Greece defaulted on its 1.6 billion euro payment to the International Monetary Fund (IMF) at the end of June, after five months of negotiations between the Greek left-wing government and its creditors led nowhere.
This resulted in the European Central Bank (ECB) withholding emergency monetary assistance, which is critical for Greek banks to have enough liquidity (cash available) to pay pensions for grandpas and grandmas, and for other people to withdraw money to purchase the things they need for everyday life.
However, the ECB is not going to give emergency money to Greece if banks are insolvent (they don’t have enough cash), which they are, or if there is not a bailout agreement in place with European institutions (the previously standing bailout agreement went out the window after Greece defaulted on the above mentioned IMF payment).
Greek Prime Minister Alexis Tsipras called a flash referendum on July 5th, where 61% of Greek voters turned down the latest proposal by the European creditors. Tsipiras’ government has insisted that the “No” victory was not a mandate to exit the Euro, but to leverage a better deal for Greece that will include the write off of part of its humongous foreign debt. However, the heart of the matter is not whether or how much Greek debt should be forgiven; everyone on each side knows that a small country with an aging population and no major industries will not be able to pay back its debt.
The real question is whether the different players want Greece to remain in the Euro or not.
The rhetoric and actions of leaders on both sides is contradictory on the matter of whether they want to keep Greece inside the Eurozone, but contradictions by politicians are hardly anything extraordinary. What is extraordinarily worrisome is that their actions seem to counter their own interests.
According to renowned economist Jeffrey Sachs, the negotiating strategy of Germany’s finance minister Wolfgang Schäuble is to force Greece to leave the Eurozone. This appears to be a very counterproductive strategy, and explaining the finance minister’s actions away as simply being a hard-line conservative is hardly convincing. The reason is that if Greece leaves the Eurozone, they can opt for what I call “the Argentina option.” In the current international climate, it would be unlikely to pan out, but it is a consideration worth making for its geopolitical implications.
The Argentinean government in 2003, under the late President Néstor Kirchner, solved its severe foreign debt crisis and by-passed the IMF by getting funds from his oil-rich ally: Hugo Chavez of Venezuela. If Greece leaves the Euro, something that the many hardliner leftists inside the Syriza governing coalition advocate, it will open the possibility for this small but geostrategic country to seek out funds and political agreements from other countries such as China and Russia.
How would a Russian naval base in Greece, a NATO member, fare in Schäuble’s (and thus Germany’s and the larger EU’s) plans and interests?
European negotiators wanting to play hardball with Greece may calculate that neither China nor Russia are willing or able to become Tsipiras’ Chavez (Russia might be willing, but with the plummeting of oil prices and international sanctions, probably not able). Nonetheless, it would be a very risky gamble on the European (i.e. German) part to leave that path open.
On the Greek side, five months of stalling in negotiations casts doubts on whether they do indeed wish to remain in the Eurozone. The current Greek governing coalition argues that they have to defend a popular mandate to scrap austerity measures, which have not brought the country out of its deep economic crisis. This is true.
As mentioned before, the Greek debt is too high for this small country to pay it back in full and under the present conditions, and austerity measures are not the best way to revitalize an economy. However, scrapping austerity measures, without making deep changes to Greece’s fiscal and economic structure, will not result into sustainable economic growth and employment in the country.
Greece did not get into the giant hole that they find themselves in because the IMF put them there. The IMF comes in after a country is in the hole.
It is true that the IMF is not really effective at getting countries out of economic trouble, but blaming them for the economic crises that countries like Greece find themselves in shifts blame from the real culprits. In the Greek case, the culprits have been several governments that chose acquiring debt to fund short-term projects that bought them votes instead of funding long-term developmental projects that create jobs, and things that people with jobs can buy.
If the current Greek government aims to leave the Euro so that they can print Drachmas in order give cash to people and show that they have the people’s interest at heart, then hyperinflation may ruin the populist party if China or Russia do not come with U.S. dollars (or Euros…) to back those Drachmas. The far-left exemplifies Venezuela’s rescue of Argentina as an act of “South-South solidarity.” However, Greece is not Argentina, and Venezuela is out of cash.
I for one am skeptical of the EU side for playing hardball with a small country that cannot pay its debts – thus effectively choosing creditors over EU citizens – and of the Tsipiras government, because their actions seem not to be aligned with their supposed will to stay in the Euro.
Therefore, I agree with the recommendation of economists Charles Goodhart and Dimitrios Tsomocos that Greece requires debt restructuring (debt forgiveness and better repayment terms) along with “hard” budgetary constraints. The last part does not have to translate into austerity, but making the Greek government think hard about where and in what they are going to invest. Thus, (hopefully) the Greek government will invest in real economic development, and not cash giveaways that will buy the government votes, but not provide its people with sustainable jobs and economic growth.