The Observer view on Greece, bailouts and the euro
Without the single currency and bailouts, Greek, Irish and Portuguese banking systems would have collapsed. Anti-Europeans should acknowledge this
Wolfgang Schäuble, Germany’s finance minister, says that the radical left party Syriza will have some difficulty selling what is seen in some circles as Greek climbdown during Friday’s cliffhanger negotiations that tried to put
an to end austerity. Elected on an impossible mandate to renegotiate the country’s tough bailout terms and stay in the euro,
Syriza now finds itself recommitting to austerity as the price of getting crucial loans extended for four months. Without them,
Greek banks would have collapsed. Mr Schäuble seems almost happy that the tieless Syriza leaders, shamelessly talking about
reparations for the second world war, have had to confront “reality”.
Meanwhile Britain’s army of Eurosceptics have had a field day. If the negotiations had gone wrong, as many predicted, and Greece went on to leave the euro and restore the drachma then it would be the best vindication yet that Eurosceptic Britain was right. The eurozone, already accused of being the single most important, if not the only cause of Europe’s economic plight, would be exposed as teetering on collapse. And if instead Greece managed some compromise deal, then it would be a slap in the face for democracy.
Greek voters would have been denied what they had voted for. The EU stands accused, variously, of denying democracy and tethering a country to self-defeating austerity.
What has happened is more subtle and hopeful. All electorates in all countries are tempted to vote for party programmes that promise gain and no pain – and Greece’s is no different. If politicians have the brass neck to offer it, democratic electorates vote for the impossible.
Syriza did just that, but if it has not achieved the impossible it has done remarkably well. The tieless politicians should manage to sell the deal, notwithstanding Mr Schäuble.
The starting point is that Greece was and is locked in a programme that demands it run a budget surplus by the former
troika – the IMF, the European Commission and the European Central Bank – in return for the foreign exchange to service its debts and stave off the collapse of its banking system. Not only that, the troika has spelled out precisely what it expects Greece to do, from privatisations to redundancies in the public sector, in order to meet the tough budget targets.
It was a suffocating straitjacket, but Germany, the Netherlands and the other main eurozone creditor countries have been right to say that Greece should never have borrowed so much internationally in the decade after it
joined the euro in 2001. Already, they say, Greece has been forgiven a formidable amount of its international debt. Foreign private creditors accepted writedowns and more than £30bn was injected into the capital base of its banking system by the troika – proportionally more than Britain spent in 2008. The countries of northern Europe are democracies, moreover. They have to justify to their electorates opening their national chequebooks to Greece yet again. Thus the resistance to Syriza’s demands.
Syriza wanted a four-month extension of the bailout, a commitment to reschedule Greece’s debts and new funds to recapitalise its banks. During this time, the government wanted agreement to be able to negotiate new, radically softer budget targets, and to be free to decide how to do deliver them. Finance minister
Yanis Varoufakis won the extension, the bank funds and freedom to decide how to organise Greece’s budget – gains the previous government did not even try for. But Greece has had to concede that it cannot abandon running a budget surplus, nor reschedule its debts. Honour is satisfied on both sides – and electorates in all eurozone countries, along with Greece, have accepted a compromise.
Nor has Syriza ever contemplated leaving the euro. The dangerous inflation that would follow, along with certain bank collapses, would impose much more draconian economic pain. Much of its new debt is denominated in euros, and default on that would lock it out of international capital markets for years. It would be forced to radically cut defence spending, making it more vulnerable to possible Turkish aggression.
Instead, Syriza is now being forced to do what most Greeks – and the country’s creditors – believe is a must. It has to modernise the state, broaden the collection of taxes beyond Greek’s ordinary citizens to the top families, upper middle-class and shipowners, for whom tax evasion is habitual. They also have to radically thin out the byzantine regulations that govern contemporary Greece. Signs that this is at last happening will then allow politicians in the north of
Europe to sell debt rescheduling to their electorates – along with a relaxation of Greek austerity.
Germany does not want Greece to leave the euro: Chancellor Angela Merkel took that decision between 2010 and 2012 when Greece’s first bailouts and subsequent debt writedowns were arranged. Now, on top of the economic risks, there are geopolitical risks. Greece has one of the best armed forces and strongest air forces in Europe. This is not a member state
Germany wants willingly to weaken as Vladimir Putin flexes his muscles.
The much-deplored euro is showing its worth. The British economic and financial establishment is in thrall to the neoliberal attraction of floating exchange rates, living in a dreamland in which national economic rivalries, competitive devaluations or the domino effects from collapsing banking systems never happen. In reality, without the euro and the accompanying bailouts, the Greek, Irish and Portuguese banking systems would by now have collapsed – and the domino effects would have profoundly affected not only the eurozone banking system but Britain’s. Europe would not be slowly recovering from a long recession: it would be languishing in depression, while countries with no euro mounted competitive devaluation after competitive devaluation in a system of floating exchange rates – trying to export unemployment to each other.
What is happening is not elegant, and very often bad-tempered and fractious.
Greece will modernise its state after a fashion, will ultimately get its debts rescheduled, and will eventually get to relax austerity. Its electorate will get some of what it voted for – and other electorates in Europe will get partial protection from endless Greek demands. Spain and Italy will follow suit. The EU will hold together, managing rival democratic claims in an era of national interdependence – and it will resume growing. The banking system will get through intact. Britain, when it comes to it, will never vote to leave the EU. The European glass is half full and gradually filling. The debate in Britain would be healthier if this reality were better understood.
.