The Euro-Greek Crisis
Talks between the creditors and the debtor Greece have started in Athens to work out the terms and conditions of the € 86 billion bail-out, the third since Greece approached the Euro Zone for money five years ago as it faced bankruptcy. On July 5, the Greek people voted on a referendum on the terms of the bail-out; 61 per cent voted with Prime Minister Tsipras, much to the annoyance and anger of the German Chancellor and other European leaders who have taken a hard line against Greece. They have been treating Greece as a borrower and as a patient requiring treatment in an Intensive Care Unit (ICU), a patient entitled to hardly any say in the treatment.
Tsipras had calculated that a clear majority in the referendum would strengthen his hand in negotiations with the creditors. He reasoned that the European Union is based on democracy and the voice of the Greek voters carried weight. He was, however, sadly and totally mistaken. Merkel and others in her camp wanted to teach a lesson to the 40-year young Prime Minister. First, they made it clear that they would like to throw Greece out of the Euro Zone. But since there is no legal provision to remove a member state from the Euro Zone, they thought they would humiliate Greece in public and then demand that it submit new proposals for their consideration. German Vice Chancellor Sigmar Gabriel made it clear that by holding a referendum and winning it, Tsipras had “torn down the last bridge between Greece and Europe”. The German Finance Minister Wolfgang Schaueble publicly asked Greece to leave Euro “temporarily”. He should have known better, that there is no way of leaving temporarily. In any event, the intention was to humiliate and provoke a ‘Grexit’.
Tsipras refused to be provoked into walking out of the Euro Zone. Confronted with the harsh realities, he changed direction and got his Parliament to give him a mandate to agree to a rather harsh set of terms and conditions from the creditors. Initially, the Euro Zone Finance Ministers failed to arrive at a consensus between those who wanted Greece out (led by Germany) and those who wished Greece to remain in (led by France). Finally, the Euro Zone summit met for 17 hours and on July 14 an agreement was reached, an agreement that had to be approved by parliaments before negotiations could begin. Additionally, Greece was required to get its Parliament to legislate some reform measures within 48 hours.
Le Monde’s headlines read “Europe avoids implosion by keeping Greece in Euro Zone”. The reaction in Germany was different. Bild stated that Merkel “saved Greece with our money”. On his return to Athens, Tsipras faced an earthquake. He had been elected in January on a platform to regain Greece’s independence from Brussels, and he had signed a treaty similar to the Treaty of Versailles imposed on Germany after World War I. His ministers of Finance and Energy resigned. His party Members of Parliament (MPs) revolted with 25 of them voting against him. He survived only with support from opposition parties.
In short, while those who wanted ‘Grexit’ did not get what they wanted, they can derive much malicious pleasure from the disarray and a potential implosion in the party of Tsirpas, a left wing party they hate and fear. If he succeeds in Greece, another party, Podemos (We Can), of similar ideology and fiercely opposed to austerity might gain in the election in Spain due later this year. The German fear is that eventually left wing parties will gain power in the south of Europe.
A key question to ask is, whether the higher dosage of austerity will work? Since the medication has not worked so far, why should a higher dosage work? François Cabau, an economist working for the Barclays Bank, has pointed out that the Greek economy will shrink at 6 to 8 per cent a year. It has already shrunk by 25 per cent under the treatment of Dr. Merkel and her team. Currently, Greece’s national debt is 180 per cent of its GDP. The IMF has estimated that this figure will soon reach 200 per cent unless debt relief is provided. For months, the IMF has been saying this privately to the Euro Zone and it was compelled to go public after its warnings were ignored. Any write-off of Greek debt is taboo in Germany. Merkel, put on the defensive by the IMF, has changed her stand and indicated that some restructuring might be considered, provided Greece behaves. The IMF has asked for a 30-year pause in payment, indeed a sensible suggestion but unlikely to be accepted for that very reason.
It is important to recall that the first bail-out in 2010-11 was meant to bail out the banks (Greek, German, French, and American) and the state of Greece transferred to itself the financial burden of the banks. Was that a correct decision? Further, as Joseph Stiglitz has pointed out, there is need to work out a method to deal with sovereign debt rather than leave it to accountants.
It is pertinent to go back to the Le Monde headlines and raise the question: Will Europe implode in the near future? Let us pose the question in a different way. Is the treatment being meted out to Greece in conformity with the 1992 Maastricht Treaty? Article 2 of the Treaty states that Europe will aim “at high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.” Obviously by compelling Greece to promote unemployment and reduce standard of living and social protection, the creditors have violated the provision.
Some Germans have argued that Greece accounts only for 1.3 per cent of the European Union’s GDP and it will not matter much if Greece were to leave. To take the argument to its logical conclusion, there are 14 other states with a lesser share than Greece’s and they also can be thrown out without affecting the survival of the Union. Malta, for example, accounts for only 0.05 per cent of the EU’s GDP. Such an absurd quantitative reasoning might be expected from accountants, not from sensible political leaders. However, it is distressing to see that Germany should resonate with such arguments.
The UK wants to conduct a referendum on the EU. The plan is to cherry-pick from EU provisions. Will Germany and France agree? If the UK is permitted to cherry- pick, how can another state be disallowed from doing the same?
All told, there are distressing signals that the EU led by Germany is going in the wrong direction, moving away from the vision of its founders who, when Europe was prostrate after World War II, had started building a Europe of democracies based on solidarity among Europeans. It is that solidarity that Germany is working hard to dismantle. Will it succeed? In short, the chances of an implosion in EU are increasing.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India
