Institutions’ negotiating stance now untenable

In the wake of the decisive “no” referendum vote by the Greek electorate and related events, the negotiating landscape has shifted substantially. The negotiating position of the institutions now looks untenable. But this by no way changes the potential outcomes for the Greek economy, which will still either face further harsh austerity or the turbulence of eurozone exit.

Let’s remember the starting point here. In late June, after just over five months in power, the Greek government coalition, led by the Syriza party and its prime minister Alexis Tsipras, decided that the negotiations with the institutions formerly known as the Troika – the IMF, the EC, and the ECB – were at a standstill. Syriza wanted debt relief because they believed the government debt burden was unsustainable. The Institutions refused to broker this issue. What’s more, the institutions said that the chief Greek negotiator, Yanis Varoufakis and his insistence on debt relief, was the major impediment to a deal getting done.

The Institutions and the Greek government were not that far apart on primary fiscal surplus targets but significant differences remained on sacrifices by the working and middle classes vs. corporates and the rich, on the reform agenda – including so-called pension and wage reforms – and, of course, on the need for immediate debt relief. As an example, the Greek government wanted to impose a one-time corporate tax of 12% on profits over 500,000 euros. But the Institutions rejected this.

Wanting and needing a deal, Greek Prime Minister Tsipras called a nationwide referendum on the last offer presented by the Institutions, campaigning for a rejection of this offer but promising to sign a deal if the Greek people voted “yes”. But the Greek people voted “no” – overwhelmingly.

This “no” vote changes the landscape for three reasons.

First, in the wake of Syriza’s win, Greek finance minster Varoufakis has resigned. The Institutions can no longer insist that he is a stumbling block to agreement.

Second, even before the vote, the IMF released a report that essentially vindicated the Greek negotiating position that debt relief would be necessary to stabilize the Greek government’s fiscal situation. Former IMF official Ashoka Mody said “the IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith.”

Third, the “no” vote was so overwhelming – with a 22% margin against the Troika position – that the next decisions by the Troika will be seen as either backing the ‘will of the people’ or over-riding the wishes of a sovereign nation and violating the appearance of democracy.

These three developments do indeed strengthen the Greek government’s negotiating position, particularly given the new post-vote political framing that now pits national sovereignty and democracy against the power structure with the European Union. If the Institutions are now seen as running roughshod over Greece, it will have permanently negative consequences for the legitimacy of the European Union in a world in which nationalism threatens to rip the EU apart.

But in terms of outcomes for Greece, I do not see the referendum as having made a big difference. Even if the EC, ECB and IMF capitulate and accept the Syriza offer, austerity is still going to be the order of the day in Greece. And that guarantees continued pain for the Greek economy and continued record levels of unemployment. And this is the best case scenario. Other scenarios include the ECB cutting off the Greek banks entirely, forcing a collapse of the Greek banking system and an eventual exit by Greece from the eurozone in an uncontrolled and catastrophic way. And while Grexit may be a ‘victory’ for the Troika’s negotiating position, it would be a pyrrhic victory that would devastate the Greek economy in the short-term, and effectively be the beginning of the end for the eurozone and European economic integration.

So there are not a lot of good outcomes here. The eurozone remains in crisis. And nothing that happened on Sunday in Greece changes this.