The deadline set by the Eurogroup for Greece’s capitulation…excuse me…acceptance of the existing bailout program conditions expires today. Posturing has continued throughout the week in the wake of the collapse of the previous round of talks over the weekend. Eurogroup Chairman Jeroen Djisselbloem has made clear that “it is Greece’s move”… yet when the Greeks formally requested a bailout extension on Wednesday, Germany said “nein!” on Thursday citing a lack of credible measures to cover the tax shortfall and repay the debt.
The rhetoric has softened somewhat since then. Greek Prime Minister Alex Tsipras said he believed Greece had done enough to show its good faith, yet was nevertheless on the phone continuously with François Hollande and Angela Merkel. Finance Minister Yanis Varoufakis also said in an opinion piece published by the New York Times: “Greece is not bluffing…we will not cross our red lines”; however, he continues to make clear that he believes there will be a negotiated solution. The Germans seem to begin to believe it too, with a German member of the EU Commission stating that agreement was still possible over the next eight days (before the expiration of the current bailout program) – if necessary via a further meeting of government leaders.”
So much for Mr. Djisselbloem’s ultimatum. It will expire without a deal being reached.
That is unlikely to mean much: the European Union never does anything on time and its crisis management is necessarily slow beyond belief. Most of the big decisions have been taken long after the crisis point had been reached and passed, with Angela Merkel allowing the sirens to blare long enough to scare German voters into supporting her emergency measures. The current drama will almost certainly play out in the same fashion.
In fact, nothing would necessarily happen even if the current bailout program expired without an agreement. It is not an automatic trigger for Greek default or the collapse of the Syriza government. Without a deal in place, starting the 1st of March, the government of Greece would have to face its debt servicing obligations wholly on its own. Without a doubt, it would quickly run out of money – but not immediately. With certain expedients such as delaying payment to domestic suppliers, employees, etc.., the government of Greece could probably meet obligations for a couple of months before being forced to either default or to take “unorthodox” measures.
Thus all the talk of “ultimatums”, “imminent default”, dogs and cats living together, mass hysteria is just that: hysteria. And a big dose of propaganda as well to try and get Greek nerves to crumble: either those of the government or those of the Greek voters, who might then petition the government to accept any deal offered by Berlin with humble thanks. So far, neither effort has worked. The government obviously knows its financial position and options as well as the European press does, while the public has largely backed the government’s position to the point that Syriza is more popular today than when they were elected.
The only way the 28th of February could become a tripwire is if Europe decides to make it one: the European Central Bank could order the Bank of Greece to terminate the Emergency Liquidity Assistance program that it is currently using to prop up the domestic banking sector. Without it, the Greek banks will not have access to either ECB funding or Bank of Greece funding, and face a liquidity crisis. They would not be able to meet their obligations and the Greek government would either have to impose capital controls to prevent the withdrawal of deposits or face the collapse of the banking sector.
Should the ECB deliberately order the destruction of Greek banking, it would be a conscious political decision to throw Greece under the bus arrived at by mutual accord of Angela Merkel, Wolfgang Schäuble and Mario Draghi. It is inconceivable to me that these three leaders would attempt the economic ruination of Greece merely as an object lesson to the rest of the Eurozone; it is too much like burning your own house down just to get at annoying neighbor. Yet it may be that the Germans believe that the money they would spend propping up Greece yet again would be better spent making whole the German creditors of a defaulting Hellenic Republic. Nor would it be the first time that the ECB has acted as Europe’s hangman. Nonetheless, it is a political decision, not an economic or financial one.
Deal With It
We’ll soon find out just how exasperated the Germans are. The first real opportunity to smite Greece would be this evening. If no agreement appears on the horizon, the ECB could take advantage of the Djisselbloem ultimatum to act on ELA. Alternatively and far more likely as a trigger would be the 28th of February, the following Saturday. This would be a more realistic and justifiable excuse for Mario Draghi to order the suspension of liquidity assistance.
At that point, what are Greece’s options? Should they surrender now, before it is too late?
In fact, Greece has a number of options, some of which are of dubious legality. I believe Greece should pursue all options before capitulating, even to the point of provoking a European-wide constitutional crisis.
- Greece remains a sovereign nation with all the powers a sovereign nation wields. If the European Union or the ECB can dismiss a democratically elected government or force ruination upon a national economy without any oversight, legal recourse or check upon that power, then the institutions are irreparably flawed. Both institutions have dictated terms to Ireland, forced the resignation of an Italian government, and threatened Portugal, Greece and Cyprus into servile obedience;
- No treaty or agreement between sovereign states has ever been interpreted as requiring one of the parties to commit national suicide. The fact that Greece has voluntarily entered into an agreement with the 26 other sovereign states forming the European Union does not oblige Greece to submit to demands that would be immediately ruinous to the country. I am not referring to the bailout and reform conditions, which Greece accepted; here I am referring to a potential order by the ECB to suspend ELA.
