Clip-clopping around Europe over the past few weeks, Yanis Varoufakis, Greece’s dashing finance minister, has urged the euro zone to chart a new course.
Endlessly forcing new loans upon indebted countries like Greece in the pretence that they will one day be repaid, he argued, was a strategy for depression and deflation.
“The disease that we’re facing in Greece,” he told the BBC, “is that a problem of insolvency for five years has been treated as a problem of liquidity.”
This view would not seem outlandish in the academic world that Mr Varoufakis recently quit. Few believe that Greece’s debts, worth over 175% of GDP, will ever be repaid in full. But saying so betrayed a woeful misunderstanding of the euro zone’s rules.
If the European Central Bank shared Mr Varoufakis’s view, it would have to cut off Greek banks, potentially driving Greece out of the euro. Indeed, earlier this month, when the minister visited the ECB in Frankfurt, Mario Draghi, its president, snippily told him to keep his opinion to himself. He has not repeated it since.
Mr Varoufakis’s gaffe is a mere footnote in a list of mishaps that have characterised Greece’s miserable experience in the euro. But it is depressingly typical for a government that, for all its high popularity at home, has squandered every opportunity to improve its lot, and ultimately that of the euro zone.
Even as Mr Varoufakis and his colleagues in Greece’s ruling Syriza party have loftily declared that the changes they seek would benefit all Europeans, not just Greeks, their negotiating strategy has been small-minded, self-defeating and naive.
Some of this may be put down to inexperience. A few Europeans were guilty of assuming that Alexis Tsipras, the prime minister, would perform what Greeks call a kolotoumba (“somersault”) the instant he took office. But Syriza has no excuse for making idle references to the Nazi occupation of Greece. Nor has it helped by playing games with its partners in the Eurogroup of finance ministers. European officials have been incensed by a Hellenic habit of leaking supposedly private discussion papers.
The wrangling over whether to extend Greece’s second bail-out, which expires on February 28th, has shown Mr Tsipras’s government at its worst. Admittedly Syriza was dealt a bad hand by its predecessor, which before Christmas accepted an extension of only two months. But rather than accept an extension, Mr Tsipras and Mr Varoufakis have dug in their heels, robotically insisting on a “bridging” deal that would unlock euro-zone funding while allowing the government to slow or reverse reforms.
Greece’s creditors, unsurprisingly, were unimpressed. On February 19th Greece put forward a more conciliatory proposal to extend its loan. But this was almost immediately rebuffed by Germany. Trust has seemingly been so grievously eroded that Greek promises of discipline are not worth much in Berlin.
These spats matter far beyond the hurt feelings of a few politicians. Greece’s survival in the euro depends on two factors largely outside its control: the willingness of the ECB to keep its banks on life support, and that of the Eurogroup to strike a long-term financing deal (Mr Varoufakis avoids the term “bail-out”) to keep the country afloat. It has weakened its hand on both fronts.
The ECB’s reasoning will rest in part on its assessment of the health of Greek banks. Depositors are withdrawing around EUR2 billion ($US2.3 billion) a week. Syriza’s stubbornness has hardened attitudes on the ECB’s council. On February 18th, it offered only a small increase in liquidity support; and the support will end entirely if two-thirds of its members say so. Some are reported to favour capital controls as a better option. Greece will be on perilous terrain if it enters March without a deal in place.
As for a long-term deal, Germany and others have dangled sweeteners before Greece, including an easing of debt terms and a lower primary-surplus target. But these are prizes to be won at the end of talks, not the beginning. Syriza has already started to reverse some reforms, including privatisations and collective-bargaining rules, antagonising its creditors further. The Eurogroup will probably not withdraw its fiscal offers but, with trust in the Greeks at zero, the reform conditions that it will attach to a third bail-out will surely be tougher than ever.
Time is short, particularly if the Eurogroup fails to agree with Greece on the terms for a bail-out extension. Thanks to a collapse in tax revenues, the government could run out of cash before an IMF bond falls due in March. By squeezing suppliers and raiding funds, Greece may be able to finance itself for a few months, but without further help it will certainly be unable to meet debt repayments to the ECB in July and August.
Isolation is rarely splendid
Yet an essential formula remains unchanged: that neither Greece nor its partners want to see it forced out of the euro (although the odds of an accidental “Grexit” have shortened). So at some point Mr Tsipras will have to perform his kolotoumba, potentially at high cost. At home, having raised expectations of a big win (75% of Greeks support his tough line) he might face calls for a referendum or a new election.
The real Greek tragedy is that, with a bit more statesmanship, Mr Tsipras could have nudged Europe on to a happier path. The euro zone desperately needs a counter-narrative to its failed German-inspired policy of austerity.
As leader of the hardest-hit economy, armed with a strong democratic mandate, Mr Tsipras was well placed to offer one. He could have sought allies against excessive austerity and for looser fiscal and monetary policy in places like Italy and France–and even inside the ECB. Yet by quibbling over his debt extension and backtracking so ostentatiously on sensible reform he has alienated more or less everyone. That is quite some achievement.
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