President Tusk has given an ultimatum when declaring on 19 June: “We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or head towards default.”
According to Tusk, only a few days are left. The deadline, 30 June, is the day Greece is due to pay back €1.6 billion to the IMF, an amount it currently cannot afford. If it is to pay, Greece would first have to accept further funding from the “Institutions”, which would come only if the Greek government accepts undertaking a series of reforms dictated by them. The most contentious point of the proposed reforms is the request that Athens save or raise an additional 2.5% of GDP for the state budget, including through cutting pensions and/or raising taxes (VAT in particular)— possibilities that the Tsipras Government has recurrently rejected.
If Greece doesn’t pay by 30 June, it would technically enter into default (that is, not being able to pay its debts) and a cascade of events would follow (no further financing from any source, the freezing of EU transfers, the likely emptying of private deposits from commercial banks) that would dry up Greece’s coffers and make it impossible for Greece to continue in the Eurozone. Or, rather, Greece would unavoidably start issuing its own currency, at whatever that currency’s value would be, if it is to have something with which the government can pay.
What does Greece propose instead?
The Tsipras Government, and especially Finance Minister Varoufakis, have explained again and again that they see no point in continuing in what they view as a downward spiral of debt. Taking additional loans to pay previous ones, while making reforms that further jeopardise domestic economic growth is, in their view, a recipe for disaster, and at a huge social cost. Greece has already endured the biggest salary and benefit cuts of any EU country and is in a dire humanitarian situation. Instead, they want a restructuring of the current debt (longer periods to pay, interest rate adjustments and even partial condoning of debts). In exchange, they would offer some increase in taxation, selective privatisations, and tax evasion and fiscal fraud prevention. With this formula, the Greek economy should be able to grow again and increase its capacity to pay back its debt.
Why won’t the “Institutions” accept this offer?
First, that means changing ex post facto the conditions under which funding was provided to Greece. No lender likes changing the conditions agreed upon by the borrower. And if they change, at least in the private sector, this would bring a penalisation on the borrower. The whole financial architecture rests on the assumption that contractual obligations are to be respected. If there’s been irresponsible borrowing, the borrower will have to find his own way out of the mess. Varoufakis’ counterargument is that each irresponsible borrower corresponds to an irresponsible lender, thus trying to split responsibilities. He then concludes that sacrifices should justly be borne by both parties of the contract.
Second, the “Institutions” would like to see reforms that fall more in line with their ideological inclinations: reducing the size of the public sector, diminishing the burden of social expenditure, and further liberalising the labour market without increasing the fiscal burden on businesses as a recipe to attract investment. The proposals put forward by the “Institutions” go in this more orthodox direction: borrow more to pay your debts (“we are already upholding our part of the agreement to lend more”) and let the lenders have a major say as to how Greece handles its economy to make sure it pays it back.
And thirdly, they generally do not trust the current Greek government to deliver on its own calculations, especially concerning its capacity to increase fiscal revenue through the proposed measures.
But there is a point on which both the “Institutions” and the Greek government share concern: somewhere, somehow sources of economic growth for Greece have to be found. And austerity measures do not help. Rather, the contrary—they shrink internal demand. This is the reason why internationally reputed economists are siding with Tsipras’ positions.
And then comes the demagogy
Against this backdrop, all kinds of ill-intentioned, ill-construed arguments have been unleashed: lazy Greeks want to live off the backs of northern Europeans, Germans want to squeeze the Greeks to the point that they sell the whole country at bargain prices to multinational corporations, and so on.
In addition, the countries where austerity measures seem to be working—mainly Ireland, Portugal and Spain—would rather not see Greece get away with special treatment. This would somehow make their governments appear as having been weak in resisting the pressure for adjustments and having forced their peoples to endure severe austerity measures, wrongly arguing that there was no alternative course of action. This reasoning is, however, flawed, as the level of austerity Greece has already endured is far above the one experienced in any of those three countries, and its economy has already contracted by 27%, more than thrice the figure of any other.
The Mother of All Summits
As the finance ministers of the Eurozone could not find an agreement on 18 and 19 June, President Tusk has convened a special summit of heads of government for 22 June at 20:00 h. (to be preceded by a Eurogroup meeting at 12:30 h.), thus signalling the unprecedented gravity of the situation. To some, what is at stake is much more than Greece’s economic and social future: if Greece leaves the Euro, the whole European construction would suffer a major blow, the irreversibility of the Euro would be called into question, and this may bring unpredictable consequences in financial markets worldwide. This is the card that allows the Greek government to stubbornly stick to its demands, whether reasonably or not, against its much more powerful interlocutors (maybe Varoufakis’ game theory knowledge will prove determinant after all).
To others, the cost of letting Greece cope with the consequences of its past behaviour would not be that high. The Union will go on and the Eurogroup will get rid of a member whose inclusion was premature in any case. Learning that membership of the Eurogroup brings with it a commitment to the rules may be even a good lesson for other countries.
Until now, the European Union has always managed to avoid traumatic episodes. Compromises, highly elaborated solutions, and constructive ambiguity have always been permitted as a means to move forward without any one member state being left behind against its will. But rarely has the situation been so antagonistic between one member state and most of the others, together with the common institutions. This time, the outcome may be no different, but it is difficult to see exactly how. Most likely, Greece will show some, albeit minimal, flexibility with respect to one of its two key points—pensions or VAT—while the Union will propose new, fresh investment plans designed to generate growth. Will that work?
The editorial team of Katoikos
