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European Union Divided Over Greek Bailout

Fervent democracy at the national level is hampering monetary policymaking for the broader European Union in bringing quick end to the Greek debt crisis, explains Chris Miller, a Yale doctoral candidate and research associate at the Hoover Institution. Greek voters resent austerity measures imposed by the rest of Europe led by Germany, yet polls show that two thirds prefer staying in the eurozone. Europe is divided: Electorates in the south generally favor debt write-offs and those in the north insist on austerity. Extremists on both the left and right take advantage of the divide. The debt crisis could be ended swiftly with a compromise mix of write-offs and conditions on austerity, yet both sides stubbornly seek voters’ approval to cling to their positions. An exit by Greece from the eurozone would trigger economic chaos along with other unintended security consequences spreading throughout the continent. The reputations of Greece and the European Union each would suffer with a Grexit. – YaleGlobal

European Union Divided Over Greek Bailout

Stalemate on Greece: Fearing voters’ wrath, European leaders lack courage for a deal on austerity and bailouts
Chris Miller
YaleGlobal, 16 April 2015
The Greek dilemma: Greek Prime Minister Alexis Tsipras did not get the support he expected from Russian President Vladimir Putin (top); meanwhile Greeks have had enough of austerity

NEW HAVEN: For a brief moment after Greek Prime Minister Alexis Tsipras touched down in Moscow last week for meetings with Russian President Vladimir Putin, it seemed as if the eurozone’s agonizing debt crisis might end with the restructuring not of Greek debt but of European politics. Tsipras hoped Russia might provide loans to lighten the load of austerity, while the Kremlin sought to sow divisions within Europe.

The results of the Putin-Tsipras summit, however, were far less conclusive than many had feared. Greece failed to win substantial economic aid from Russia, and in turn made no commitments to veto the extension of European Union sanctions on Russia, which come up for renewal this summer. Indeed, the main result of Tsipras’ jaunt to Moscow was to underscore the extent to which Greece and Europe are stuck with each other. If Greece stays in the eurozone, the only option is further negotiations with Europe.

After the election of the far-left Syriza party,  the crisis seemed to turn a corner. The contradictions between Syriza’s refusal to tolerate continued austerity and creditors’ unwillingness to provide further funds without painful reforms raised hopes that Greece might either see relaxed bailout terms or be forced to leave the eurozone.

Three months into Syriza’s government, however, the reality has barely changed. European creditors have softened some bailout terms, but not nearly enough as Syriza had promised. The European Central Bank, fearful of German criticism and skeptical of reform promises, continues to take a hard line on terms of credit to Greek banks. If the ECB were to withdraw financial support, it would force Greece’s banks and the country’s entire financial system into bankruptcy, reversing the tenuous economic upturn.   

Syriza itself is stuck among competing demands. Polls suggest that at least two-thirds of Greeks want to stay in the eurozone regardless of the cost. Syriza has promised voters both that their country will escape austerity and remain in the eurozone. That will only work with serious concessions from other European countries or the European Central Bank, neither of which has been forthcoming. At the same time, the left wing within Syriza – comprising perhaps a third of its MPs – want Tsipras to take a harder line in negotiations, even if that means Greece exiting the eurozone.

Polls suggest that most Greeks want to stay in the eurozone. Leaders suggest Greece can escape austerity.

In this test of wills, time is not on Greece’s side. The likelihood of eurozone exit reduces depositors’ willingness to keep money in Greek banks, because if Greece does leave the euro, the value of its new currency would plummet. Greeks can easily move money from banks in Greece to those in other eurozone countries, where funds are safe from devaluation. Or Greeks can hold cash, which unlike bank accounts would not be immediately converted into drachmas after a Grexit.

If Greeks start withdrawing large sums from bank accounts, as they did in the weeks after Syriza’s victory, that destabilizes Greek banks, reduces the European Central Bank’s willingness to continue funding them and hastens an exit. With Greek bank deposits at the lowest level since the crisis began, Tsipras has few strong cards to play if he remains committed to keeping Greece in the euro. His finance minister, Yanis Varoufakis, underlined that point by publicly promising that Greece would “meet all obligations to all its creditors, ad infinitum.” If that’s true, then why would Greece’s creditors budge?

EU officials and Greek political commentators have already begun talking about a new way out of the stalemate that would require yet another change of government in Greece. If Syriza leadership were to ally with two smaller center-left parties, it could retain its parliamentary majority even after dumping the party’s far-left MPs who push the government toward eurozone exit. Such a maneuver might produce a government willing to sign a new deal with the eurozone and the International Monetary Fund. But this would not substantially improve Greece’s economic outlook.

A Grexit is still possible, but only if a Greek leader decides to abandon the euro against popular will.

