Clock Is Ticking Down on a Greek Solution
Prime Minister Alexis Tsipras risks leading the country to disaster
Alexis Tsipras risks leading Greece to disaster—and he has just days to pull the country back from the brink.
It is three months since Mr. Tsipras forced a snap election and six weeks since he became prime minister. In that time, the Greek economy has nose-dived. A tentative recovery has been stopped in its tracks: Tax receipts fell more than €1 billion ($1.05 billion) below target in December and January, the banks have been emptied of more than €20 billion of deposits, loan defaults have risen and investment has been put on hold. Any day now, the government could run out of money.
No one knows exactly when because Athens has refused to allow eurozone officials to inspect its books. Some officials suspect that even Yanis Varoufakis, Greece’s finance minister, doesn’t know the true picture. Besides, his credibility is so badly damaged that his word is barely trusted in eurozone circles.
The frustration felt across the eurozone was laid bare this week by Jeroen Dijsselbloem, the Dutch head of the Eurogroup of eurozone finance ministers. On Feb. 20, Greece thrashed out a deal with the eurozone that would allow its present bailout to be extended for four months. Since then, officials have been arguing about who would meet whom, where and on what terms. Technical work still hasn’t started. “It’s been a complete waste of time,” Mr. Dijsselbloem said at a news conference Monday.
A list of proposed reforms sent by Mr. Varoufakis to Mr. Dijsselbloem was greeted by many with ridicule. Its most striking proposal was a plan to wiretap tourists to uncover value-added-tax cheats—this from a government that spent three years preparing for office and claimed that its top priority was fighting tax evasion by oligarchs. The list suggests a government out of its depth and already out of ideas. In fact, Athens appears to have only one overriding idea: to force the eurozone to provide Greece with unconditional cash.
At first, it hoped the money would come directly or indirectly from the European Central Bank—until the ECB pointed out that it is prohibited by European treaties from financing governments. Then it tried to persuade eurozone governments to drop their insistence on reforms in exchange for loans. Now it is making deals and immediately trying to undo them, relying on textual analysis for evidence of “constructive ambiguity.”
As the clock ticks down to a Greek debt default, Athens seems to be counting on either the ECB or the Eurogroup to blink.
There is a certain logic behind this game-theory strategy:
If Mr. Tsipras can force the eurozone to hand over one unconditional euro, he will have changed the nature of the currency union. More euros will follow. But this strategy has no chance of succeeding. A currency union between sovereign states can operate only on the basis of laws. Even if politicians were willing to cut deals, other agencies have little room for maneuver.
Far from being too tough on Greece, some central bankers worry that the ECB is already exceeding its mandate: They say the ECB should be ordering Greek banks to cut their holdings of Greek government debt and to raise capital, amid concerns about the damage that the economic crisis is inflicting on both their liquidity and solvency ratios.
Similarly, the International Monetary Fund can’t disburse cash to Greece without an agreed-upon bailout program based on a credible debt-sustainability analysis. It is already lending Greece multiples of its formal quota—money borrowed from some of the poorest countries in the world. And if the IMF refuses to lend, what eurozone parliament will agree to hand out cash?
Besides, the risks of ripping up the eurozone rule book to help Greece may outweigh the risks of allowing Greece to exit the zone. In 2012, the contagion risks of a Greek exit were clear, but this time, there is no sign of a spillover to Spain, Portugal and Ireland. Instead, those former crisis countries are now among Europe’s fastest-growing, with falling unemployment, accelerating foreign investment and record-low bond yields, helped by the timely launch of the ECB’s government bond-buying program.
The market is putting no pressure on the eurozone to cut a deal with Greece at any price. Indeed, the market is more likely to react negatively to any deal that fuels support for radical leftist parties in other countries similar to Greece’s Syriza.
After all, the economic consequences of radical leftist policies can be clearly seen not only in Greece, but also in Venezuela, where Syriza has turned for inspiration and whose citizens have recently had to queue for toilet paper.
That isn’t to say that anyone is complacent about the risks of a Greek euro exit. No one can predict the nature of the political backlash across Europe that will result from a possible implosion of the Greek economy; no one wants to be confronted by a full-blown humanitarian crisis inside the European Union.
A Greek exit would pose huge challenges. Most eurozone policy makers are clinging to the hope that Athens will ultimately respect eurozone rules and remain in the currency union.
Yet this decision is now largely out of the eurozone’s hands. If Greece is to remain a member, one of two things needs to happen: either Mr. Tsipras must repudiate many of his electoral promises; or Greece must repudiate Mr. Tsipras. Right now, neither of those outcomes looks likely.