Greece is running out of time and money. The deadline to unlock the remaining €7.2bn of bailout funding, without which the Greek Government will surely default on its debts, is the end of June. Default could then be followed by Greece’s departure from the Eurozone (‘Grexit’). But, even though the stakes are so high, Greece is playing a dangerous game of brinkmanship. It seems to believe, or at least gives the impression that it believes, that its creditors will make huge concessions and let the funds flow, such is their desire to keep Greece in the currency bloc. It seems to believe its creditors will blink first. I think they are mistaken.
Of course, even at this late hour I have little doubt the Eurozone’s leaders would prefer Greece to stay in the bloc for political reasons. It is quite valid to argue that Grexit would shatter the illusion that membership of the Eurozone is irreversible, possibly setting a dangerous precedent. It can also be argued that if Greece thrived outside the euro other vulnerable Eurozone countries might be tempted to consider an exit route, further weakening the euro as a pillar of EU political union. And the euro is, above all else, a political project. But, whilst popular support for the euro is so high within the Eurozone and the political commitment to Eurozone membership seems so solid, this seems an unlikely development – at least in the ‘foreseeable future’. The probability of major instability in the Eurozone following Grexit, therefore, seems very unlikely.
The situation was very different in 2012 when the Eurozone experienced its ‘existential crisis’. It then seemed that Grexit could trigger the departure of other struggling members, undermining the very existence of the Eurozone. But much has changed since 2012. Firewalls have been constructed to stabilise the bloc including the European Stability Mechanism (ESM, the permanent bailout fund) and a banking union of sorts. The European Central Bank (ECB) has also been active, promising to do ‘whatever it takes’ to support the currency. Economic governance procedures have been significantly reinforced, including the Fiscal Compact, and crucially other peripheral members, especially Ireland and Spain, are recovering well. And significantly, even though the market for Greek sovereign debt has been badly rocked by the latest Greek crisis, contagion to other Eurozone members, even the weaker ones, has been minimal. Grexit was potentially very dangerous for the future of the Eurozone in 2012. It is not now.
Under these circumstances, the creditors (the European Commission, the ECB and the IMF, the ‘troika’) will surely stick to their guns and continue to insist Greece agrees to a serious programme of reform before releasing the funds. The sticking points to any agreement relate to the size of the primary surplus (the budget balance before interest rate payments), VAT rates, restrictions on pensions, required labour market reforms and the privatisation programme. These are very substantial points by any standards.
Suffice to say precious little progress has been made since the end of January, when the Syriza Government with the prime minister, Alexis Tsipras was elected on a mandate of ‘no more austerity’ and no more interference by the ‘troika’, whilst committing to the Eurozone. This was tantamount to saying that Greece would stay in the club, without playing by the rules. It was as if rules were for other members, not least of all Ireland, Portugal, Spain and Cyprus which all swallowed bitter medicine in return for their bailouts. And, as if to add insult to injury, a defiant Tsipras even rehired public sector workers who had been laid off in order to comply with the creditors’ demands for public spending cuts.
So, in conclusion, there is little doubt that the Eurozone’s leaders do not want Grexit, but Greece must play by the rules if it wishes to stay. And if Greece continues to refuse to play by the Eurozone’s rules, Grexit would surely be regarded as the lesser of two evils. The cards are stacked with the creditors, not least of all because Grexit would no longer seriously undermine the Eurozone.
* Dr Ruth Lea CBE, is Economic Adviser at the Arbuthnot Banking Group and chairman of Economists for Britain.