Open Europe Blog

Over on the Telegraph blog, we argue: 

There’s a paradox at the heart of the Greek euro debate: voters have comprehensively rejected EU-mandated austerity – parties that are (more or less) in favour of ripping up the bailout conditions mustered 68pc of the votes. And yet, according to a new poll, 78pc of Greeks are still in favour of the new government doing “whatever it takes” for the country to stay inside the Eurozone.

On one level, this phenomenon is an extreme case of having your cake and eating it. Clearly, Greece needs root-and-branch reform if it’s going to have any hope of remaining inside the euro, and naturally, Germans and other creditors will want guarantees in return for putting up cash.

But this paradox may also hold three clues to Greece’s future inside the eurozone.

First, it illustrates the conflicting view inside Greece of “Europe”. The country has been an EU member for 31 out of 38 years as a democracy (at least in modern times). EU membership is still associated with stability, prosperity and democracy, which explains why four out of five Greeks remain committed to the euro. Therefore, when German ministers, central bankers and others dare Greece to tear up the bailout deal and face an imminent euro exit, they also dare Athens to risk all which marks the break from its chequered past of colonels and instability. Rhetoric aside, are Greek parties really willing to pull the trigger?

 At the same time, though, on the current austerity path there must be a tipping point for Greece, when the euro and/or the EU becomes predominantly associated with a whole range of negatives, including undermining democracy, meaning Greece will almost certainly decide to leave. Though we’re not there yet, there are plenty of signs already.

Secondly, the Greek population is in some ways rational in its opposition to a euro exit. Yes, the country is stuck with a hopelessly overvalued currency. Yes, it was a mistake to allow it in and the rest of it. But whether staying or going, Greece is in for a very rough ride. Just to illustrate: the Greek banking sector is completely reliant on the eurozone for recapitalisation and liquidity (via the EFSF and ECB). If Greece exited, the newly independent Greek Central Bank would be forced to fill this void by essentially printing huge amounts of money, perhaps equal to half of Greek GDP. Hyperinflation would be a real threat as would the collapse of the banking sector. Would SYRIZA and others dare to risk it?

Thirdly, the Greek population isn’t entirely irrational in its opposition to the EU/ECB/IMF programme either. This programme is based on unrealistic assumptions and is choking off any chance of growth. This is not an endorsement of debt-funded growth à la Hollande – which is what put Greece in this mess in the first place – but of giving Greece some flexibility to enact structural reforms, for example via a full restructuring (which is now much harder due to the ‘private sector involvement’ in the second bailout). If the Troika could loosen the reins slightly, and a new Greek government use that to boost chances for growth while also and saving face at home, perhaps there’s a compromise to be had between Greece, Germany and the IMF – and Greece can live another day inside the euro. Though the euro still would have plenty of issues, at least, this could give Greece time to recapitalise its banking sector and achieve a primary surplus, both of which would make managing an exit easier.

In any case, in the ongoing game of chicken between Germany and the Greek anti-austerity parties, given the huge stakes, it may well be the Greek parties that blink first.

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