The last five months have seen fraught negotiations on the economic future of Greece. On one side is the troika of Greece’s official creditors – the IMF, the European Commission and the European Central Bank – while the other side has a fledgling Greek coalition government dominated by the left-leaning Syriza party.
Negotiations broke down over the weekend after the Greeks decided to insert their entire electorate into the mix by announcing that a referendum would be held on July 5 to gauge their mood. The European Central Bank retaliated by limiting its continuing support for Greek banks. Without that support, Greek banks cannot meet withdrawals from a panic-stricken population, which has forced them to shut down for the week leading up to the referendum. Withdrawals from ATMs are now subject to strict daily caps. There is a scramble in markets for daily essentials: flour, sugar and petrol.
Debt Crisis
What drove Greece to the brink? You can point fingers at the European project which prioritised monetary union in 2000 for Europe, before sufficient economic or political convergence among its many countries. You could look for flaws in the management of the new currency, the Euro, which allowed irresponsible lenders in northern Europe to finance the profligate lifestyles and asset-price booms in the peripheral Eurozone. You could pick on devious manipulations of investment banks that helped Greece conceal its financial position for too long, until finally the financial crises of 2008 laid everything bare.
There were various routes out of the hole that Greece had dug itself into. It could have chosen to default on its debts, but this would have brought down many European banks – German and French ones too – that held Greek debt on their books. So the troika offered the Greeks a series of bailouts – writing down some old debt and many new loans – so that it could repay its creditors. But bailouts don’t come free. They must include some punishments that will deter bad behaviour even if it does not improve financial prospects.
Over the past seven years Greece has been asked to submit to a regime of structural reforms and austerity. Progress on reforms has been slow given the usual complications of implementing reform in democratic settings. Austerity was somewhat easier to achieve, but at a price: the drastic cuts in government expenditure drove the economy into a sharp recession. In recent years, GDP has fallen and unemployment has soared, with youth unemployment exceeding 50%. This is the economic configuration that drove the anti-austerity Syriza to power.
Divided Greece
The Greek population is divided. They are fed up with years of austerity but still want to cling on to the Euro that gave them the high of prosperity prior to the crisis. The referendum will ask them to choose between austerity and Euro, though many continue to hope for some fudge that will allow them to renege on their debt, abandon austerity and yet keep the Euro.
Setting aside the larger question of whether Greece would benefit from exiting the Eurozone, there is a way back to a negotiated settlement. Negotiations broke down last weekend because there were too many lines drawn in the sand. Then Greek negotiators surprised the troika by announcing that they will put its ‘take-it-or-leave it’ bailout proposal to the Greek people. But – and this is important – that offer was meant to expire days before the referendum. So what proposal will the Greeks vote on?
The Opportunity
Herein lies the opportunity: the troika has five days to come up with a more reasonable proposal for Syriza to put to the Greek population. It could offer future debt write-downs in return for successful achievement on structural reforms. But meanwhile suspend all insistence on austerity. Five days looks like a short window compared to five wasted months but do not underestimate the alacrity with which Europeans can clear their desks as they pack their bags for the summer holiday.
(The writer teaches Economics at the University of London.)
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