Sunday’s referendum saw the Greek people decisively reject the terms offered by their country’s creditors to continue the bailout package which has, for the last few years, been sustaining the government.
61.3% of those who cast their vote chose to show their defiance of the further austerity measures contained in the proposed deal, which the governing Syriza party described as ‘humiliating‘. Tired of the spending cuts and reductions in public services imposed by the ‘Troika’ of the European Commission, the European Central Bank and the International Monetary Fund, Greece has elected to throw off the yoke of European austerity.
Prime Minister Alexis Tsipras said this morning that Greeks have made a ‘brave choice’. This is certainly the truth. The effects of their momentous decision will reverberate around not only Greece, but the whole of Europe, for a long time to come. It is possible that an old and proud nation has just stepped from the frying pan into a blazing inferno. Unlike that frying pan, however, this fire at least has a chance of going out.
‘Austerity’ is a term thrown around by politicians all over the world. In the UK, it began as the responsible-sounding watchword of the Coalition Government, before being seized by the left and becoming almost a curse word.
What it means, in essence, is a commitment to the first principles of neoliberalism: reduction of the budget deficit to as close to nothing as can be managed; the strict restriction of state subsidies to basic healthcare, education and infrastructure; and the total rule of market forces within all economic spheres. British austerity has been and continues to be a real phenomenon, one which a majority of macroeconomists agree has harmed our economy. Greek austerity, however, is something of an entirely different order.
The recession which began with the Financial Crash of 2007-8 hit the UK hard, but it struck Greece like a hammer blow. Three separate recessions between the autumn of 2007 and that of 2009 brought the projected debt-to-GDP ratio for 2010 to 146% (the UK’s for that year was 67.5%). The Troika launched a bailout package to the tune of €110 billion, but this help did not come free. Oh, no. It was conditional on the implementation of an array of austerity measures that would make George Osborne wince.
The ‘reforms’ ordered by the Troika devastated Greece. The unemployment rate stood at 12.2% in May 2010; by July 2013 it has risen over 15 points to 27.9%. GDP per capita, already falling since 2008, dropped further from about $22,659 in 2010 to $18,146 in 2014, leaving 44% of the Greek people below the poverty line. The damage done by austerity caused increases in the bailout package to become necessary. The total amount Greece owes to the Troika now stands at over €184 billion, in addition to its other debts.
The Consequences for Greece
The ascension of Syriza to power in January 2015 marked the apparent triumph of the Greek backlash against austerity politics. Tsipras’ government has, however, struggled to deliver on his core policy of reversing the previous government’s austerity programme, due to recalcitrance from the Troika and other creditors. The influence of the other Eurozone Heads of Government has also been considerable; German Chancellor Angela Merkel has been one of the staunchest opponents of relaxing conditions on the embattled Mediterranean state.
The significant margin of support for Tsipras’ own position in the referendum will hopefully allow him a stronger negotiating position in further talks with the Troika, but it was always a dangerous ploy. Some, including the German Deputy Chancellor, have cast doubt on whether negotiations can even continue now that Greece has rejected further austerity. This is ludicrous on the Germans’ part – and Italian and Belgian ministers have been quick to make clear that they, at least, are willing to discuss the issue further – but Merkel can be stubborn.
If Germany digs in its heels, it will be virtually impossible for any deal on a continued or extended bailout package to go ahead. This will cause Greece to default on its loans, and likely bring about a collapse of the country’s already-strained banking system. It also seems probable that Greece would have to withdraw from the Euro. This would have catastrophic effects on the country in the short term. However, it may be the only way to save Greece.
No longer tied into the German-dominated Single Currency, which Greece should never have been able to join in the first place, Tsipras’ government would be able to devalue a renewed Drachma and recalibrate interest rates to suit the Greek, rather than the German, economy. Yes, the transition would be painful, but without a deal to extend the bailout that pain is coming anyway. To attempt, as Tsipras has so far done, to remain in the Eurozone without further Troika aid would be only prolonging the misery and postponing the inevitable.
The Consequences for Europe
The No result in the referendum has already sent the international markets falling, and there is no reason to suspect that they will right themselves any time soon. The economic implications of this vote go much further than that, though. If a deal can be struck, through the recalcitrance of the Germans and others, then that will mean a further drain on the European banking system as the ECB pumps more money into Greece. However, whilst a situation is hardly likely to be stable, it would still be much less disruptive than the alternative. Greek Finance Minister Yanis Varoufakis has tendered his resignation in the hope that his ‘combative’ personality will not prove an obstacle to such an agreement (a shame, since Varoufakis is far and away the most impressive member of Tsipras’ government, but it may well prove a wise move).
If Greece cannot form an agreement with its creditors, and so pulls out of the Euro, the results for Europe’s fragile economy will be even more serious. The value of the Euro will plummet and the ripples currently being made in the markets will become roaring waves. As a non-Euro-using country, the UK would be sheltered from the very worst of the backlash, but we would still suffer as a result. Moreover, the move would act as a final nail in the coffin of the Euro as a project. Poland, Hungary, Romania and the other EU members technically committed to join the Euro once they meet the conditions to do so would become even more leery of doing so than they already are. It is also possible that Grexit would lead to other struggling nations, such as Spain and Portugal, moving to leave the Euro as well.
Politically, the referendum result represents a victory over EU-imposed austerity which will galvanise insurgent anti-EU parties, particularly those on the left like Spain’s Podemos, but also those of the right such as UKIP. The authority of the EU, already weakened in many member states, will take a serious hit, and the implications for the UK’s own upcoming referendum on membership are unlikely to be positive. On a geopolitical scale, the worsening of the schism between Athens and Brussels & Berlin could lead to strengthened ties between Athens and Moscow; a phone call between Alexis Tsipras and Vladimir Putin has already been scheduled for later today.
It is clear to me that the best way for all parties to proceed is for the Troika and Eurozone heads to offer Tsipras an extension of the bailout programme, without forcing him to implement the ridiculous package of further austerity ‘reforms’ that have become the European elite’s obsession. Debt relief is the next step – after all, the UK alone spent more bailing out its corrupt banking sector than the entirety of the EU together would have to spend to cancel Greece’s debts. The Greek government should then look towards a managed exit from the Euro and a return to the Drachma to give them financial independence from Germany.
The likelihood of this happening seems close to nil, however. What we will likely see, I fear, is an abrupt and poorly-managed Greek exit from the Eurozone, leading to increased misery for the millions of Greek people, some of whom are my friends. The Troika’s stubbornness and ideological ruthlessness will likely consign the people of the nation which gave the world democracy and the West its culture to a decade or more of poverty. As for the consequences relative to the UK’s possible departure from the EU, not to mention Putin’s scheming in Moscow, I dread to even consider.
Either way, three things are abundantly clear: 1) Greece needs to ditch the Euro as soon as it safely can, whatever happens, or this crisis will only rear its head again; 2) Those of us who believe that the EU is, in theory if not in practice, an idea worth fighting for have a lot of work to do; and 3) The bureaucrats, bankers and rightist politicians who run Europe are willing to sacrifice an entire country and its people to maintain their domination of the political-economic systems of this continent.
This article is cross-posted with the author’s blog, Cynical Optimist