BSSB.BE https://www.foreignaffairs.com 03.07.2015
Greek Prime Minister Alexis Tsipras’ decision to call a referendum on the latest plan for handling Greek debt—to which his government is urging the public to vote “no”—brought to a shocking end a week that started with high hopes of a compromise agreement between Greece and the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF).
Many observers had long seen a referendum in the cards, but they expected Tsipras to call one in order to seek public approval for an agreement that he actually backed in order to outflank the far left within his own Syriza party. Instead, the man who argued for months that an agreement with Europe was the only possible path forward appears to be declaring “game over” with time left on the clock.
The odds of Greece leaving the eurozone have now substantially increased. Throughout the talks, Greece and its creditors have been desperately seeking ways around the political roadblocks in front of them. Syriza has promised that Greeks won’t have to choose between ending austerity and remaining in the eurozone.
That, the politicians reassured voters, was Greece’s “democratic choice.” But the country’s principal creditors—other European governments—also face political pressures, and Syriza has done little to assuage concerns in Europe’s parliaments about throwing good money after bad and creating a moral hazard for future debtors.
Geography is particularly important. Greece lies at the heart of southeastern Europe, Europe’s least stable neighborhood. There are already signs that Bulgaria and Serbia are vulnerable to contagion from the failure of Greek banks.
Instability in the Balkans was part of the rationale for Greece joining the eurozone in the first place. Full integration into the European Union, it was believed, would stabilize Greece and, in turn, have positive geopolitical effects on the region. The converse remains true as well—failure in Greece will exacerbate growing tensions in southeastern Europe. Thus, the ties that bind Greece to Europe, and vice versa, are unlikely to break.
No one understands this better than German Chancellor Angela Merkel, who has been resolute in her commitment to keeping the eurozone intact and coming to an agreement with Tsipras.
She remains acutely aware of Greece’s long flirtation with Russia and of Russian President Vladimir Putin’s continuing efforts to sow discord in the EU. As the dominant political figure in the EU’s preeminent country, Merkel (not ECB President Mario Draghi, IMF head Christine Lagarde, German Finance Minister Wolfgang Schäuble, or Eurogroup chief Jeroen Dijsselbloem) remains the most important decision-maker on the creditor side, and she will try to prevent a quick Grexit after what looks like an inevitable default by Greece on its 1.5 billion euro ($1.6 billion) payment due to the IMF this week.
Merkel’s task will not be easy. During a talk at Brookings Institution last week, Emmanuel Macron, France’s minister of the economy, described Europe as being in a religious war. On the one side, he said, are Calvinists, led by Germany, who want those who made bad economic decisions to suffer. On the other are Catholics, who want to go to church and start off with a blank slate. There is truth to Macron’s analogy. And the thing about religious wars is that they tend to last a long time. Europe’s economic conflict is no different.
However, the eurozone has also pursued a risky strategy—one that can only be described as regime change. Eurozone financial leaders find Syriza impossible to deal with, and so they have (almost openly) hoped that a deteriorating economic situation in Greece, including the near collapse of the banks and the drying up of the money supply, would cause the Greek people to turn on their government.
There is little doubt that some eurozone leaders and finance ministers will be secretly hoping for a “no” in next weekend’s referendum. They must expect that the eurozone can simply cut Greece loose with great cost to Greece but with little or no contagion to others. The rest of Europe can then move on without the distraction of the Greek drama. In fact, the euro should be stronger without its main delinquent, or so the argument goes.
Based on recent interviews one of us conducted in Berlin recently, this argument has apparently come to dominate the German Finance Ministry. Schäuble probably holds it, too, as evidenced by reports that he believes policymakers should prepare for an orderly Greek exit from the euro. One German newspaper, Bild, even suggested he was on the verge of resigning over differences about how to handle Greece. Now, Tsipras’ decision to call a referendum will probably reinforce that line of thinking, making it even harder to grant Athens any new concessions.
Moreover, if the world has learned one thing from financial crises over the past two decades, it is that governments must stop thinking in terms of moral right and wrongs. Sometimes, to save the system, they must help the irresponsible banks and financial institutions at the heart of the crisis. If they don’t, as happened in the 1930s, the crisis will deepen, contagion will spread rapidly, and democracy itself will come under serious strain.
END OF THE LINE?
Tsipras’ strategy of scheduling a referendum after the deadline for Greece to repay the IMF is similarly risky. Should the “no” vote win, it is unlikely that Tsipras has any plan for the day after, not only because the deal upon which Greeks were voting would no longer exist but also because, even if it did, it is very unlikely that creditors would be willing to reopen discussions of its terms.
A “yes” vote appears to be the more likely outcome of next weekend’s referendum, not least because recent public opinion polls have showed increasing support for staying in the eurozone. That doesn’t mean that Tsipras (or Greece) will be out of the woods, though. Should there be a “yes” vote, Syriza’s standing within Greece would be diminished, hurting its legitimacy in negotiations with creditors. It isn’t at all clear whether or how a new coalition government would form.
Should Tsipras resign following a “yes” vote, the path would open to some form of national unity government, either political or technocratic. This government would immediately restart negotiations with the creditors in the hope of closing a deal before Greece’s 3.5 billion euro ($3.92 billion) repayment to the ECB comes due on July 20, and it would probably succeed.
But if Tsipras chose not to resign, which looks equally likely, the path to a deal with creditors would be much more challenging. With Syriza on its heels, Tsipras could opt to walk back Syriza’s previous demands by pointing to the referendum mandate to reach an agreement with creditors. Should that scenario come to pass, Tsipras would restore his reputation for craftiness, call new elections, and likely remain the dominant political force in Greece.
At the end of the day, it is in Europe’s best interest not to push Greece out the eurozone door. Should Greece vote “no,” Europe’s negotiators could double down on the regime change strategy in the hope that a deepening financial crisis will shift the Greek political dynamics.
This strategy could very well succeed, especially given that any pseudo-currency would likely rapidly depreciate against the euro and erode the Syriza government’s credibility. But should Syriza not fall even then, Europe would be faced with the worst-case scenario of a weak and alienated Greece becoming a “free radical” in Europe’s least stable region. So, just as a “yes” vote would focus pressure on Tsipras, a “no” vote could become Merkel’s most serious challenge yet.