- By Phil LevyPhil Levy is Senior Fellow on the Global Economy, The Chicago Council on Global Affairs, and teaches strategy at Northwestern University’s Kellogg Schoool of Management.
On the face of it, the recent behavior of the Greek leadership is more than a little puzzling. Prime Minister Alexis Tsipras spent weeks rejecting European overtures, then called a referendum, then defaulted on Greece’s loan from the International Monetary Fund (IMF), let his European program expire, then indicated that maybe he would accept Europe’s offer after all — with some revisions.
I wrote earlier this week in the Chicago Tribune about the dire consequences of a Greek departure from the euro, based on the assumption that Greece would, in fact, leave. The odds of that actually happening anytime soon have been changing by the day. A couple days back, the Royal Bank of Scotland put the odds around 40 percent; noted analyst Mohamed El-Erian put the number around 85 percent. My own expectations are more in line with El-Erian’s, but it would be easier to predict if we could make sense of what the major players in this drama are doing.
Here, then, is an attempt to rationalize Tsipras’s actions:
He and his Syriza party were elected in January with a conflicted mandate. A majority of the Greek public consistently expressed the desire to stick with the euro. But Syriza was brought in to stop making concessions to the eurozone powers (led by Germany) and to put an end to painful austerity. How was Tsipras to reconcile these two, if the eurozone powers were demanding concessions and austerity as the effective price of staying in the eurozone?
The problem was even more difficult because the eurozone powers had grown tired of “extend and pretend” — the practice whereby they would keep lending money to Greece and Greece would keep promising to undertake reform. Although Greece did undertake some reforms — and certainly suffered — the reforms were not sufficient to turn Greece’s situation around, either in terms of prosperity or in terms of ability to repay loans (the two are tightly linked). One can argue whether this was because the demands for austerity were ill-conceived or because the implementation was incomplete, but either way the net result was that the eurozone powers were far less willing to settle for promises of future action than they had been in the past.
So, Tsipras was faced with a series of dilemmas.
If he had simply accepted the creditors’ demands some time back, he would have had a very difficult political problem back in Greece. It would have violated the central tenet of his campaign and it is not clear he could have gotten enough parliamentary support to pass the requisite reform package.
On the other hand, if he had baldly announced that Greece was leaving the euro and returning to the drachma, financial upheaval would have followed. True, Greece is experiencing financial upheaval anyway. But if Tsipras had made a clean break, he would have been more culpable for the result.
Here, then, is a way to understand his recent behavior: He keeps making offers to his eurozone counterparts that they cannot accept. When they reject the offers, he can claim that the economic turmoil is due to European recalcitrance. He, after all, has been clearly, visibly, trying.
Note that he also announced the referendum for this coming Sunday — after all the European offers have expired and after Greece’s IMF default. There is a wonderful quote in Tuesday’s Wall Street Journal about this upcoming Yes/No vote. A 40-year-old woman says, “I feel like I need to choose between two doors, but no one’s really told me what lies behind each.”
Had the referendum been held a week or two earlier, it could have been a clear vote on a creditor offer. Instead, it is an amorphous choice between knuckling under (“Yes”) and standing firm (“No”). Tsipras backs “No” and presumably set the timing to weaken the “Yes” position.
By pushing things to this stage, he is forcing the Greek public to choose between the two conflicting prongs of his mandate. Which do they care about more — staying with the euro or relief from European conditionality?
So where do all these moves by Tsipras lead? In pushing things to a crisis stage, he and his eurozone counterparts have eliminated one important path that Greece might have taken. A couple weeks ago, Greece and its creditors might have settled on a viable extension of the status quo, whereby Greece’s plan was extended with similar terms and a bit of new money for a set period of time. Now, that cannot really work.
Money was beginning to flood out of Greek banks, which forced the government to shut them down and restrict withdrawals. This is precipitating an economic crisis even worse than what Greece has experienced to date. It will exacerbate the departure of talent from Greece; that talent is sometimes referred to as the “tax base” — they’re the ones who would have paid the taxes to get Greece out of its debt. Even if a short-term extension were on offer now from the eurozone creditors, it would be a disaster. If the short-term program were not seen to offer a long-term fix, it would just offer a window for a newly motivated populace to remove their remaining money from the country.
In a debate in the German parliament, as reported by Open Europe on Twitter, one member recognized the impossibility of short term fixes: “Hofreiter: If we reach deal for Greece — we’ll start w/the circus again in 4 months! We can’t afford to have this circus every few months.”
So what are the alternatives? Setting aside the bargaining mechanisms that would take them there, the two prominent ones appear to be: 1) Europe decides to pour a lot more money into Greece; 2) Greece leaves the euro.
Whatever it cost to bail out Greece two weeks ago, it will cost more now, given the impact of the crisis. Nevertheless, given Greece’s small size, this could seem an appealing option, until one remembers that Greece is not alone in its indebtedness. Turning again to Open Europe’s reporting on Twitter and another member of the Bundestag: “Gabriel: If we capitulated to (Syriza) — we would be entering a transfer union w/out rules. Other countries (France & Italy) would follow.” France is the second biggest economy in the eurozone; Italy is third.
Without such a bailout (transfer), Greece will run out of money. Greeks aren’t paying much in taxes and receipts will soon plunge. Greece is already defaulting on its external debts. When it runs short on money to pay its workers and pensioners, it will have little choice but to start printing its own.
Tsipras is forcing a choice while building a case that the outcome was forced upon him. It is a risky business.
ANGELOS TZORTZINIS/AFP/Getty Images