On Sunday, July 5, another chapter opened in the odyssey of Greece’s tortured relations with the eurozone. Around 61 per cent of Greeks voted against the conditions demanded by Greece’s principal creditors for further funds. The Troika (International Monetary Fund, European Commission and European Central Bank), as they are known, had demanded further tax rises and expenditure cuts. In a defiant response Alexis Tsipras, leader of the left-wing Syriza party and Greece’s Prime Minister, called a snap referendum to ask the Greeks their view of the Troika’s proposals. He campaigned for a “no” vote, which he has now resoundingly won. Mr Tsipras is no doubt delighted by this slap in the face for the Troika. Unfortunately, it could also be a punch in the gut for the European project.
If the Troika refuses to relent and provide further funds, Greek banks — already closed for over a week — will remain closed and the Greek state will soon be unable to function. The only way to restore some semblance of economic life would be for the Greeks to resurrect their own currency: the drachma. The likelihood is that the drachma would steeply devalue on foreign exchanges. Rampant inflation and default by Greece on its massive debts would almost certainly result.
If the economic consequences of an exit for Greece would be dire, the political consequences for Europe as a whole could be worse. If the Greeks abandon the euro, then no doubt the financial markets will ask which country is next. Already the interest rates at which the weaker members — Portugal, Spain and Italy — can borrow are edging upwards. How long before their borrowing becomes prohibitively expensive? How long before they leave the euro and default on their loans? If the euro unravels, the stronger economies, particularly Germany, face the prospect of having to reintroduce their own currencies too. These would most likely strongly appreciate, making their exports costly and uncompetitive. But the damage would be much more than economic.
The euro was, and is, as much a political project as an economic one. It is a symbol of European unity as well as an important element of the single European market, itself a powerful motor of European integration. Membership of the eurozone is supposed to be irreversible; the euro is supposed to be permanent. If it is shown to be all too fragile, the other pillars which uphold the European Union (such as free movement of people, trade and capital), also thought to be irreversible and permanent, will be at risk.
Amid this gloom, there is a glimmer of light. Most Greeks, Mr Tsipras included, do not wish to exit the euro. He was clear during the referendum campaign that a “no” vote would not lead to exit. Exasperated as other European leaders are with Greece, most do not wish for it to leave the eurozone either. All parties seem to appreciate the calamity of a Greek exit. Moves are afoot to restart negotiations. This time an accommodation may be reached. Yanis Varoufakis, the Greek finance minister who before the referendum had conducted negotiations, resigned the day after the vote. Casually dressed in a leather jacket and with his shirt untucked,
Mr Varoufakis at times seemed more interested in causing personal offence than in finding a solution. He has said he bears the loathing of Greece’s creditors with pride. With Mr Varoufakis gone, the atmosphere in negotiations is likely to improve.
More concretely, the IMF has acknowledged that Greece’s debts are unsustainable. This chimes nicely with one of Greece’s key demands: significant reduction of its debt burden. It also provides political cover for the other members of the Troika to become more accommodating. Perhaps, therefore, some kind of deal can be struck. With goodwill and realism on both sides, one can envisage an agreement under which the Troika continues to provide funds and reduces Greece’s debt burden in return for thorough economic restructuring and significant improvements in tax revenue.
To reach such an agreement would clearly be a relief, but it would be a mistake to think that the eurozone’s problems were at an end. The eurozone’s architecture is seriously flawed and requires radical reworking if it is to be stabilised. The Germans, with the strongest economy and currency in Europe, were persuaded to embrace the euro with two promises. The first was that the European Central Bank would behave like the Deutsche Bundesbank, the German central bank; and the second was that eurozone members would not be liable for each other’s debts. This has meant highly restrictive monetary policies and a strict aversion to bailouts. While the European economy was doing well these restraints did not chafe too much on weaker eurozone members. However, with the financial collapse in 2008, they have proved to be suffocating and — as Greece shows — almost fatally so.
If the eurozone is not to lurch from crisis to crisis, the European Central Bank has to be allowed to behave like a proper central bank. When times are bad, or a eurozone member state is in significant difficulty, it has to be allowed to inflate the money supply and buy up government debt of its own initiative. Instead it has had to engage in wrangling and convoluted manoeuvres to overcome political objections from some eurozone members. The result has been that when measures are finally taken they are often too little or too late. Alongside proper monetary policies, there has to be significant financial aid to assist economic adjustment in weaker eurozone economies if they are not to be condemned to permanent stagnation. If the political will to make these changes is lacking, then the prospects for the euro, and the European project with it, look extremely bleak.
The writer is a lawyer and a keen observer of European affairs, and works in the UK and France
