5 reasons why a Greek euro exit is unlikely (for now)

Yanis Varoufakis (right) with Wolfgang Schaeuble.
Yanis Varoufakis (right) with Wolfgang Schaeuble.

I had originally intended to write today about something a little bit more abstract and theoretical as a tonic to the political commotions of the last few days. However, after Yanis Varoufakis’ whistlestop tour of Europe in support of Syriza’s electoral promise of Greek debt reduction, now seems like a good time to reflect on developments.

There were encouraging noises from unexpected quarters early in the week with George Osborne and Barak Obama both joining the calls for a review of the crushing austerity policies currently proscribed by the troika. “You cannot keep on squeezing countries that are in the midst of depression”, said Obama. Very true indeed. As the Greek delegation arrived in Germany, however, things predictably took a turn for the worse. The ECB’s announcement that it would no longer accept Greek bonds as collateral for additional funds was inevitable but still something of a surprise. Although Greek banks will still have access to the Emergency Liquidity Assistance, this was a setback, and one the markets did not take kindly to. After a meeting with ECB chief Mario Draghi, Varoufakis met his German counterpart, Wolfgang Schaeuble, in a much anticipated showdown. The fact that they couldn’t even agree that they had agreed to disagree speaks volumes on the lack of progress made.

Into the background of this has emerged Charles Dallara, the former Greek negotiator on behalf of the private sector who has added to the criticism of the suffocating troika policy by claiming that the ECB’s announcement adds to the possibility of an “accidental” Greek exit from the eurozone. Dallara oversaw the biggest sovereign debt restructuring in history in 2012, with the private sector accepting a 53.5% face-value loss on Greek bonds. Private sector creditors have rightly complained that the troika’s lack of openness on their bailout contribution during the private debt negotiations forced creditors to accept greater losses than would otherwise have been acceptable. And to top it all off, the crushing austerity measures in place have continued to shrink the Greek economy and eliminate possibilities of growth.

So after an action-packed week for Syriza and its European creditors, where does this leave the eurozone? Things would appear to be on a knife-edge at the moment with both sides waiting to see who blinks first. Will the Germans soften their stance or will the Greeks extend their bailout programme? In the short-term the answer, probably, is neither. Tsipras has repeatedly said that his government will not consider an extension to the current bailout programme, which expires at the end of this month. With no compromise in sight at this stage it seems more likely that Greece will find the bridging loan mentioned by Varoufakis and give all sides a little breathing space to consider what happens next. But in the medium-term, despite widespread opinion to the contrary, I feel that a “Grexit” is still highly unlikely and here’s why:

  1. Tspiras stated last week that “Greece cannot be blackmailed because democracy in Europe cannot be blackmailed.” This looks like a strong stance with the implication that Greece is ready to default unless an agreement on debt reduction can be found. However, it is worth emphasising that these words were said in front of the new parliament Athens, a forum in which it would have been unwise politically for him to back away from his pre-election stance. That said, however, Tsipras also said the Greece will “respect the EU rule for primary balanced budgets.” Note that he said “balanced” and not “surplus”. In other words, the implication here is that the Greek position hinges on getting the troika to agree to loosening the primary budget surplus demands of the current austerity policy. If this happens, the new Greek government would be in a position to boost domestic growth.
  1. Although the German stance was predictably hardline on debt reduction, there is increasing political and public pressure on them to soften their stance. Commentators from across the political spectrum are now turning against austerity with even Obama adding to the calls for more growth-based policies. If Greece were ultimately to leave the eurozone and fall into economic turmoil, it is looking likely that at least a part of the blame would fall on Germany. This is would be a political disaster and one which even Merkel would want to avoid.
  1. Varoufakis was wise to raise the spectre of the Nazi Party in his talks with his German counterpart, Wolfgang Schaeuble. “Germany must be proud of the fact that Nazism has been eradicated here. When I return home tonight I shall find myself in a parliament in which the third-largest party is not a neo-Nazi party, it is a Nazi party,” he said, referring to the Golden Dawn in Greece. This statement is laden with political significance and is a strong reminder that there is more than finance at stake here. Would Germany, or any of its eurozone partners, really risk a surge in fascist/far-right sentiment within Europe? It seems unlikely.
  1. As I have mentioned elsewhere, Greece would be plunged into several years of financial chaos if it were to leave the eurozone but contagion would also spread through the rest of the continent, undermining both the financial and political foundations of the union. While Greece is being squeezed through austerity, this may seem like a risk worth taking to some Greeks, but no one knows for sure what the true impact would be inside the eurozone. And they do not want to find out.
  1. Much has been written about Varoufakis’ expertise in game theory, and he has surely called on all of this in his negotiations in recent days. We do not know how he has approached things behind closed doors but it may be relevant to consider the negotiation tactic of “anchoring” – focusing negotiations around a much higher target than the one ultimately aimed for. If this is the tactic being employed here, as seems likely, then Syriza is willing to accept less than they have demanded and only require their European partners to show flexibility to meet them halfway. This certainly fits in with the debt swap plan floated last week as well as much of Varoufakis’ rhetoric in recent days. If this is indeed the case then expect them to yield further before they ultimately make for the exit. If Syriza shows willingness to adapt and compromise then the troika will surely give some ground too in search of a solution.

For those wishing to hold the monetary union together there are clearly some reassuring signals. However, it is worth mentioning a couple of other issues that may well undermine efforts to keep Greece onboard. While Greece still has access to the Emergency Liquidity Assistance, this source of funding differs from regular loans in that the ECB has far greater discretionary power over its distribution. The ECB can restrict this financial assistance at any moment and so have considerably strengthened their negotiating position with the Greeks. Secondly, the comments emerging from the US yesterday seem to backtrack on Obama’s original anti-austerity sentiment with the US Ambassador in Athens saying that “Greece should continue to make administrative and structural reforms and exercise fiscal prudence.” It is too early to tell whether the American stance will be significant over the next round of discussions but this is certainly not encouraging for Tsipras and Varoufakis.

All of this is of course speculation. But the next few weeks and months will be fascinating and may well define the future of Europe for several generations to come.


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