Insight: Greece bail-out to beggar belief

In Groundhog Day Greece, the latest deal brought violence to the streets and derision from economists. Can it really prevent Grexit or the Eurozone’s collapse, asks Dani Garavelli

A FORTNIGHT ago, Alexis Tsipras – the striking, tie-less leader of Syriza – was a symbol of resistance, refusing to bow to the most powerful institutions in the world. After 60 per cent of the Greek people voted “Oxi” (No) in the referendum – giving him a mandate to reject the latest punitive bail-out offer – he stood as a beacon of hope for all those who oppose austerity, the banks and lack of democracy in the Eurozone.

Now, having been humiliated by Eurozone leaders and accepted harsher reforms than were on offer before the vote, the prime minister has lost his lustre. The 17-hour “mental waterboarding” that forced him to capitulate not only robbed him of his Athenian swagger, but taught the world a lesson about the dangers of investing too much faith in one man, and about how difficult it is to stick to your principles when the fate of a nation lies in your hands.

If the protracted stand-off was a game of poker, then Tsipras folded. Once the Eurozone leaders realised he was determined to keep his country in the club, they could impose any conditions they wanted on their proposed ¤86bn bail-out; and they showed no mercy. The reforms that have already been passed by the Greek parliament include tight limits on public spending, VAT rises, the overhaul of the country’s collective bargaining system and measures to liberalise its economy. It has also agreed to sell off ¤50bn of state assets with the proceeds earmarked for a fund supervised by the creditors. A second round of reforms will almost certainly be passed this week. In return for Tsipras’s compliance, Eurozone ministers have also approved a bridging loan of ¤7bn, which will allow Greece to meet its next European Central Bank (ECB) and IMF repayments, and the ECB has agreed an extra ¤900m Emergency Liquidity Assistance to enable the Greek banks to reopen on Monday, although the daily ¤60 cap on withdrawals will still apply.

Even so, no-one appears to believe the bail-out – the third since 2009 – will solve anything. The former finance minister Yanis Varoufakis, who resigned after the referendum, compared it to the Treaty of Versailles, while Tsipras said the reforms would exacerbate the problems in Greece, where unemployment stands at 26 per cent. There have been violent street protests, and even the IMF has warned the deal will not work without debt relief. Last week, it predicted Greece’s debt would peak at 200 per cent of its GDP and said its creditors should either write down a massive proportion of it or allow a 30-year grace period so the country could recover. But as long as Greece remains in the Eurozone, debt relief is regarded as a no-no, and even if it wasn’t, leaders worry it might send out the wrong message to other countries. Specifically, debt relief is unlikely to be countenanced until after the Spanish elections where the fortunes of rising anti-austerity party Podemos might be buoyed by any suggestion Syriza had gained concessions.

German finance minister Wolfgang Schäuble’s suggestion that Greece might undergo a temporary Grexit of, say, five years, has been welcomed by those who believe it might kick-start a recovery, but dismissed by others. Once out, critics argue, Greece would be unlikely ever to fulfil the criteria to rejoin – it didn’t fulfil them in the first place. And, if after having endured the pain of Grexit, it did recover, why would it want to put its future on the line again?

Though most opposition MPs back Tsipras – allowing him to get the austerity measures through parliament – the split within Syriza, which saw 39 MPs refusing to support the legislation, has cast doubt over the party’s future. Though a reshuffle on Friday rid the cabinet of three left-wing rebels, it seems likely there will be an election in the autumn.

Confusion reigns and economists are divided. But at the centre of all the clamour is one unavoidable question: if this deal is destined to fail, why is everyone pursuing it? With no attempt to restructure the debt, won’t it condemn Greece to an economic groundhog day, with bail-out leading to crisis leading to bail-out, and all control ceded to the troika?

According to campaign group Global Justice Now, the latest bail-out – like the others before it – exists for the benefit of the lenders, while the harsh reform measures are a means of punishing Syriza for challenging the orthodoxy. “The point is not – and I don’t think ever has been – to help Greece recover: the vast majority of the bail-out money will go towards repaying the people who lent the money in the first place,” says director Nick Dearden.

“The latest tranche will be exactly the same; it will go back to the lenders so the lenders can lend more money, so the debt goes up. It’s about bailing out the European banks, using Greece as a mechanism, and the additional harshness of the conditions applied this time are about destabilising a government.

“The vindictiveness of the policies – right down to liberalising Sunday opening hours to a degree to which they are not liberalised in Germany – explains the latest wave of anger.”

Given that many experts view a Grexit as the only way to break the vicious circle – and both sides use the threat of it as a bargaining tool – why are the Greeks so reluctant to jump? Well, for a start there’s the fear factor. Also, despite suffering at its hands, many Greeks still have an emotional attachment to the Eurozone and see membership as a status symbol.

