Grexit: The Wrong Way Out of the Crisis
Now that the latest installment of the Greek drama is over, it is useful to draw some lessons from the experience.
It has become clear that the tail risk of a Grexit is still not banned, despite the various assurances over the past few years that Greece, albeit too slowly, is on track to heal from the deep wounds caused by the debt crisis. While it is tempting to spot half-full glasses littering the streets of Athens, it is obvious that the country is in fact still a long way from where it should be both in terms of economic growth and fiscal stability.
The past weeks have proven that even if all actors involved in Greek debt negotiations had no rational intention to cause a Grexit, they came dangerously close to causing an accident. The inexperience of the new Greek leaders confused creditor nations such as Germany. At some point the reckless attitude of the Greek prime minister Alexis Tsipras and his finance minister Yiannis Varoufakis led some European partners to suspect that perhaps the true intention of the duo was to act as a Trojan horse and blow up the monetary union. Even the governments of France and Italy, which were prepared to show more leniency toward Athens, stiffened and rallied behind the hardliners, not to mention the former program countries, Ireland, Portugal, but also—and especially—Spain. The Madrid government was extremely worried that giving in to Syriza today would embolden the anti-establishment party “Podemos” and jeopardize the outcome of Spanish elections later in the year.
This toxic mix of national politics forced the European Central Bank (ECB) to play hardball, too. The governing council kept Greece on a very short leash by restricting liquidity provisions to Greek banks to a trickle, just enough to give politicians time to come to their senses. In the end it was Jean-Claude Juncker, the new president of the European Commission (EC), who, according to a number of media reports, took over. He spoke to Tsipras fifteen times over the phone. His collaborators more or less dictated to the Greek authorities what needed to be included in the written reform proposals to be submitted to the three institutions (the EC, the IMF, and the ECB) and the European finance ministers in order to secure the extension of the €172 billion bailout program.
Finally, Europeans realized that Greece had indeed no intention of causing a breakup of the monetary union. But let’s not be fooled by the deal. What we have is the extension of the program for four months—no more, no less. Syriza and its leaders now face hard domestic choices and many voters, who probably mistakenly thought that voting for a new breed of leaders would provide a clean break with the past, could be sorely disappointed by what is likely to happen next. Morgan Stanley writes in a note to clients that ultimately the Tsipras government still faces an “impossible trinity” of staying in the euro, staying in power, and undoing the bailout. I would not be quite that pessimistic. Undoing the bailout may not be necessary if the terms of the program can be changed. This will require significant steps on all sides. And the past few days prove that neither side is unwilling to compromise. Now that Greece and its partners have gained four precious months, many bold announcements made during the campaign can be diluted and repackaged. Undoing the bailout in a dramatic, clear-cut fashion may not be necessary after all. But flexibility on all sides will be required.
That means that a pure rules-based approach is likely to come under attack in the near future. Its backers have won a significant battle in the past few days, but they are likely to lose eventually.
Under Juncker’s stewardship, the EC has demonstrated that it is determined to act much more politically than under its predecessor. This is a good and welcome development, but it also means that there will be more “elasticity” in interpreting the rules. Europe needs a stronger political voice. The EC can play that role. The European Council, made up of heads of governments and states, will continue to have much bigger difficulties representing a unified European position that can be successfully sold to domestic audiences in member countries.
We already witnessed a defining moment this week. After submitting their revised budgets to the European Commission, Belgium, Italy, and France managed to avoid the opening of an excessive deficit procedure. Especially in the case of France and Italy, given the flimsiness of their fiscal position, a stricter interpretation of the rules would have meant that Brussels would not condone the two countries’ governments. However, some structural reforms have taken place and, over time, the budgetary situation could improve if economic growth is allowed to make a comeback. Hence, the Commission looked favorably upon Rome’s and Paris’ budgetary position. What does it tell us about Greece in coming months? What will Berlin do? Answering these questions will tell us much about the road ahead. Don’t forget: watch the Commission. It will be the more interesting player to watch in the coming months.