ vote. Following his victory, Prime Minister Tsipras reached out to the opposition and obtained their support for a strategy to negotiate with the troika.

The IMF has come out with a paper pointing out that the debt owed by Greece (Euro 320 billion, working out to more than Euro 29,000 per capita) is unsustainable and, avoiding plain English as is customary, has hinted that either a write off of a part of the debt or restructuring involving a longer repayment time frame is necessary. This finding could and should have been brought out long ago as it has been obvious all along.

The ECB has been callous enough to refuse additional money to Greek banks, raising the risk of a total collapse of the country’s banking system and economy. In fact, the troika wants the sword of Damocles to hang over Greece as it begs for money from creditors. This is financial terrorism. In Greece normal life has come to a halt. People cannot afford to go to a café as they cannot afford VAT at 23 per cent. Small businesses run the risk of shutting down as there are no customers. As Greece imports fuel and food, there is risk of starvation.

There was a summit of the Euro-19 on July 6. Before that there was a meeting of finance ministers attended by Euclid Tsakalatos, the new finance minister who succeeded Yanis Varoufakis. Varoufakis was seen by his peers as rather abrasive and not humble enough for a debtor. For his part, he had said that he would consider the loathing of his peers as a badge of honour. Tsakalatos did not formally hand in any proposal when he met the Euro finance ministers on July 7 and a furious troika issued an ultimatum asking for a written proposal in 48 hours.

Greece handed over a proposal on July 8, which will be considered by the creditor-troika. If the troika finds the proposal acceptable, there will be a summit on July 12 of the Euro-19 to accept that recommendation. If the finance ministers do not find the proposal acceptable, instead of a summit of Euro-19, there will be a summit of EU-28, probably to bring matters to a head. The troika seems to calculate that if ECB stops sending money, Greece will be forced to print its own money and thus will be out of the Euro.

Obviously, the troika does not want to show the courtesy of discussing with Greece its proposal. By threatening to accept or reject the proposal the troika is asking for surrender. But the troika may have misread the situation. What it does not seem to have taken into account is the probability of Greece’s repudiation of its debt or asking creditors to wait for 40 years. What can the creditors do to punish and compel payment? Not much.

There are grave geopolitical risks in a Grexit about which some among the troika talk in too relaxed a manner. If Greece walks out repudiating its debt, the European financial system will be in trouble. There can be an assault on Spain and Italy by speculators and the ECB does not have the money to go to their rescue.

There is another geopolitical risk. Tsipras telephoned President Putin after the referendum; we do not know what transpired between them. Tsipras then telephoned President Obama requesting him to put some pressure on Merkel. Obama called up Merkel and asked her to be a little more accommodative as there is the risk of the Russians getting a foothold in the eastern Mediterranean.

There is high risk for Merkel. It was her predecessor Helmut Kohl who took the lead in introducing the Euro in 1999. If the Euro project fails, Merkel’s position might be in danger. The problem with Merkel is that so far she has not addressed the problem head on. She could have changed the medication, but she has been stubborn.
Eminent economists like Paul Krugman have argued convincingly for changing the medication. Thomas Picketty, the author of Capital in the 21st century,and Jeffrey Sachs along with other leading economists, have made this appeal in public:

“Together we urge Chancellor Merkel and the Troika to consider a course correction, to avoid further disaster and enable Greece to remain in the eurozone. Right now, the Greek government is being asked to put a gun to its head and pull the trigger. Sadly, the bullet will not only kill off Greece’s future in Europe. The collateral damage will kill the eurozone as a beacon of hope, democracy and prosperity, and could lead to far-reaching economic consequences across the world. In the 1950s Europe was founded on the forgiveness of past debts, notably Germany’s, which generated a massive contribution to post-war economic growth and peace. Today we need to restructure and reduce Greek debt….” (emphasis added.)

Will Europe sleepwalk into a Grexit and the attendant collapse of Euro and the European Union as it did in World War I about a hundred years ago? The answer depends mainly on Chancellor Merkel.

My personal guess is that sanity will prevail and there will be no Grexit. The repercussions of a Grexit can do significant damage to the global economy and India would not be immune.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India