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February 20, 2019

What Next For The Eurozone, Greece?

Political parties rarely commit suicide. The current crisis in Greece, which has led to Sunday’s referendum on the terms of a deal with the European Union, is mainly about the survival of Prime Minister Alexis Tsipras’s Syriza Party. But it is also about the electoral future of Germany’s governing party, the Christian Democratic Union.

Almost all of Tsipras’s time since Syriza was swept into power in last January’s election has been devoured by negotiations about Greece’s foreign debt – at 175 per cent of Gross Domestic Product, the highest in the developed world. But the negotiations did not focus on what to do about that staggering burden, which is so big it can never be repaid.

Four-fifths of the money is owed to official European bodies like the European Central Bank, with a relatively small role for the International Monetary Fund, but the “eurozone” authorities just want to kick the can down the road. Why? Because 90 per cent of the money they have lent Greece in successive “bail-outs” goes straight back to the German and French banks that financed Greece’s 10-year party on borrowed money.

Greece’s economy was too weak to join the euro, but the government of the day manufactured false statistics that concealed that fact. Once in the euro, the Greek public and private sectors could borrow money at low “German” rates – and they borrowed vast sums.

That money was blown in a massive spending spree on luxury goods, early retirement deals for the voters, anything but productive investment. The Greeks thought they were being very clever, but then came the global financial crisis of 2008. Greece’s economy has been on life support ever since, and the first bail-out came in 2010.

It wasn’t charity. The richer eurozone countries were protecting their own banks, which recklessly lent Greece the money, and trying to stop Athens from crashing out of the euro, which would raise awkward questions about the viability of the new “single currency” as a whole. (At least four other eurozone countries – Italy, Spain, Portugal and Ireland – were also in financial difficulties at the time.)

So Greece got the money, but to justify these bail-outs to voters in the richer eurozone countries (who were really footing the bill), the Greeks had to accept severe austerity measures. So severe that the Greek economy has shrunk by a quarter in the past five years and 25 per cent of Greeks are now unemployed.

Yet during that time Greece’s debt has continued to grow. Greece’s only hope of escape from perpetual austerity is a “restructuring” of the debt that writes off as much as half of it. But Germany and the eurozone’s other big creditor countries will not even discuss that, because their own taxpayers would rebel.

So five months of negotiations about Greece’s debt haven’t even touched on “restructuring” it. They have just been about what new austerity measures Greece must accept to get the last tranche of the last bail-out, which would give Athens enough money to pay the loans that are coming due this summer.

Tsipras was elected on an anti-austerity platform, and the left of his own Syriza Party would rebel if he gave in to all the demands for further cuts in Greek government spending. He came close to his “red lines” in June, but he would not cross them – and Germany’s Chancellor Angela Merkel still won’t discuss writing off some of Greece’s debt. So in the end Tsipras walked away and called a referendum.

The last eurozone offer, which only crossed Tsipras’s red lines a little bit, is no longer even on the table, but the referendum on Sunday asks Greek voters if they will accept it. The eurozone leaders say it is therefore a vote on whether Greece wants to leave the euro (and quite likely the EU as well), but Tsipras insists that a ‘no’ vote will just strengthen his hand in another round of negotiations.

If the Greeks vote ‘yes’ – and they may well do so, because they really want to stay in the euro and the EU – then Tsipras says he will simply quit and let somebody else take the blame for accepting the terms. His own party’s unity will be intact, and he will be a hero to the Greek left. There would have to be a new election, and he might even win it. (A referendum win requires 51 per cent of the vote; you can win a Greek election with 35 per cent.)

If the Greeks vote ‘no’, Tsipras will stay in power. Maybe there would then be further negotiations, but that depends mainly on whether Angela Merkel can be moved on the question of debt relief. That could be very costly politically for her, but after the talks collapsed both the European Commission and the IMF put out statements saying that writing off some of Greece’s debts could be part of future negotiations.

If Tsipras doesn’t get a solid promise on that after winning a ‘no’ vote, he might end up leading Greece out of the euro and the EU. That would open several new cans of worms, but we can wait until Sunday before we get the can-openers out.

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