Given the stunning events of the weekend, it’s easy to forget that, just ten days ago, the creditors and Greece were both making positive statements about progress towards a solution to the Greek bailout crisis.
Who could have forecast that we would suddenly find ourselves with a breakdown in the talks and a referendum called by Greek Prime Minister Alexis Tsipras on the latest “humiliating” proposals from the institutions? He is urging the Greek population to vote “no”, which he claims will then give him a mandate to argue for more concessions from Greece’s creditors.
Everyone knows that this is not a sustainable position. But in the process, everything has been thrown into confusion and we are in crisis mode again.
What motivated the Greek action? It is possible that Tsipras, who had been hoping that German Chancellor Angela Merkel and French President Francois Hollande, with whom he had been in frequent conversation, would make a decision to keep Greece in the Eurozone at all costs in order to avoid contagion. Equally, he may well have been worried by what looked like the intransigence of the IMF, one of the creditor institutions.
But additionally – and more importantly – Tsipras had probably been coming to the realisation that both the proposals from the institutions and his own government’s counter-offers had ended up differing little in terms of the overall level of austerity. As such, they were unlikely to get through the radical left of his party Syriza, which was already protesting and calling for Greece to leave the euro. The Greek Parliament may have rejected the proposed deal anyway, as it offered no guaranteed relief to Greece’s unsustainable government debt burden.
But at what cost – and to the country’s fragile banking system in particular. The European Central Bank (ECB) has now frozen emergency assistance, provided to Greek banks to offset huge deposit withdrawals since earlier this year, at the level of last Friday. Given that withdrawals continued (and seemingly intensified) over the weekend, yesterday the banks had to close, capital controls were introduced, and withdrawals from ATMs have been restricted to just €60 daily. The 2013 Cyprus model has now been introduced, at least temporarily, in Greece.
So what next? In the period leading up to Sunday’s referendum, when the Greeks will decide whether to accept the creditor conditions (and by implication determine whether they stay in the Eurozone), the economy will decline further. Not only are Greeks restricted in what they can withdraw in cash, but it appears that payments by credit cards are also difficult to do. This will act as a brake on consumer spending. Demonstrations by both sides in the referendum are also planned, and this could put off tourists – on whom the entire economy depends.
The wider implications should not be underestimated, especially if there is a No vote in the referendum. The reintroduction of the drachma, and even the beginning of the break-up of the euro, with all the economic consequences that might entail, is getting closer.
The financial markets have had the jitters already, but much turns on what happens today. If Greece does not repay the €1.5bn it owes the IMF and with the bailout extension finally running out, it is unclear whether the ECB will pull the plug on the Greek banking system entirely. Uncharted waters indeed.
And yet all this could easily have been avoided if both sides had been prepared to behave more like “adults”, as the IMF’s Christine Lagarde put it. It would have spared both the Europeans and the Greeks from the enormous costs, both short and long term, that a Greek exit from the euro may bring in its wake.