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Grexodus: Under the Bus by June 5th


The latest round of discussions between Greece and its European partners stalled over the weekend without any agreement being reached. Officials from both sides and the IMF are meeting today in Brussels, but it seems increasingly like no agreement will be reached. On the one hand, the Eurogroup continues to insist that contagion can be managed, that a Greek exit would not blow the EMU apart, and that it might actually be the best thing for everyone. On the other, Syriza has already conceded almost every point the “institutions” have demanded; to the point that they are increasingly facing an internal rebellion from their own hard left wing[1]. Even though the space between the two parties has narrowed, the remaining gulf may be unbridgeable. And it boils down to austerity.


Prime Minister Alex Tsipras has already agreed to a long list of demands from the creditor nations, a list that gives the lie to any remaining semblance of sovereignty or independence on the part of Euro member states. The Greek government has already agreed to the creditors’ demands on:

  1. Full repayment of the debt and the debt schedule;
  2. Privatizations;
  3. Tax increases;
  4. Labor market reforms;
  5. Pension reforms (after the summer);

The last sticking point is the demand that Greece maintains a 2.5% primary budget surplus through the end of this year and then increases it to 3.5% next year, ad infinitum. Meanwhile the Greek government is asking that the surplus requirement be lowered to 1.5% so they may have some additional headroom for government spending and payrolls to reactivate the moribund economy[2]. That is not “radical leftist politics” that is the purest Keynesian orthodoxy; but the “creditors” are saying “nein”: there will be no relief from austerity.

The excuse made by the “creditors” is that Greece hasn’t done enough, but that claim holds no water at all. Greece has done as well as any of the other rescued nations in reducing its deficit. Spain, held up as “poster child” of austerity and reforms, continues to run the largest deficit of all, but without any word of reproach from the “Institutions”.


Even when compared to the “Big Four” economies in Europe, Greece’s efforts remain impressive; better than the efforts of France and the United Kingdom. Only Germany and Italy maintain a larger surplus.


This has been accomplished despite suffering the greatest collapse in GDP of any Euro economy. Greek GDP is still 20% below the 2005 level and 26% below the 2007 peak. No other European economy has suffered so severe a fall in production.


All of these figures are well-known in Frankfurt and Brussels, but irrelevant. The Eurogroup has decided that Syriza must go; and if the Greeks go with them, so be it.

Neither side appears ready to blink: the “Institutions” have dug in their heels[3] and will only accept complete capitulation on all their demands while Tsipras has gone as far as it can in accepting those demands without provoking his government’s collapse[4]. That is undoubtedly what the Eurogroup desires: to push a deal so hard and unpalatable that it causes an internal revolt in Syriza, the collapse of the government, new elections and a return to the “good old boys” of New Democracy.

The only risk of contagion that the Germans see now is political contagion: Spain’s municipal elections last weekend proved disastrous for the conservative Partido Popular that has been Germany’s best friend in Europe. Sooner than “lose Spain” to a left-wing government, the establishment would rather make an example of Syriza and Greece: pour encourager les autres. This strategy is extremely short-sighted. Though the European banks are ring-fenced and almost all Greek debt in the hands of the ECB and IMF, the probability of an immediate meltdown does appear low. But the longer term costs will be much higher.

By throwing Greece under the bus, the European Union tears away what little veil remains over the façade of European democracy and respect for sovereignty. The rights of small countries will only be observed so long as they don’t threaten the capitalization of Commerzbank or Credit Agricole. Is that the kind of Union the British people would like to be in? The brutal and callous policy that forces a Grexodus would be a God-send to the Eurosceptics in the United Kingdom and could be a catalyst for Brexit.

It would also shatter the illusion of the Euro’s permanence. If one member can be forced out, so might others. Markets will eventually punish such behavior; and while the member states won’t care so long as the ECB is buying unlimited amounts of their debt, that is not a recipe for fiscal discipline by governments. And the more debt the ECB buys, the greater the degree of control it will have over national economies and policies. Mr. Draghi has already said in Portugal that the European Central Bank will take a more active role in “promoting” deeper structural reforms. Eventually, someone is going to revolt. If it is in a small country, there will be another victim buried next to Greece in a cornfield; but if it is a big country, the Eurogroup will shatter.

Finally, this inept mishandling of an essentially domestic dispute casts serious doubts on Germany’s ability to handle serious international issues, like the Ukrainian crisis. Berlin’s willingness to throw out a member of the EU family and a fellow member of NATO at a time of increasing crisis and instability along the Atlantic Alliance’s eastern and south-eastern flanks is mindboggling. It is nothing less than a gift to Mr. Putin, who need do nothing but sit back and with a nudge here and a push there, help the European Union to implode. Why should he risk a war in Ukraine? It might very well fall into his lap should the EU and NATO collapse thanks to German malignancy.


Greece must disburse salaries and pensions on the 29th of May and then make four payments in June totaling 1.6 billion euros to the IMF. The first payment of 300 million euros is due on June 5th: but Greece has already said that it doesn’t have the money to make this payment. Additionally, they have already drawn down their emergency fund[5] with the IMF to make their payments last month. There is much more than the repayment of some debt at risk over these next two weeks. Too much for the IMF, ECB and Berlin to decide on their own. The United States must become more publicly involved as a mediator to ensure that the Greeks are not forced into a default and that neither the European Union nor NATO are compromised by these machinations.


Sources and Notes

[1] “SYRIZA’s Left Platform makes gains but proposal voted down,” eKathimerini, 25 May 2015

[2] “Greece calls on creditors to compromise as IMF payment nears,” eKathimerini, 25 May 2015

[3] “IMF’s Blanchard says Greek budget proposals not enough,” eKathimerini, 26 May 2015

[4] “Worrying signs in ruling party,” eKathimerini, 26 May 2015

[5] Special Drawing Rights account reserves

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