Greece has, for five years now, flirted with financial collapse. And this week, it's gotten closer to the brink than ever before.
Negotiations over how Greece would pay back its debts due Tuesday to the International Monetary Fund halted abruptly this weekend. Prime Minister Alexis Tsipras announced a referendum next Sunday over whether to accept the deep spending cuts that European lenders demand; if the referendum fails, exit from the Euro is likely. The government imposed now strict limits on how much Greek citizens can withdraw from their bank accounts (no more than €60 per day), and blocks-long lines at some ATM machines.
How did this particular crisis get so much worse than those in recent history? Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics, has a one word answer: politics.
When he looks at the current mess in Greece, he points a finger at the new governing party that came into power in January. Syriza ran on a platform of reversing the austerity policies that Greece's lenders demanded — a promise that proved politically popular but that Kirkegaard argues has, in governance, hugely harmed the country. What follows is a transcript of our discussion, lightly edited for clarity and length.
Sarah Kliff: I was hoping you could start off talking about how this particular crisis in Greece is different from those that have happened previously. Is this time different and, if so, how?
Jacob Funk Kirkegaard: There's no doubt that, with the capital controls now in place, it really is a dramatic escalation of the deterioration. This will be a dramatic and quite deep recession in the short run, coming on top of an already deep recession that Greece has been in. This is, quite frankly, a disaster for the Greek economy.
Unfortunately, it's going to be more of the same in terms of recession. That's very unfortunate for the Greek people, but I must also say it was predictable, with the Greek government taking the step it did of ending negotiations and calling a referendum. What they did was quite reckless.
SK: How does this particular crisis stand apart from those that have happened to Greece, or in other European Union countries, in recent years? It seems to have gotten much more advanced than what we've seen elsewhere. Why?
JFK: What was different this time, first and foremost, was the length and the depth of the crisis in Greece. The decline in the economy, in recent years, has been larger than the crises in other economies. And that ultimately yielded a political outcome where, in Greece, we now have a party in leadership that self-identifies as the radical left. This is a government that, to date, has proven either unwilling or incapable of governing in the way that European institutions [lending Greece money] require or expect.
Greece has been through a very dramatic economic recession. They've done extraordinarily poorly. The political response, then, has some foundation in the economic situation in Greece. This was a government that predictably ran on assuaging economic pain, ending austerity, and ending the structural reforms that European institutions demanded.
That's all fine when you're campaigning, but when you're governing, you assume responsibility for the country. That means, or should mean, you stop campaigning and start governing. Governing means it can no longer be about what you want, but what's the best you can get. And that transition isn't one the current government has made. They have still been campaigning on ending austerity and debt relief.
SK: The current Greek prime minister, Alex Tsipras, came to power in January 2015. When he came into power, was it clear that the country would end up in a situation like this? Or are there certain decisions they've made that have laid this groundwork?
JFK: What's changed since then is that, I think almost any other government I could think of wouldn't have allowed a referendum to unfold in this way. A referendum would have been fine two months ago, when there was no chance of going over financial deadlines or a risk of banks closing down. You could have had an informed debate without the economy collapsing.
Waiting until the last minute to do it — in the dead of night, to the surprise of everyone including Greek negotiators — that's been a surprise to me. And one that, of course, has had and continues to have very dramatic, negative consequences. There have been five months of negotiations with no progress. And then it culminated this weekend with the calling of a referendum, which I consider to be a quite reckless decision.
SK: Why is it reckless?
JFK: The new situation we're in now is one where the European Central Bank is not going to increase its level of financial support and, as a result of that, banks have shut down today. And Greece should have known this would happen, when they unilaterally decided to call off negotiations and have a referendum. That's what I mean by reckless: any responsible government will do almost anything to avoid having banks shut down because the human consequences are very dramatic.
Think about who in Greece will not have time to line up for hours in front of ATMs? They're sick, they're old, and they're poor. They're the ones who need to make rent payments. So it's highly regressive, and will disproportionately hurt disadvantaged people who can't get to an ATM.
I would predict we're going to see Greek unemployment rise significantly and a lot of businesses close. This isn't really a surprise though, it's entirely predictable, yet the government chose to do it anyway.
SK: How do you think about this interim period before the Greek referendum on whether to stay in the Euro? Is it possible for banks to run out of money?
JFK: I don't think so, there should be enough money in the banks. The 60 Euro withdrawal limit is quite low, and obviously calibrated to the amount of money left. It's very much in the interest of the government to implement these controls rigorously. If they don't, they risk banks collapsing and never re-opening. So they will have to implement these capital controls and, unfortunately, you'll have a lot of people short of cash, prices for basic goods will rise, people will be laid off, and a lot of people in Greece will become more and more desperate.
SK: What do you think will be the outcome of the referendum? Is this Greece getting a bit closer to the possibility of leaving the Eurozone — or does it seem possible we'll see an actual exit?
JFK: I continue to believe strongly that the Greek population will ultimately vote in favor of staying in the Eurozone and against their own government. That will be the foundation where Greece stays in the Euro, but it will require a new government, and maybe that requires new elections. That requires more time, beyond the July 5 referendum. I don't think the banking controls can be lifted until there is a new government that has negotiated a new agreement with the Troika.
SK: Why would a new government be required? Could the current government implement the economic reforms that the referendum would mandate?
JFK: I think any kind of political logic would suggest that a government that campaigned against this program and loses, will have lost their democratic legitimacy if the people vote against them. As a result, they should resign, although there's no guarantee they would do that. There's a risk they'll do whatever it takes to remain in office as long as possible. The problem will be that I don't think creditor countries, and certainly not the ECB, will believe a word of what the currently government says. They've shown they're not serious.