The Greek government has a responsibility first and foremost to the people of Greece; the Bank of Greece has a responsibility first and foremost to protect the Greek economy and financial sector stability. Neither exists to serve foreign creditors. If the ECB orders the suspension of ELA to Greek banks, the Bank of Greece should refuse. The Bank should continue to print Euros and expand its balance sheet to whatever point is necessary to maintain the stability and functioning of the financial system. Given that the Bank of Greece has a publicly-operated Euro printing facility in Athens, this is perfectly feasible.
What could the ECB do in the face of Greek defiance? Not much. According to the Europa website Summaries of EU Legislation, the ECB’s ability to impose sanctions are limited to fines:
“Sanctions. The fines and periodic penalty payments imposed by the ECB are subject to the following limits:
- Fines: the upper limit is EUR 500,000;
- Periodic penalty payments: the upper limit is EUR 10,000 per day of infringement. Periodic penalty payments may be imposed in respect of a maximum period of six months following the notification of the decision to the undertaking.”
Those are not penalizations that are going to make the Greeks blink. The European Commission could also involve itself and insist on compliance. If Mr. Tsipras says “όχi” then the only recourse is to refer the Greek government to the European Court of Justice. On the other hand, the Greek government could also in theory refer the ECB and its President to the ECJ for failure to perform its duty to ensure financial stability in the member states. Perhaps they should.
The ECB could then call in all outstanding Greek debt, both public and private. This would indeed provoke a selective default, as the country obviously could not meet such a demand. Capital controls would be necessary and defaulting banks would have to be nationalized, requiring the Bank of Greece to expand its balance sheet even more. Greece would be invited to leave the Euro, to leave the European Union: they should simply refuse. Such an attitude would undoubtedly send the Germans, the Finns and a few others in paroxysms of rage. Deal with it.
This hypothetical situation would a massive contravention of European agreements and impose an impossible strain on the single currency. After all, no one would want to accept the Greek Y-series Euro notes given the prospect of those being rejected or withdrawn by the ECB at some future date. Yet the ECB cannot refuse to honor only the Y-series notes without undermining the credibility of the Euro entirely. There is little anyone could do about such open defiance without entering into blatant illegalities and disregard for the EU charters themselves: there are no real enforcement mechanisms in Europe:
- No member may be expelled from Europe without voting themselves out;
- No member may be expelled from the Euro without voting themselves out;
- There is no pan-European police force or military to enforce compliance.
We go back to the initial point: Greece is a sovereign state with the Euro as its currency. Despite its voluntary surrender of some sovereign powers to the EU, no treaty commitments can obligate the Greek government to obey instructions that will result in its immediate ruination and default. That is the glaring weakness of the current “Articles of Confederation” and why the best solution possible for Europe is a one that leads to a constitutional convention and the creation of a federal structure for the United States of Europe.
Let me be clear: I am NOT recommending that Greece provoke a crisis. I am NOT calling for a Greek default. The preferred solution is a negotiated solution that guarantees the full repayment of the Greek debt in return for greater flexibility on fiscal targets so that the government can reactivate the economy. That would be the rational, orthodox Keynesian answer to the horrific depression of the Greek economy: a recipe that worked for both the United States and the United Kingdom in their responses to the financial crisis.
But if the European Union and ECB join in a foolish decision to humiliate and castigate Greece, and make it a sacrificial lamb on the altar of austerity, then I strongly support a Greek refusal to cut their own throats.
Syriza has long ago agreed to the primary German demand that there be no debt forgiveness; they are now making a perfectly legitimate request for the means to reactivate their economy in order to be able to pay that debt. Insisting now on their abject submission, on the fire sale of public assets that no one wants, and the imposition of continued suffering on 11 million European citizens is not only bad policy, it is grotesque. If Europe invites Greece to jump off a cliff, perhaps Greece should jump: but make sure to hold on to the rope that binds them the rest of the continent.
 Agence France-Presse, “Greece handed ultimatum as eurozone bailout talks collapse,” Hurriyet Daily News, 17 February 2015
 Reuters, ”Greek PM confident on extension, calls for ‘historic’ political decision,” Ekathimerini, 20 February 2015
 Jan Strupczewski and George Georgiopoulos, “Germany softens tone ahead of crunch Greek debt talks,” Ekathimerini, 20 February 2015
 I have heard that the Spanish, Mariano Rajoy and Luís de Guindos, have taken the hardest of lines in the Eurogroup talks because of the domestic challenge posed by Podemos, but while I believe it might very well be true, I simply don’t think Spain carries the weight to influence the Germans in any direction they don’t want to go.
 Stephen Donnelly, “’Perfect gentleman’ Trichet dictated terms to Ireland,” The Independent,09 November 2014
 There are private companies that also are authorized to print Euros and these would be under immense legal and commercial pressure to comply with an ECB order.