A Greek Tragedy?

tsipras

It wasn’t supposed to be like this.  When Alexis Tsipras and his Syriza party won in January, he vowed to keep Greece in the Eurozone, but end the austerity programs the Greeks had been suffering through for nearly five years.   There was skepticism, but early on signs pointed to the possibility of a new deal.  Greece still had to maintain austerity and reform its system, but the EU would work out a way to make it less painful.

Despite some brinksmanship and harsh give and takes, EU Commission President Jean-Claude Juncker seemed optimistic, sympathetic to Tsipras and the Greek predicament.

Then the tone changed.   Last week Juncker was visibly angry, claiming Tsipras was lying to his people.   Headlines asked “Is Tsipras crazy?”   Insiders say he made promises he later did not keep, said Greece would do things and then backed down.  You don’t do that in the EU – the heads of government form a close knit group and while they may disagree heavily at times, the one rule is to be up front and keep your word.  Tsipras seems to have broken that rule.

The straw that broke the camel’s back was his sudden call for a referendum, to be held Sunday July 5, on whether or not Greece should accept the conditions imposed by the EU.  That violated the shared understanding of what the process would be, and seemed to come from nowhere.  EU leaders felt betrayed.

So what gives?   Are we on the verge of a “Grexit?”   What would that mean?  It’s a complicated situation so I’ll simply offer seven points.

Last week's bank closures gave the Greeks a taste of what default would mean

Last week’s bank closures gave the Greeks a taste of what default would mean

1.   Tsipras is in over his head.   It appears that while he may have been willing to reach a deal, his party balked.   They are a left wing anti-establishment movement with no qualms about leaving the capitalist EU.  He realized he couldn’t get the parliament to agree to any deal without relying on votes from the opposition, which would likely force him to call new elections.  Under pressure, he improvised, called for the referendum and hoped European leaders would panic and accept Greek positions.  They didn’t.

In 1914 German Kaiser Wilhelm II realized that the decision to invade France via Belgium was wrong and ordered the trains to turn around and come back.  But it was too late – he had already gone too far.  Tsipras is in a similar situation.

Merkel needs Finance Minister Schaeuble's support to get a deal through the Bundestag

Merkel needs Finance Minister Schaeuble’s support to get a deal through the Bundestag

2.  Angela Merkel is facing the toughest dilemma of her ten year Chancellorship.   Tsipras believed that a deal would be reached because he knows Merkel desperately wants one.   Ironically, the Greeks were relying on the Germans to make a deal happen.

Merkel’s commitment to the Euro and the EU is absolute.  She sees the EU as not primarily about trade or economics, but European peace and security.  Her finance minister, Wolfgang Schaeuble, has real gravitas in the CDU, Merkel’s party.   He was in Helmut Kohl’s cabinet as early as 1984, when Merkel was still a scientist in East Germany.   He also believes fervently in the Euro, but disagrees with Merkel’s desire to keep Greece in the Eurozone at any cost.  He thinks the Eurozone without Greece will be stronger.  She wants a deal but Schauble’s wing of the party will only support it if it makes economic sense – in other words, if it’s not too generous to Greece.  With Tsipras acting up, she has no choice but to say no deal.

Finance Minister Yanis Varoufakis says he will resign if the yes side wins Sunday, signaling that Syriza's government needs a no vote to survive

Finance Minister Yanis Varoufakis says he will resign if the yes side wins Sunday, signaling that Syriza’s government needs a no vote to survive

3.  Sunday’s vote is big.  Polls show the “yes” vote (accept the bailout conditions from the EU) to be leading, but only slightly.  If it passes, then Tsipras’ government will likely fall and new elections will be held.  The chances of a Greek-EU deal will greatly improve.  If the vote is “no,” Tsipras will try to restart negotiations, but it’ll be difficult.  He’s lost the trust and respect of his fellow leaders and they’re hinting that any post-referendum conditions might be harsher.  Still, most want Greece not to leave the Eurozone, so a late deal is possible.

4.  One reason Tsipras has such a weak position is that no one is fearing contagion.  In fact, if Italy, Spain and Portugal see Eurozone leaders willing to kiss Greece goodbye, they’re more likely to continue their reform programs, recognizing that it is their only real option.  If this had happened in 2012 it would be a very different story.

5.  Even in default, a Grexit is not inevitable.  The chaos last week when Greek banks closed show show that the Greeks are playing with a dangerous fire.  A return to the drachma doesn’t just mean that the Greeks could use monetary policy to stimulate the economy, it also means that politicians could go back to the kind of corrupt shenanigans that caused this problem in the first place.  Greece would fall behind many former Soviet bloc countries in economic well being.  The consequences of default for the European and global banking system as well as for Greece means that no one is going to rush to the Euro exit.

Years of economic mismanagement leave the Greeks with no good choices

Years of economic mismanagement leave the Greeks with no good choices

6.  A Greek Tragedy?   The frustrating thing is that a Grexit is irrational, against the interests of both the Greeks and the EU leaders.  This is the kind of situation where a compromise must be possible, both sides want it desperately.  Yet the way it’s playing itself out, with Tsipras’ ineptitude, anger in both camps, chaos in Greece, a snap referendum, and the inability of Tsipras to lead his own party, it’s possible everything will come undone.  People will look back and say “how could they have let that happen?”

7.  To end on a point of optimism:  Greece won’t likely leave the EU even if it were to leave the Eurozone, and the EU and the Eurozone aren’t themselves in danger.  Under the adage “what doesn’t kill you only makes you stronger,” handling a Grexit would demonstrate the capacity to survive a crisis.   Moreover, blame is on the Greeks – no one could say the EU didn’t try hard to reach a deal.

My prediction: a narrow “yes” victory on Sunday, followed by a deal and new elections in Greece.  But don’t take that to the bank (they’re closed in Greece anyway).   Anything can happen!

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