GrEUxit?
Greece’s brinkmanship is risking its membership of the EU
Quite why the received wisdom has taken root that should the Greek government default on its debts then it follows that Greece will leave the Eurozone is something of a mystery. Logically, the two do not follow at all. Several cities and even states in the US have defaulted without leaving the Dollar zone and while Greece is a semi-sovereign country rather than a province in a federation, which makes a currency switch for them far easier, the American examples prove the move to be unnecessary.
Furthermore, a return to a Drachma would do little to help. As rcs1000 noted on politicalbetting earlier this week,
“Greece’s problems are four-fold: they have one of the least flexible labour markets in the developed world, they collect too little tax, they think it is OK for civil servants to retire in their mid-50s, and corruption is rife. Leaving the Euro will not solve any of those issues.â€
And he’s right. Indeed, there’s every reason to expect that a Greek government outside the Euro would use the flexibility that comes with an independent currency to put off solving those problems.
There’s another reason why a Greek exit from the Eurozone (what we’ll call Grexit-light), is unlikely: there’s no provision for it in the treaties. That’s not necessarily an insurmountable problem; political will and force of events can enable rules to be fudged and ways to be found. Still, true believers in the European Project will be loath to set a precedent if there’s an alternative.
However, there’s also the opposite solution: Grexit-heavy, or GrEUxit, if you like. Greece’s electorate and politicians have set in place a momentum which could very easily produce that result. Tsipras and his Syriza colleagues are holding so firm against the creditors’ demands partly because it’s what they believe but also because they have the backing of the Greek public. From the 36% they polled in this January’s election they’re now routinely scoring in the low-40s. And why not? For as long as they can deliver the best of both worlds – keeping the money flowing while easing the creditors’ conditions – floating voters will keep backing them.
But continuing to achieve that may very easily prove unsustainable, perhaps as soon as within the next few days. It relies on those owed the money continually backing down in games of brinkmanship. The never-ending nature of those games may easily lead the IMF, EU and others to conclude that the one-off pain of a default is less than the lingering nature of the alternative.
In any case, events may force either side’s hand rapidly. The scale of withdrawals from Greece’s banks would already be reaching ruinous levels were it not for emergency funding from the ECB, which will review its funding again on Monday. Also on Monday is the scheduled meeting of the leaders of the Eurozone countries. It’s hard to believe that the two meetings are not closely connected. Failure to reach agreement by the politicians is likely to lead to a still greater run on the banks but without agreement, can the ECB, having said it would review matters, credibly carry on regardless? Probably not. In which case, we’d have arrived at a very messy endgame, with tempers and recriminations rising so high among public and politicians that GrEUxit would have to be on the table.
Is there an alternative? Even if Tsipras wants to compromise, he couldn’t deliver it in Athens without doing a MacDonald: splitting his party and governing in coalition with his opponents – which there’s absolutely no indication he’d even contemplate never mind try (and the fate of Pasok should explain why). So it comes down to whether the creditors are willing to figleaf another climbdown. That may yet happen – the instincts of compromise and solidarity run deep within Europe’s leaders – but it’s far from guaranteed. Alternatively, Tsipras may be willing to risk the warm embrace of the Russian bear or the Chinese dragon in a meaningful sense, though the question would have to be what price they’d extract in return.
The Eurocrisis has rumbled on for so long now (close to half the life of the Euro itself), that each new deadline surpassed and crunch meeting navigated tends to increase confidence that the next ones will be too. But to believe that would be dangerously complacent. A Greek economist on Radio 4 yesterday said he was optimistic because both sides want to do a deal. That they do. The question is whether they want to do one enough. That, I think, they don’t. Expect fireworks.