Going into this past weekend, it looked as if the Grexit crisis that had occupied the world’s attention for weeks was finally heading into the final stretch. The Greek government debt crisis had spiralled out of control with one finance minister from the Eurogroup warning “Greece may be suspended from the currency union” in Europe. But as it stands, a deal has been reached, waiting for the Greek Parliament to sign up. Greece received an ultimatum from its European creditors: either comply with the creditors’ set of demands or face exclusion from the benefits of the eurozone. And the Greek government capitulated. Along the way, however, I believe irrevocable damage has been done to the European Union. Some thoughts on the proceedings below
Let’s rewind a week and put things in a broader perspective first. Greece had broken off talks in late June to put the choice whether to continue with austerity and reform to the electorate in a referendum. It won overwhelmingly, the electorate choosing to end austerity. Last Monday, I wrote on how the Greek referendum wouldn’t, and couldn’t, have changed the country’s reality. And that reality — the one that remains in place today — is that Greece faces one of only two possible outcomes: either harsh austerity and continued economic suffocation or exclusion from the eurozone, the so-called Grexit. The latter being a move that would precipitate a collapse in the banking system and economic turmoil.
Some may have believed that the overwhelming “no” vote of the referendum might have strengthened Greece’s hand, by creating an ugly dynamic in which the creditors appear to be overriding the democratically expressed wishes of a sovereign nation. After this weekend, those hopes have been dashed. The Greek government remains a supplicant, asking for mercy from its creditors, with little to no bargaining power. And the institutions formerly known as the Troika have shown no qualms about trampling over delicate sovereignty issues. What transpired this past weekend and the days leading up to it was pure power politics.
After the referendum, the Greek government stated that Greece would not “leave” the eurozone voluntarily; it would need to be forced out. The European Central Bank (ECB), the only entity that has the power to do the forcing, because it controls Emergency Liquidity Assistance (ELA) to Greek banks, acted immediately with “haircuts on collateral for ELA adjusted” upward; in other words, no new bank notes for Greek banks from the local Greek branch of the European System of Central Banks. Without new bank notes, Greek banks had so little cash on hand to meet withdrawals that capital controls could not be lifted until and unless the Greek government signed a deal with the Troika, which includes, of course, the ECB. This was an act of coercion.
Under pressure from the ECB and from creditor demands, on Thursday Greece tabled a proposal that contained harsher austerity measures than the proposal that the Greek people had overwhelmingly rejected by referendum just one week prior. Prime Minister Alexis Tsipras then quickly garnered parliamentary approval for his proposal, to avoid the country’s economic collapse, returning to the negotiating table this weekend. Under pressure to make labor reforms, liberalize markets, and accelerate privatization in the face of threats to exclude Greece from the eurozone from German Finance Minister Wolfgang Schäuble, Greece had caved. It was total and complete capitulation — the white flag, if you will. Surely, it seemed by Friday morning, an agreement was close at hand.
But once Greece was at the table, something strange happened. The creditors upped the ante, looking for for Greece to sign up to even more draconian and harsh terms. After hours of bickering, the negotiations ended with no conclusion and yet another ultimatum backed by Germany and its allies in the Netherlands, Austria, and the former eastern Bloc: either Greece accept the Eurogroup’s latest, more austere proposal for a bailout, ratify this a series of its reforms Parliament by Wednesday or leave the eurozone “temporarily.” The demands included spending cuts, accelerated privatization, resolution of non-performing loans in the Greek banking system, and many other measures, all to be accomplished under the watchful eye of the Troika to ensure compliance.
The problem in Greece is that that an allegedly clientelist political system has made economic overhauls difficult over the past quarter century. The Wall Street Journal’s Greece correspondent Matina Stevis concluded recently that in Greece, “hurting vested interests is harder than taxing citizens to death.” Signing up for and forcing through the kind of reforms that the creditors are calling for will be difficult. The Troika, lacking trust that Greece will actually deliver, has, therefore, made the deal as ironclad as possible including a 50 billion euro privatisation fund by which “valuable Greek assets will be transferred to an independent fund that will monetize assets through privatisations and other means.” Italian Prime Minister Matteo Renzi saw these harsh terms as an attempt to humiliate Greece — as did many others commenting via Twitter. And so Greece faced a choice to accept a Eurogroup ultimatum harsher than anything proposed to date with minor tweaks here and there — and backed by ECB muscle — or simply watch their economy collapse into chaos. They chose humiliation and defeat – but only to prevent economic collapse. Of course, the potential of being excluded from the eurozone should focus minds. After all, according to the BBC, the Greek government has not helped its banking system and economy prepare for Grexit in any way.
Now Tsipras has the unenviable task of bringing what he secured back for a vote. Here is a PDF of the deal. Here is how Tsipras is trying to spin it:
- “We fought hard for six months and battled to the end in order to get the best agreement possible, so Greece can fight on.”
- “We resisted demands for the transfer of state assets abroad and averted a banking collapse which had been meticulously planned.”
