The government of Greece has decided to hold a yes/no referendum on a final proposal from the European governments to whom it owes money with Greece's prime minister arguing that Greek citizens should vote "no." It's not entirely clear what the implications of a no vote would mean, but it seems likely to lead to Greece's exit from the Eurozone and an uncertain future for both Greece and the single currency.
Could you break this whole yearslong saga into a few bullet points?
It's going to take 10 bullet points:
- In the spring of 2010, it became clear that the government of Greece was on course to default on its debt, much of which was owed to foreign banks.
- At the time, it was feared that a Greek default would trigger a wave of defaults across the continent and precipitate a global financial crisis.
- The European Commission (the central bureaucracy of the European Union) stepped into the breach on May 2, 2010, with the backing of the European Central Bank and the International Monetary Fund with a bailout that avoided a disorderly default.
- The terms of this bailout required Greece to begin running a primary budget surplus (i.e., a budget surplus if you ignore the cost of interest on old debt) and also various "structural reforms" related to privatizations, public sector layoffs, and changes to Greek law around collective bargaining and hiring and firing of workers.
- By the fall of 2013, Greece's unemployment rate had reached a staggering 28 percent. It subsequently slowly drifted down to just above 25 percent by early 2015.
- On January 25, 2015 the far-left political party Syriza swept into office on a platform of reversing many of these unpopular changes and ending austerity.
- The new Greek government has not been able to come up with an alternative set of proposals that secure support from any substantial number of other European governments, leading to a deadlock.
- By June 4, 2015, the Greek government was running out of cash and resorted to an unusual (but legal) move to delay a payment to the IMF.
- As the end of June approached, the best offer Greece could get from its creditors was one the Greek government regarded as politically untenable so they went for the referendum option.
What, specifically, are they arguing about?
Because these are negotiations and the two sides both claim the other is misrepresenting what's been happening, it is difficult to tell exactly what's been going on. But by and large, both Greece and its creditors seem to be mostly haggling over the exact size of the primary surplus that Greece is going to be required to run.
Greece is, in essence, asking for flexibility to run a less austere policy, and some of its creditors are reluctant to let the country do it.
On this level, the whole thing is really pretty simple. Back in 2010, Greece was in the position of supplicant, asking richer and more creditworthy European countries for money.
But Greece also had a fair amount of leverage. A disorderly default might have spread financial chaos to countries like Portugal, Ireland, Spain, and maybe even Italy. Under the circumstances, other eurozone countries had strong self-interested reasons to help Greece out.
In the intervening five years, a lot of work has been done to insulate other European countries and the European banking system from the risks involved in a Greek default. Greece is asking for more generous terms, but it has less objective leverage.
Indeed, while back in 2010 other debt-burdened European states really wanted Germany and others to bail out Greece by 2015, their calculus has now changed. If a far-left party sweeping into office and demanding more money works out in Greece, then that imperils the establishment political parties in Spain and elsewhere. So even if Germany were feeling generous, it would face pressure to be stingy.
Is German obsession with austerity to blame here?
Yes and no.
As Tony Yates of the University of Birmingham points out, it's very misleading to say that Germany has been demanding austerity from Greece. If Greece defaults on its debt, it will be locked out of international credit markets and forced to run a very austere budget policy. Any financial assistance at all entails a reduction in the level of austerity relative to what would be the case if Greece did not get help. The deal is: "if you want to avoid super-strong-austerity by taking more money from us, carry out reform."
In that sense, the problem has nothing to do with German aversion to austerity and everything to do with Greece's failure to put forward a reform program that seems compelling to Greece's creditors.
On the other hand, the German government really is obsessed with austerity. German's aversion to public sector investment is hurting its own economy and making life more difficult for all of its trading partners.
Concurrently, the eurozone's overall inflation rate has been incredibly low for the past several years. This tight money has made it more difficult for countries like Greece to restructure their economies and has hurt growth in almost every European nation, Greece included.
In other words, a German government that was more open to the case for stimulative policies would be good overall for Greece (and for Germany), but wouldn't resolve this particular standoff.
Why doesn't Greece just leave the eurozone?
To many outsider observers, it seems like Grexit — a Greek departure from the eurozone — isn't really an outcome people should be working so hard to avoid.
Doesn't Greece need to leave the Euro for the same reason everyone needed to leave the gold standard in the 1930s?
— Josh Barro (@jbarro) June 8, 2015
I get it: transitioning off the Euro would be very very painful. But not transitioning off also looks very very painful!
— Josh Barro (@jbarro) June 8, 2015
To see why this is considered so unappealing, you have to understand that the euro is a political project. To many European policymakers, the slogan of "ever closer union" has been an enormous success at pulling the continent out of the destructive cycle of wars that characterized the first half of the 20th century. To Greek citizens, participation in the European project signifies the country's emergence from decades of civil war and military dictatorship.
Whether these considerations are really as compelling as European leaders seem to believe is up for debate, but the calculation they are making is not strictly based on dollars and cents.
What happens if Greece votes no?
Nobody knows for sure. On paper, it seems as if the absence of an agreement should lead to two big consequences. One is that the Greek government runs out of euros with which to meet its various spending commitments. The other is that the European Central Bank retaliates against Greece by no longer providing short-term financing to Greek banks.
Both circumstances would tend to push the Greek government toward issuing some kind of new, non-euro currency.
They could call them "new drachmas" to make the change seem purposeful and deliberate. Or they could call them IOUs or promissory notes to make it seem temporary. Either way, one of the new currency units would be worth much less than a euro, and the country would de facto be out of the eurozone.
Most likely, the Greek government would also want to impose capital controls — regulations limiting people's ability to take euros out of Greece.
Alternatively, you could imagine a more cooperate scenario — similar to what happened in Cyprus — where they imposed capital controls first, creating a situation in which Cyprus uses money that's called euros, but a euro inside Cyprus or a Cypriot bank can't actually be exchanged for a regular euro or taken outside the country.
What would be a good solution?
Wolfgang Münchau at the Financial Times had perhaps the best account of the lost opportunity for a meaningful breakthrough. Greece has been hobbled for decades by extremely weak public institutions and extensive corruption in its public sector. Syriza, as a party that has never before held office and substantially stands outside the system, was in a sense ideally positioned to deliver on a much stronger reform agenda than any of the mainstream parties.
In a reasonable proposal, Münchau writes, Syriza would have offered much bolder reforms in exchange for meaningful budgetary flexibility:
Step back a little and the solution is not hard to see: less austerity, more public sector reforms, and some clever debt restructuring. That was the overwhelming conclusion of a recent conference by some of the world’s leading experts on this issue, as reported by Richard Portes and co-authors from the London Business School in a recent article.
We are not talking about reforms of the ideological variety, on hiring and firing for example, or on ending collective bargaining, but socially useful reforms such as credible tax collection, a modern public administration or a working legal system.
Without a modernisation of Greek public-sector infrastructure, there is no way that Greece and large parts of northern Europe can coexist in a monetary union. It would be a recipe for a never-ending, structural slump.
Instead, the continent appears to mostly be stuck between a Greece that wants some face-saving concessions on austerity and European leaders who want to save face by drawing a tough line.