“All of us are responsible for the crisis and all of us have a responsibility to resolve it.” – President Donald Tusk, July 7th, 2015
Greek citizens voted in majority Oxi to the July 5th referendum. The question asked by the Tsipras government, which was campaigning for a ‘no’ vote, was yes or no to accepting a continuation of the bailout program with all the austerity measures coming with it (read here a previous analysis). The results were very clear throughout the country with 61.31% for the no vote and 38.69% for the yes vote (see here the map produced by the Greek Ministry of Interior showing that the no vote won in each Greek region). Greek citizens felt that the best option – out of two bad – was to reject the terms of the bailout on the table. If for a day the discussion was about the meaning of the ‘no’ vote (is it against the EU, the Euro, or simply a desire to remain a member of the Eurozone), today’s reality is about the future of Greece as a member of the Eurozone. So where do Greece and the EU go from now on?
Negotiations and Survival
In less than two days, a succession of events has taken place. For over five years, it seems that the Greek file was dragging, it has certainly taken an all new meaning and urgency. Prior to the results, Chancellor Merkel of Germany was meeting her counterpart, President Hollande, in Paris in order to find a common ground. The day ensuing the political victory of the Tsipras government, the
infamous Greek finance minister, Yanis Varoufakis, announced his resignation. Many advanced that Tsipras had to go in order to demonstrate to his European counterparts that Greece was serious in seeking for a viable option. Varoufakis had gone too far and had lost some of his support within the Eurogroup of finance ministers.
Then on Tuesday, an emergency summit meeting took place with no substantial results.
Tsipras was supposed to bring, as highly recommended by the French government, a new proposal. But the summit meeting failed as Athens did not provide an acceptable option. Tsipras has now until Thursday (as requested by Merkel) in order to present a new proposal to his creditors. A failure in finding an agreement could lead to “the bankruptcy of Greece” warned Donald Tusk, the president of the European Council, “and the insolvency of its banking system.” Tusk added that “tonight I [Donald Tusk] have to say it loud and clear — the final deadline ends this week.” On Sunday, as announced by the 19 eurozone countries on tuesday, the 28 EU leaders will be deciding on the future of Greece.
In addition, the New York Times reported that for the first time – at least publicly – the President of the Commission, Jean-Claude Juncker, has announced that he has “a Grexit scenario prepared in detail.” If a Grexit scenario is now on the table, Tsipras will be defending his case before the European Parliament on Wednesday morning.
Consequences of Staying in the Eurozone, or Leaving It?
In the middle of the negotiations and in finding a solution, a key player is the European Central Bank (ECB). Currently the ECB is the institution that is keeping the Greek banks alive by providing liquidity. Because today Greece is unable to borrow money on the international market and the Europeans are the one providing money to Greece in order to have its economy and banking systems going. The ECB will continue to do so if a deal is agreed. However, in the case of a break-up, the ECB will remain a central player as it will stop providing liquidity to Greece. In addition, even if Greece missed its first payment of July 1st to the International Monetary Fund of $1.8bn, the second deadline of July 20th to the ECB of $3.8bn will be key for Greece and the EU.
If Greece wants to stay in the Eurozone, they will have to implement a set of policy measures that will require: tax reforms; fixing the pension program, which will affect early retirement program; labor market practices. Once these are ongoing the international and european creditors will have to give meaningful debt relief.
In the case Greece decides to leave, or is expelled from the Eurozone, then it will have to introduce a new currency. The country will ultimately default on their debts, and will have to create its own economic agenda in order to lay down the foundation for future economic growth. This scenario will naturally require serious structural reforms.
If Size does not matter, Precedent does
The Greek case is not about the size of the Greek economy. In fact the Greek economy only represents 2% of the Eurozone GDP. So far it does not appear that a Greek default could take with it the whole Eurozone and send a massive shockwave throughout the global markets. No, the case of Greece is a matter, for the EU and its Member States, of establishing a precedent. Germany and other wealthy Eurozone members want to avoid such precedent, where a member state refuses to pay its debts and call for a national referendum in order to provide such country leverage at the European level. Chancellor Merkel was correct in claiming that Greece is a sovereign state and has the right to organize such a referendum, however what type of legitimacy does that provide the Tsipras government in coming back at the bargaining table?
The Greek referendum is national decision on a complex financial question. But the Greek referendum does not affect the decision of Greece’s creditors. If the vote empowers Tsipras domestically, it does not at the European level. Now, Tsipras has to navigate in these tumultuous waters of a domestic electorate, opposed to additional austerity, while providing a proposal acceptable to his creditors, most of them highly in favor of additional austerity measures. Tsipras seems to be facing a conundrum, either remaining in the Eurozone and what it entails, or leaving the Eurozone, and dealing with the consequences of a default.
In the mid-term, there are many technicalities that need to be figured out if Greece decided to leave the common currency. The legal baseline is the 1992 Maastricht Treaty,
which does not provide any information in order to leave the common currency. In the contemporary European history (aside from the collapse of Habsburg empire), there are no precedents, no rules and no plans in order to leave a common currency. But with a return of the Drachma, the real question for the Greek government will be about the exchange rate between the Drachma and the Euro as all Greek accounts are in Euros. At the end of the day, the Greek savings will be severely devaluated causing massive financial losses.
The Greek drama illustrates the complexity of the unfinished European construction. Since the Treaty of Maastricht of 1992 laying out the current foundations of the European Union, the Member States have avoided any decisions for furthering/deepening the integration process or completely loosening it. Today, if Greece is in such trouble, is certainly because of its domestic problems (high level of corruption and lack of structural reforms), but as well because of an integration à la carte of the Eurozone. At the end of the day, a Grexit or not is only a technicality. The real question is: will the Eurozone members be working once and for all on finalizing a fully integrated and functional Eurozone?