- “We succeeded in securing debt restructuring and the release of significant growth funds.”
- “The measures are recessionary, but we hope that putting Grexit to bed, means inward investment can begin to flow, negating them.”
- “I guarantee that the burden will be distributed fairly. Those who have avoided it, with government protection, will pay their share.”
But what if despite the oversight, Greece doesn’t comply, doesn’t execute? What could the Eurogroup do? The ECB is the most important factor here because it has coupled the banking system with the government by limiting ELA to Greek banks, using the wrangling with the Greek government as a pretext. The Greek banks have no more liquidity left as a result. They are running out of euros. Without a deal, they will have to be nationalized and go through a resolution process. The Greek government could issue IOUs in order to make good on its domestic bills but the economy would effectively be cut off from the rest of the eurozone.
To formally cut the Greek economy off from the eurozone, the Eurogroup would need a pretext, however, as the Greek government has said it would fight exclusion tooth and nail, by legal means if necessary.This is where Article 7 of the Treaty of the European Union, a mechanism to protect EU values, comes into play. Article seven of the Treaty reads that “on a reasoned proposal by one third of the Member States, by the European Parliament or by the European Commission, the Council, acting by a majority of four fifths of its members after obtaining the consent of the European Parliament, may determine that there is a clear risk of a serious breach by a Member State of the values”. As a result of this kind of breach, “the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of the Treaties to the Member State in question, including the voting rights of the representative of the government of that Member State in the Council.” This article has never been invoked. But it can be invoked and I believe it is the only way to make good on a promise to exclude Greece from the Eurozone without Greece’s explicit consent.
Clearly, Greece will want to avoid exclusion as much as it would like to avoid a collapse of its banking system. But its choices are now limited. As the dictum goes, “beggars can’t be choosers” and Greece now has no negotiating latitude whatsoever. It must do what is requested by the creditors or face the consequences – and this includes an exit from the eurozone, and possibly the European Union. The creditors have given Greece an out, though. Schäuble tabled a proposal by which Greece would undergo a ‘temporary’ Grexit, devalue its currency, make structural reforms outside the currency area, and then return again once it was ready.
The problem with the idea of a ’temporary’ Grexit is the following: logic dictates that a Greece operating outside of euro restrictions, with its own currency and with the full monetary and fiscal sovereignty enjoyed by Britain or Sweden in the EU or fully independent countries like the United States or Japan, would want to remain outside the euro area for ever if its economy flourishes. After all, why go through the adjustment process of going back to the euro if your economy is doing well outside of the euro area? On the other hand, f Greece is unsuccessful economically, with high deficits and high inflation, it would not be permitted to re-enter the euro zone. So, a ’temporary’ Grexit could quickly become permanent. Moreover, Sweden, and Poland are two examples of European Union countries operating outside of the euro area indefinitely, with no pressure to join whatsoever. Greece could join them, within the EU, but outside of the euro area without a special exemption like Denmark and Great Britain.
On balance, however, my sense is that this temporary Grexit idea is largely driven by a desire in Germany and other ‘hardliner’ countries to be rid of Greece without having to take Target2 losses. See, the history of the temporary Grexit idea began with German economist Hans-Werner Sinn and his worry about the build up of balances in the Target2 system connecting euro zone national central banks into a cohesive unit. Sinn first called attention to this alleged problem in 2011. Sinn argued that a departure of one country from the eurozone would lead to large losses for German taxpayers due to accumulated Target2 balances. However, Irish economist Karl Whelan put significant holes into Sinn’s theories. Whelan wrote in 2013 that, contra Sinn, “the characterisation of the TARGET2 balances as representing a bailout of these countries or being driven by current account deficits are also largely inaccurate”. Moreover, as Whelan puts it, “on balance, theTARGET2-related risks to Germany associated with a Greek exit appear to be very low.” But, it is clear that the ’temporary’ Grexit idea is one borrowed by the German finance ministry from Sinn and that the reason this scheme exists is that the German government believes it allows Target2 losses to be avoided.
I find this whole affair exceedingly distasteful because of the political symbolism. The ultimatum Greece now faces also demonstrates the disregard of the euro system for any right to national sovereignty Greece may have as a member of the monetary union. It exposes the European project as a power grab by unelected elites at the European Commission and at the European Central Bank. For the first time ever, the whole world is realizing that not only does the European Union require a gradual fading away of national sovereignty as economic harmonization advances, it also involves an abrupt, violent, and complete loss of national sovereignty on the occasion that a country’s economy stumbles badly and requires assistance.
After seven years of difficult economic adjustments, economic nationalists in Britain, in France, and even in Germany will seize upon these events and rightly call out the EU as a project by European elites with dubious long-term economic benefits for ordinary people. They will call for a break up of the European Union and a return to national governments with full national economic and monetary sovereignty. And eventually they will probably get what they want. The movement aimed at having Britain exit the EU — so-called Brexit — is just the beginning. With Greece, we are witnessing history in the making. This fiasco has put the disintegration of the European project in play.