Despite Syriza’s election, in other words, the Greek crisis has returned to its previous stasis. Syriza took power but, bound by its leadership’s commitment to staying in the euro, lacks leverage to improve Greece’s economy. Unless voters in Greece or its creditor countries change their minds with regard to the wisdom of staying in the union or the fairness of further bailouts, the current balance of power – and implied stalemate – may well be more durable than most have expected. A Grexit is still possible, but only if a Greek leader decides to buck the poll data and abandon the euro against popular will. So far Tsipras has shown no willingness to take such a step.

Listening to pundits on either side, one might conclude that the crisis could be easily resolved if only Europe’s leaders could summon the political courage to resolve the crisis. German Chancellor Angela Merkel should realize that the only solution is for Germany to loosen its opposition to debt write-offs, argue many in Southern Europe and across Europe’s left. Tsipras must come to terms that budget cuts and liberalization are the only means of staying in the eurozone, insists Northern Europe and others on Europe’s right.

Europe has arrived at its current stalemate less because of individual choices than because the continent’s elected leaders are dutifully following their countries’ public opinion. 

The governments of Greece and its creditors do not just stand on principle. All are constrained by their voters.

The structure of European politics –  the divide between national-level elections and eurozone-wide monetary policy – means that the crisis persists because the democratic will of the Greeks, as expressed through repeated elections, directly contradicts that of the German people. Like a tragedy written by one of Greece’s classical playwrights, further suffering is nearly impossible to avoid. Leaders of Europe’s democracies, from Greece to Germany, are constrained by the contradictory demands of their electorates.

The arguments of Greece’s creditors have a powerful political logic. No politician from a creditor country can be seen handing over cash to Greece without strict guarantees about how it will be spent. Such politicians note that even as Greece requests further bailouts, its pension system remains relatively generous, encouraging early retirement. The share of employed Greeks between the ages of 55 and 64 is nearly half that of Germany. In 2012, for example, Greece spent 17.5 percent of GDP on government pensions, compared with 12.3 percent in Germany. Such comparisons make European voters balk over further bailouts. Politicians in Slovakia and the Baltics, nations no richer than Greece, struggle to explain to constituents why their countries should help fund Greek pensions. Fix the holes in Greece’s perpetually leaky tax system first, many constituents contend.

The governments of Greece’s creditors are not just standing on principle or following economic theory. They are constrained by their voters, too.

The Greek government faces a similar democratic dilemma. Its creditors are demanding steps such as spending cuts, privatizations and market liberalization, which have proven politically suicidal for every government that attempted them. Even if Greece’s government were not led by a coalition that included many anti-capitalist elements, ideologically committed to dismantling austerity, the realities of democratic politics and the threat of elections would push the country in that direction.

Without a bailout, forgiveness and conditions, Greece will slide into economic chaos, black markets, corruption, speculation and partnerships with the likes of Russia or China. Both sides would lose control and respect with a Grexit.

Many critics of the European Union have argued that the continent faces a “democracy deficit.” The reality is more complicated. Greece continues to suffer from the mismatch between the fact that monetary policy takes place at the EU-wide level, while the elections that matter happen within individual countries. That is why Europe’s oldest democracy, Greece, and its largest democracy, Germany, are stuck in a stalemate. No one doubts that Alexis Tspiras and his eurozone colleagues could do a deal. The problem is that they can’t find a deal that their voters would tolerate.

 

Chris Miller is a PhD candidate at Yale University and a research associate at the Hoover Institution. He is currently finishing a book manuscript on Russian-Chinese relations

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Comments on this Article

19 April 2015
The writer follows traditional orthodox economics and Keynesian thinking about currencies and devaluations. It is old logic from an old playbook written by old men like Schauble in Central Banks, while it may happen, the trend has been to dollarize or in Greece case, perhaps Euroize outside the framework of being in the Eurozone (Ecuador has dollarized and they are not in the US, so it is not a far fetched concept, and noted currency specialist Stephen Hanke at Johns Hopkins has stated it is "technically possible", but the Germans may go ballistic).
Additionally, circulating 'New Drachmas' or any type of IOU like CA (USA) did in 2001, will discredit Tsipiras left wing govt. which has promised alleviation, not more pain. Historians seem to think Greece will resort to tactics of the old Ottoman Empire, searching people at borders, over stamping their current Euros, etc.... no one is fooled by these old artifices of control anymore, the world has changed.
It will be interesting to see what actually happens. As I have written in a previous YG article in March, people are no longer fooled by their Central banks game playing with currency controls and devaluations. In essence, the Greeks have had enough warning time with mass media to raid their savings and avoid the devaluation trap, as we have seen in Russia, where the ruble is now rapidly REBOUNDING in value.
http://yaleglobal.yale.edu/content/currency-wars-fool-few-age-social-media
Mass social media, internet, and a world awash in liquidity has changed some economic tenents. Any economic historian should reflect this new currency "paradigm".
-Will Hickey , Jakarta