BackWhen Greece said no to the troika
The leaders of Germany and France have an opportunity to respond to the calls of the Greek people with a human face
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“Today is a day of celebration, because democracy is celebration, it is joy," said Greek Prime Minister Alexis Tsipras. He has been savagely battered for the past eight days. He has been accused of being irresponsible and playing with fire. He has been criticized for eroding the trust for finding pragmatic solutions. He has been accused of lacking nous and skills, which his country so badly needs for its immediate survival.
He must be replaced at any cost, otherwise his anti-austerity campaign could spread to other countries (Italy, Spain and Portugal)—that is the message from European leaders, particularly German Chancellor Angela Merkel. She and her finance minister Wolfgang Schauble made no bones about their preference for a ‘yes’ vote in the Greek referendum held on Sunday.
A ‘yes’ vote would have almost certainly paved the way for the removal of Tsipras and his radical-left party from the government. By strangulating Greek banks and paralyzing the economy, the European elite in Brussels, Berlin and Frankfurt issued notice to the Greek electorate. Either dump the Syriza government or face dire consequences. In effect, it seemed like a regime change without boots on the ground. “What Brussels and the troika want today is the ‘yes’ (vote) and they forced us to close our banks so they could humiliate the Greeks," said finance minister Yanis Varoufakis, who announced his decision to quit after the referendum.
But, the referendum produced a resounding ‘no’ vote. It resurrected Tsipras and his radical-left Syriza government, which came to power six months ago. The snap referendum called by him on
26 June came after a week of intense negotiations over the breadth and depth of the wrenching reforms in value-added taxes and pensions for another bailout package.
The troika of creditors—the International Monetary Fund, the European Central Bank and the European Commission—forced substantial changes in the comprehensive Greek offer that included raising corporate taxes and moderate value-added-tax duties on electricity and pharmaceuticals. The Greek government nearly concurred with the troika’s proposed changes. The differences in the cash-for-reforms proposals between the two sides came down to almost $2 billion.
Yet one issue kept the two sides far apart. That is the relief on Greece’s outstanding debt of more than $340 billion. At around 177% of the GDP, the interest payments amounted to a financial millstone. The harsh austerity policies wreaked havoc over the past five years. An emaciated economy with a drop of 25% of the GDP and youth unemployment of over 50% convinced the electorate that things cannot be worse than what they are at this moment. The troika merely promised to look again at the sustainability of Greek debt but refused to reduce or write off debt at this juncture.
Clearly, a fresh bout of sweeping reforms for a bailout package without resolving the debt write-off would be tantamount to political hara-kiri for the Syriza government. Hence, the referendum on whether to say ‘nai’ (yes) to the austerity proposals or ‘oxi’ (no) to the troika’s reforms without the debt relief. The decision to seek the people’s verdict on the creditors’ reform package and stringent conditionalities came as a rude shock.
Meanwhile, the Greek government failed to make a payment of $1.72 billion to the International Monetary Fund on 30 June. Another outstanding payment of more than $3.7 billion is due on 20 July to the European Central Bank. With capital controls and closed banks and a maximum withdrawal of €60 permitted from automated teller machines, Greece looks like a financial war zone. An enveloping panic and a humanitarian crisis looms on the horizon.
However, in a grand stroke of poetic justice for the Tsipras government, the International Monetary Fund has conceded that the debt-ravaged Greek economy would need more than $60 billion of extra funds over the next three years and large-scale debt relief to create a breathing space. It vindicated the Syriza government’s fundamental claim that economic growth cannot take place with such unsustainable debt burden. The International Monetary Fund suggested that Greece should have a 20-year grace period before making any debt payments and final payments should be deferred to 2055. The International Monetary Fund’s verdict on Greece was kept under wraps for all these days.
Even as the International Monetary Fund’s policies compounded the economic and social problems in the Greek society, it insisted on pressing ahead with more reforms. The International Monetary Fund’s report on Greece’s debt sustainability analysis raised serious questions about the credibility of its managing director Christine Lagarde, European Central Bank chief Mario Draghi and Merkel, who insisted on having no course correction. It is small wonder then that a large chunk of the bailout funds of over $250 billion merely went to servicing the debt owed to bondholders and banks.
But the Greek electorate refused to bow down and chose to say ‘no’ to the austerity policies. The Tsipras government made it clear that a ‘no’ vote is not for leaving the 19-member euro zone. Athens is ready to accept palatable economic measures for regenerating growth and development, with debt relief. There are also signs of a toning down of the rhetoric and returning to the negotiating table.
In short, the ball is now in Brussels’ court. The European Central Bank has to decide whether it will stop freezing the emergency liquidity assistance to Greek banks at €89 billion in the next 24 hours to keep them afloat.
The leaders of Germany and France, who called for an emergency meeting on Monday, have an opportunity to respond to the calls of the Greek people with a human face. Germany has to convince other euro zone countries such as Ireland, Slovakia, Latvia and Spain, who remain opposed to debt relief for Greece.
The referendum also opened a Pandora’s box for reforms within the euro system, especially for addressing the broader issue of a transition from monetary union to political integration. Instead of regretting the verdict, it is the responsibility of the European leaders to avoid “a Versailles treaty within the euro zone", said French economy minister Emmanuel Macron.
Economist John Maynard Keynes detested the Versailles treaty for having punished Germany with a bout of extreme austerity measures in 1919, which ultimately led to fascism and World War II.
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