Greece as Pawn Sacrifice

How long to continue? The Greek crisis saga goes into its seventh year, and x-emergency packages later, Greece is not in a position that would allow to look optimistic into its future. A recent report of the IMF makes the point – this being the more urgent argument than the one already presented in 2015 – that the future debt ratio would not be sustainable as – given current trend – it would climb from currently 160 % to 265 % in 2060. As a result of this projection, the IMF urges the EU to go for a far-reaqching debt cut. The EU, led by Germany plus a group of other ‘Northern’ economies are not willing to do so, and insist that Greece would have to continue generating a annual primary budget surplus of 3.5% of its GDP as a condition to stick on a upward directed growth path of GDP. However, such a policy would further diminish the impact of Greece’s state on the economy, continue with the social blood bath and drive the Greek society beyond its social and political endurance limits. The position of the EU is difficult to understand as at the same time the Commission, again driven by Germany, insists that the review of the program and any continuation of payments to Greece depends from the participation of the IMF. The IMF, on the other side, made pretty clear that it is not willing to participate without debt cut, and actually can refer to its rule that it only is allowed to engage in support programs if debt sustainability is guaranteed.

The position of the Commission could be justified by its growth forecast. As a matter of fact, the Commission seems to be very confident to argue that Greece’s economy will move onto a steady and higher growth path, and this would automatically constrain an increase of its debt ratio. The idea that Greece can grow out of its debt trap by own efforts is optimistic, not least as Greece, unlike other historical cases, is part of a common currency and thus lacks one critical policy variable. The IMF, on the other side, is much more pessimistic when it comes to GDP growth of Greece. Now, a projection until 2060 is not very serious in economic terms. What the report does, though, is to provide an argument that Greece is caught in a debt trap, and can’t escape without external help. That the IMF insists at the same time that Greece needs to stick to a pretty demanding reform program after a strong debt cut, makes political sense but not so much economic sense as one can ask where additional slack can be find.

This whole debate may be soon irrelevant, when the largest stakeholder of the IMF reveals how to proceed with crisis management in the periphery of the Eurozone. For President Trump and his potential new Ambassador to the EU, Greece is like Christmas and Easter falls together: Refusing a further participation of the IMF in the Troika would throw Greece’s rescue package off the track. Already in early summer the Greek crisis would be back, just in time when German election campaign starts in earnest. If Merkel wants to be re-elected, then she can’t step in and continue with Greece’s rescue without the US – the Parliament would never give her green light. At the same time, her party would not be willing to accept a debt cut, as German voters would punish the party for breaking a promise. As a result, Greece would go bankrupt, and also would leave the Eurozone. Given that this is only possible by leaving the EU, Grexit would be a logical consequence.

All this sounds horrible, in particular with the critical election outcomes in the Netherlands and in France in mind. Deliberately pushing Greece out of the Eurozone and the EU can’t be a promising political option, not only for reasons of geopolitical security but also in terms of unifying the EU in times of global turbulences. On the other side, one can argue that getting rid of Greece could be the coup to eventually return stability to the Eurozone. Economic logic and political logic indicate different actions. But then the solution comes from outside, as it may be the decision of the IMF that drives Greece into the abseits.