Germany’s reluctance to see Greece leave is about more than economics too. It shares Greece’s emotional attachment to the European project as an ideal – the building of a civilisation with shared values – even if those values have been undermined by the handling of the Greek crisis. And it worries that a Grexit would spark the defections of other southern European countries.

The German voters’ attachment to the project has been strained, of course, by the perception they are paying for another nation’s profligacy. Last week, a poll found 49 per cent of Germans do not want the government to enter bail-out talks, which explains Chancellor Angela Merkel’s hard-line stance.

As for Schäuble’s Grexit call, who knows whether it is born of a genuine desire to see Greece leave or if the German finance minister is merely applying diplomatic pressure?

“The sinister aspect of [his endorsement of a temporary exit] is that it supports some suggestion there is a plan to reduce the number of member states within the Eurozone, to open the door for the weaker economies in southern Europe to exit and to make the Eurozone a club of only the most industrialised, developed, economically strong states,” says Dr Georgios Karyotis, senior lecturer in international relations at Glasgow University. “This would support a move towards more federal political integration and that would increase Euro-scepticism.

“As such, it is against the German interest and against the interests of the Eurozone – that’s why I interpret Schäuble’s insistence as a stick, a diplomatic tool, rather than something that is likely to foster adequate support across Europe to turn into policy.”

Dearden is among those who believe that – for all its uncertainties – a Greek exit is the best option.

“It would be a very serious situation; the economy would need to essentially go on to a war footing,” he says. “But my argument would be that, other than the serious reform of the Eurozone and the ECB, it’s the only solution.” Grexit would allow Greece to secure debt relief and to devalue its currency to make itself more competitive and encourage exports.

But Karyotis, author of The Politics Of Extreme Austerity, believes the moment when a Grexit might have been the right choice has passed, and that now the economic and political costs would outweigh the benefits.

“If we go back to 2010, before the first bail-out, knowing what we know now, it might have been better for Greece to leave then and not accept the deals that have been exceptionally bad for the Greek economy and society,” he says. “However now, five years after austerity, an exit would be a double whammy. The economy has already been destroyed.” Having already suffered internal devaluation, there would be an external devaluation of the new currency by up to 50 per cent. “That would mean more unemployment, at least in the medium term, it would mean the import-driven Greek economy would face difficulties in accessing essential goods, depositors would risk losing much of their money in the Greek banks, and it would add to the very negative economic outlook.”

Tsipras’s decision to hold a referendum was a miscalculation. Whether he thought a win would strengthen his hand or he hoped to lose so he had a mandate to capitulate, it backfired. Still, Dearden and Karyotis believe that – right or wrong – he acted out of concern for the fate of the Greek people. Perhaps this explains why, though he has lost his hero status, Tsipras is not universally reviled. One poll taken after the agreement showed 60 per cent of Greeks continued to have a mainly positive view of him, while seven out of ten would want him to continue to be prime minister in the event of a coalition government. “We have a strange situation. Tsipras broke his pre-electoral promises and has even gone against the referendum, but he still has political capital to proceed with the implementation of a difficult deal,” Karyotis says.

Convinced a Grexit would cause more harm than good, Karyotis’s hopes are pinned on the bail-out providing a short-term fix until a debt relief package can be put on the table. “We have had extreme austerity in Greece for five years and the economy has continually got worse,” he says. “It becomes very difficult to support an effort without seeing any results, so one of the key factors that will determine the sellability of this new bail-out is whether it is followed by adequate support with growth and stimulus packages, and whether it puts the issue of the sustainability of the Greek debt at the forefront of debate.

“I anticipate that once the Greek government has demonstrated it is committed to continuing with the reforms and has regained some of the trust it lost with the institutions, it will be easier for the German or the Finish or other governments to sell debt relief to their own domestic audiences, which is key. Merkel wants to remain popular, Schäuble has become more popular because of his stance, so the climate has to change for debt relief to be granted.”

With so many balls still in play, predicting what will happen in the long-term is nigh on impossible. On Friday, Austria and Germany voted in favour of the new bail-out talks (France and Finland having already done so), therefore it shouldn’t be long before they get under way. In Greece, street protests tend to die down in summer, but if there is no obvious sign of progress there may be a resurgence in the autumn.

Like Karyotis, Dearden believes the reforms will make things worse, yet he too retains a degree of optimism. “There are two hopeful scenarios: one is that sheer disquiet this has caused across Europe creates enough political pressure that we are forced to rethink the Eurozone and seriously reform it and democratise it. But I fear that’s unlikely to happen without the second possibility, which is Greece exiting. That may be what it takes to rethink the project or for the project to collapse and for us to start something new,” he says.

“We need financial regulation to control the people who are doing the lending and we need to cancel some of those debts which have built up on that extremely deregulated financial system that nearly brought the world to its knees.”

Could this mark the beginning of the process? “Hopefully. We need to keep fighting for it because the alternative is horrific: the rise of far right governments and – who knows – in a couple of decades perhaps serious European conflict.” «

Twitter: @DaniGaravelli1