Every good story has its dark moment, a crisis that comes before a resolution. The Greek debt saga appears to be reaching such a crunch point. Both sides are refusing to compromise further and are insisting the other is to blame, while Greece’s impossible IMF repayment at the end of the month looms. But amid the rhetoric, there remains a very real case for the euro and for compromise.
Led by the IMF, Greece’s creditors have submitted their proposals as an ultimatum: Syriza must cave on its election promises and submit to further austerity, including wage and pension cuts. The IMF has sent its team home after demanding these measures, while Eurogroup ministers have also called time on any further discussions. Instead of surrendering, Alexis Tsipras delivered an address to Greek parliament insisting that Syriza has a mandate to end austerity, and that further wage and pension cuts are off the table.
Narratives are divided along political lines, with many in European capitals and the IMF viewing Greece as stubborn, saying it must reform its economy and further slash spending to join the modern world. Equally, Greece’s argument that further austerity would be unproductive is finding support among leading economists. Most notably, Paul Krugman and Simon Wren-Lewis have argued that further austerity on an economy already in contraction makes no economic, or moral, sense.
It’s easy to assume that Greece has the weaker hand and will therefore cave before creditor demands. However, the reality is far from this simple.
Greece may be more willing to default than its creditors assume. The oft-quoted polls stating that Greeks want to stay in the euro, even at the cost of austerity, are likely to be ignored by Syriza. After all, they won an election entirely on the basis of ending austerity.
Greece’s creditors appear to be largely operating on the premise that contagion from Greek default would be limited. This is probably correct in the short term, but it ignores the fact that a Greek departure would set a precedent for future crises, laying bare the fundamental flaws of the euro. Markets are not blind to this either. The threat of default will be permanently priced into Eurozone yields, despite anaesthesia from the ECB. There is also the small matter of the some €200bn of bilateral, IMF and European Financial Stability Facility loans, which Greece would have little incentive to honour should it leave the euro.
Another argument exists for compromise. The seven years since the financial crisis have so far failed to yield a solution to the Eurozone’s debt issues. But it’s worth remembering that as little as 80 years ago Europe settled its differences in an entirely different fashion. The European project has ensured peace, security and prosperity that is extraordinary by historic and global standards.
Economic integration has been an essential component of this progress, with the euro at the forefront. With no method for fiscal transfers and no means of using currency depreciation as a release valve for struggling economies, further economic integration will be on shaky ground if Greece is cast aside.
A basis for a compromise clearly exists. Greece appears willing to deliver on substantial reforms and on fiscal sustainability, but its sacred cows must be left alone. Despite the rhetoric, it is the Eurozone that has the most to lose. Billions in capital aside, the credibility of the euro and the European project is under far greater pressure than Merkel, Juncker and company appear to believe.