Officially, Greece was not even on the agenda at the Spring meetings of the IMF and World Bank Group last week. But the country’s obstinate flirtation with disaster was very much on everybody’s mind, including U.S. officials. One sentence that I heard repeatedly over the past days best encapsulated the bewildered puzzlement with which Greece’s European partners look at Athens: what happens next, they say, entirely “depends on the Greek government.” What makes the situation so volatile is the fact that no EMU member state official fully understands what the Syriza government is trying to achieve:
- Is it a grand bargain that unlocks generous funds by blending the completion of the current rescue program with a vague third program, with few strings attached and largely based on trust?
- Given the fact that creditors have already made clear that this route leads nowhere, is the Syriza government blindly following this path hoping that European partners will blink first?
- Or are the prime minister Alexis Tsipras and his finance minister Yanis Varoufakis consciously steering Greece toward a default within the euro zone or even toward a Grexit?
- Alternatively, and more mundanely, does Tsipras have the political situation within his own party and coalition under control? Or is it perhaps the case that it has already become impossible for him to compromise with Europe because this would be perceived as a betrayal by the more rigid, far left elements of his own party and government? What comes first, the political survival or membership in the monetary union? Not to mention the dysfunctional character and rampant corruption that pervades huge parts of the civil servants’ body and makes the implementation of any plan quite difficult.
Perhaps there simply is no plan and Tsipras is indeed sleepwalking toward a cliff. Even the game theorist Varoufakis should slowly be beset by doubts. He managed to solidify the euro group’s front against him. Instead of weakening Germany within the monetary union, he has managed to isolate himself. Even the U.S. government added its voice to a chorus that is asking Athens to simply get its act together and compromise.
Considering the poor record of achievements over the past two months, Syriza should start doing some soul searching. Since it won the Greek elections, the new Greek leadership has merely managed to rebrand the reviled troika, comprised of the IMF, ECB, and European Commission, and call it “the institutions.” By doing so, they have injected new life into what they set out to destroy. Without this ill-timed intervention, the troika, in all likelihood, would have been phased out anyway.
The European Court of Justice recently voiced its concerns about the European Central Bank’s role in one of its signature programs, OMT (Outright Monetary Transactions), since it can be perceived as blurring the lines between fiscal and monetary policies. In fact, a truly independent central bank should not tell governments how to conduct their fiscal policies. The same could be said about the central bank’s involvement in the troika, which formulates conditions about economic and fiscal policies for countries under a program of financial assistance. I do not see a huge appetite at the Frankfurt-based institution to remain stuck in this legal grey area indefinitely. Hence, I would argue that a follow-up program with Greece should not and would not necessarily include the ECB.
Even the IMF would probably be more than happy to leave Greece in the capable hands of the Europeans once the current program is completed. After all, the rationale for involving the IMF in 2010 was that, at the time, the EU lacked the tools to deal with a situation such as a sovereign debt crisis within the union. That has changed.
The euro zone now has a new institution, the European Stability Mechanism, with substantial financial firepower of around €500 billion. In fact, in the future it should be the ESM that provides financial help to member countries in need, but only if they agree to a specific program.
I suspect that bigger strategic patience on the part of the Greek government would have been partially rewarded, eventually. Instead the Tsipras-Varoufakis duo precipitated a crisis that is worsening rather than alleviating Greek hardship.
But despite this series of tactical and strategic blunders, I still don’t believe that a Grexit will happen. The Europeans cannot terminate membership and Tsipras has no mandate for such a step. Polls indicate that around 70 percent of Greeks would still reject an exit from the monetary union and the European Union. The prime minister would have to call for a referendum. This is probably the only realistic way out of the current impasse. So how would such an outcome be sequenced?
Greece would honor its commitments to the IMF, even if that means undertaking unconventional steps in order to gather the funds that it needs for repayments in the coming month. Once the IMF is taken care of, Tsipras will try one more time to take the Europeans head on—and will fail. This could happen as soon as May, or more likely in June. At this point the negotiations will enter a truly critical phase and either lead to some kind of compromise that is not palatable to the leftist hardliners of Tsipras’ own party or to a partial default. I leave it to others to describe in detail what could happen in the event of the latter outcome. It would certainly trigger the introduction of capital controls and the need for the Greek state to issue some kind of IOUs, simply necessary to avoid utter chaos, a complete collapse, and a disorderly exit out of the monetary union.
If, instead, a compromise can be struck (a big if at this point), this would be the moment for a referendum, a yes or no vote on membership in the European Union, with a broad but not overly detailed program attached. Markets would be jittery, for sure, but Greek citizens, scared by the prospect of regaining full sovereignty at the price of leaving the euro and the EU, would probably vote yes to Europe and the strings attached. Under this scenario, European partners would wait until part of the program becomes national law and would then start disbursing some funds. Tsipras could then either tame or eject the hardliners from his party and start to govern in earnest.
The latest crisis would be over for Greece, but only temporarily. Just like the deceitful Sisyphus of Greek mythology, the country would once again start rolling a heavy boulder up the mountain, a boulder that only becomes bigger every time Greek politicians delude themselves and their citizens into believing that there are painless shortcuts that lead out of the underlying mess that they have contributed to create. Ultimately, what they need to understand is that the boulder would just be as big and just as heavy even if Greece were to return to its own national currency, the Drachma.