Two weeks ago, the big question in the Greek debt crisis was whether the Greek government would capitulate to its creditors' demands and get the short-term money it needs to stay in the eurozone. Now, after two dramatic weeks of deadlines and red lines and banking emergency and a referendum, the situation is reversed. Greece's European partners need to decide whether they want to take "yes" for an answer and keep Greece in the eurozone, or whether they want to find a pretext to say "no" and try to force Greece out.
Where things stand right now
- Days ago, Greece's creditors set a Sunday deadline for the country to come up with an acceptable set of budget plans and economic reforms or else have its banking system completely cut off by the European Central Bank.
- Thursday night, Greece presented a plan that represents a near-total surrender on all relevant points.
- Rather than give a quick answer, Greece's European partners called for a couple of days of study in advance of a Saturday meeting, essentially guaranteeing that a "no" verdict on the deal will leave no time for future negotiations.
- Even though Greece has given in to all of its creditors' important demands, there is a school of thought that says the eurozone will be stronger without Greece.
- There is also a school of thought that says Greece will be better off leaving the euro.
- There's just enough wiggle room left that Europe could find a reason to tell Greece no, even though there aren't many outstanding issues remaining.
Greece has surrendered, but Europe is equivocating
The latest Greek proposal represents an essentially total cave-in by Greece to what its creditors had been demanding. The two main remaining outstanding points of disagreement are essentially trivial:
- Greece wants to exempt hotels on some small outlying Greek islands from sales tax increases.
- Greece wants to implement pension reforms in October rather than right away.
If Prime Minister Alexis Tsipras had made this offer in February, the deal would have been sealed immediately, with Europe's creditors jumping for joy. If he'd made it as recently as two weeks ago, the deal would have been greeted extremely warmly. But over the past 24 hours many eurozone finance ministers have sounded skeptical, despite their near-total victory on all important matters.
Finnish Minister of Finance Alex Stubb made a great show of not being impressed:
Slovakia's Peter Kažimír was by turns noncommittal and cryptic:
Greece and Syriza have a credibility problem
If the idea of the finance ministers of Finland and Slovakia blowing up the eurozone over whether pension cuts happen in mid-July or 10 weeks later in October sounds ridiculous, that's because the issue at this point has much less to do with what is being proposed than with who is proposing it.
The politics of Greece in Europe are profoundly shaped by the widespread perception that Greece got into the eurozone by cheating and then got itself deeper into debt by cheating some more. And it gets worse than that. Chief economist at the International Monetary Fund Olivier Blanchard blogged a defense of the IMF's conduct on Thursday in which he blamed the initial failure of the Greek austerity-and-reform process on the idea that "many of these reforms were either not implemented, or not implemented on a sufficient scale."
Meanwhile, Tsipras looks personally untrustworthy and erratic to many European government officials.
- He comes from a far-left political party that has no natural ideological allies inside any European Cabinet.
- He has twice now won elections by promising Greek voters an end to austerity that he can't deliver.
- He has alternately denounced Greece's European creditors and professed a desire to work with them.
- He's now offering a deal that is extremely similar to the one he rejected a week and a half ago, even though the rejection itself has been extremely costly to the Greek economy.
What this adds up to is significant European concern that anything the Greeks agree to in a moment of crisis will be substantially set aside once the crisis is averted.
Europe has pretexts for rejecting the offer
Of course, European finance ministers can't officially say they are rejecting the Greek proposal because they personally dislike Greece's prime minister. But the handful of remaining points of disagreement do give them grounds for rejecting the offer if they are looking for a pretext. Even better, the economic chaos unleashed this week in Greece by last weekend's referendum means that the situation has changed:
- Greek banks are in much worse shape, and require more in the way of liquidity assistance to stay solvent.
- The Greek economy is far weaker than it was a month ago, so Greece's debt-to-GDP ratio looks worse.
- Tax collections and debt payments have been thrown into chaos by uncertainty, so Greece's fiscal needs have grown.
None of these add up to incredibly compelling reasons to give Greece the boot. That's why countries like France and Italy, which perceive a strong self-interest in keeping Greece in the fold, seem extremely pleased with Tsipras's latest offer. But to those European officials who are overall skeptical of the merits of Greek membership in the eurozone, there is enough wiggle room to find a reason to say no.
Greece may want to get kicked out
One potential explanation for Tsipras's erratic behavior is that Greece may want to get kicked out of the eurozone.
Many foreign observers look at the precedent of Argentina and believe that defaulting on its external debts will improve the Greek economy, at least in the medium term.
But this idea is extremely unpopular with Greek voters. Consequently, it is at least conceivable that the Greek government favors leaving the eurozone but does not want to say it favors leaving the eurozone. If that is correct, the country's optimal strategy would be to try to get itself kicked out of the eurozone while also making a great show of the extreme lengths to which it was willing to go to stay in.
The deadline could slip
Officially, all this will be settled by the weekend. Either Greece's European creditors will accept the deal, or else the deadline will pass and Greece will be forced off the euro.
This would start with the European Central Bank declining to offer continued support to the Greek banking system. At that point, the Greek government would need to start doing it itself. To do that, Greeks would need their own currency. Here's how it would probably be introduced:
- Order banks to close for several days so they can reprogram their computers.
- Pass a law redenominating every Greek financial asset, wage and price contract, social assistance benefit, and other commercial transaction subject to Greek law from euros into drachmas. Yesterday's 100 euros will be tomorrow's 100 new drachmas.
- Begin collecting taxes in new drachmas, to ensure that the currency has some value to Greek people.
- Let people keep using euro coins and bills for everyday transactions, recognizing that €100 will probably buy you way more than 100 new drachmas' worth of stuff.
- Start the process of printing physical new drachmas to be introduced several months down the road.
But the deadline itself is somewhat artificial. European officialdom is really good at kicking cans, delaying deadlines, and dragging things out. If they want to, European leaders could easily decide to keep Greek banks on life support for another week and allow for more rounds of talks.