UPDATE 13/06/2015: Following an all-night negotiating session in Brussels, a tentative deal has been hammered out by Eurozone leaders over Greece. Although the final terms of the agreement have yet to be published, the assorted budget cuts and tax hikes are rumoured to be even more stringent than the previous offer. Nevertheless, Greek Prime Minister Alexis Tsipras has welcomed the fact that the deal will also meet his key demands of debt relief and mid-term financing, neither of which were on the table during the previous round of negotiations.
Negotiations over bridge financing are still ongoing, and several national parliaments (including the Greek parliament) will now need to hold votes. Should Greece accept the deal? Is the offer of debt relief enough?
Eurozone leaders were stunned by a resounding ‘No’ from Greece in its referendum on 5 July. Now all parties must return to the negotiating table and work out exactly what it was that Greece has rejected.
The proposals offered by the institutions were withdrawn when Prime Minister Tsipras announced the referendum, so has Greece just voted to leave the euro? Not according to the government in Athens, which claims that the vote has merely strengthened its negotiating hand.
However, unless the European Central Bank (ECB) offers emergency liquidity support soon then the Greek banking system will collapse. The Greek government is said to be considering a temporary “parallel currency” of electronic IOUs, similar to those employed by California during its debt crisis in 2009, but while this might work domestically, payment in IOUs would not be accepted by Greece’s foreign creditors.
What exactly would kicking Greece out mean for European democracy? And, if Greece is effectively forced out of the euro (there is no provision in the EU treaties to force a country out of the Eurozone, but defaulting inside the Single Currency will likely be unsustainable), will markets start wondering who goes next?
For their part, Chancellor Merkel and other Eurozone leaders argue that they also have a democratic mandate, and that a referendum in Greece shouldn’t automatically trump the will of their own voters. In addition, some believe that caving to Athens would represent a moral hazard, encouraging leftist parties in other countries (such as Podemos in Spain) to seek similar concessions.
Is it possible to square this circle without fundamentally overhauling how the Eurozone works? British Chancellor George Osborne has argued that the ‘remorseless logic’ of the Single Currency will drive the Eurozone inevitably towards either deeper political and fiscal integration, or disintegration. Which are we witnessing now?
And how did things get to this point? To get a reaction, we spoke to Kalypso Nicolaïdis, Professor of International Relations and director of the Center for International Studies at the University of Oxford, and asked her what she thought:
I think we should all understand that there is blame to be shared on all sides, starting with the Greeks who didn’t know how to create a sustainable state, and who don’t pay enough taxes, but who certainly are not lazy (so the Germans need to revise their cliché of the Greeks). Certainly, the Greeks have a fundamental problem of reforming their state, and of the underlying conditions of growth and competitiveness in Greece.
I would say that many Greeks – possibly even most Greeks – recognise that the problems started in Greece. But then the Germans and other creditors need to recognise that the deepening of the problem has come also in part from the conditions that were imposed by the so-called Troika – now called the ‘Institutions’. When you are trying to address a debt problem you need to increase revenues, which means getting people to pay their taxes, but you should not radically decrease spending in the short-term. You do need to decrease spending over the long-term, because you want a balanced budget, but most economists agree that the institutions made a mistake by going too fast. They had predicted that there would be lower growth but then Greece would take off again. It didn’t. Big mistake.
Where do we go from here? Under what conditions can discussions move forward in a productive way? Here’s what Professor Nicolaïdis had to say:
If the creditors recognise that they share in the mistakes, then they also need to make an effort to help Greece create the conditions necessary for long-term growth, with investment, especially in renewable energies, and also to help Greece get back some of the money from tax evaders that has been stashed abroad. If the two parties start talking to each other again with mutual respect and with an assumption that both sides are right, then maybe we are going to get somewhere in addressing our common problem, which is that the monetary union was not designed very well in the first place and we need to remove the ideological blinders preventing it from being reformed.
What happens now that Greece has voted ‘No’ in its referendum? Should the ECB extend emergency support to Greek banks? Is it time to fundamentally reform the Eurozone? Let us know your thoughts and comments in the form below, and we’ll take them to policymakers and experts for their reactions!