Next Act

The ECB decided to keep up its Emergency Liquidity Assistance (ELA) to Greece, but without any increase. Given the speedy bank withdrawals of Greek citizens there is no chance that Greek banks will have enough Euros to feed the ATMs. Legally, it is a decision that only the Greek government can make but it is clear already that comes Monday we will have capital controls or bank holidays, or a mixture of both. Greece will probably not be in a position to make its IMF debt service payment, and it may even have problems to pay salaries and pensions end of the month. In other words, Greece will default. This will be the first default inside the Eurozone. In the meantime it is well understood that the EU has no legal provisions for an exit of a country of the Eurozone. In this perspective, GREXIT is no way out. Now, it may be only the wrong word for something legal experts will have to figure out. One way out that is been mentioned by legal scholars is that Greece will ask to leave the EU in order to be able to leave the Eurozone. It would then immediately reapply for the EU, but no longer demand membership in the Eurozone. This sounds complicated, and actually it comes with a notion of uncertainty, as it is not obvious whether such a re-application would be successful without undergoing deep political and economic reforms. Short-term, Greece will substitute the missing Euros by IOUs, in order to make its domestic payments. IOUs can be seen as money, for a minimum as a medium of transaction. Yet, it should not be expected that this money will be stable. In relation to the Euro, it will quickly depreciate. Domestically, it will quickly inflate as the import-dependence of Greece will demand high levels of imports that are being financed with a depreciated money. It will be up to the Bank of Greece to manage inflation processes and to avoid a spiralling of price increases.

Comes Monday, come turbulences of all kinds. Citizens will eventually recognize the situation of a defaulted economy. The referendum on Sunday will be the political valve to get rid of frustrations. Which political spin – Syriza or creditor spin – will be more successful, will be decisive for the outcome of the referendum. In economic terms, the referendum is a farce as the creditors made clear already on Saturday that their take-it-or-leave-it offer is off the table. In other words, Greek citizens are voting on a offer that no longer exists. Still, it may be a valuable democratic exercise. If a majority votes to accept the no longer existing offer, new elections would be the only way to come to a compromise with the creditors. They will not deal any longer with a Syriza-led government that proposes a ‘No’ for the referendum. If there is a chance for a extension of the program, then it is only if Syriza is gone.

There are good arguments that this was the aim of the creditors from the very start. For sure, Greek politicians and negotiators made all kind of faults, and they seem to have drastically misinterpreted the political as well as ideological homogeneity of the creditor camp. And yet, the impression is that even without faults and a better interpretation of the stance of creditors the Syriza-led coalition never had a chance to make its ideas being accepted. In particular the European side saw in Greece’s attempt to go an alternative route of the debt crisis a huge risk for the crisis management principles of the EU. Their core – structural reforms as a way of liberalization of labor markets and the Greek version of the welfare state in exchange for cheap credits – was endangered by the macroeconomic logic of the Greek proposals, and creditors were very well aware that the core needs to be defended.

Greece is entering a messy economic, political and social situation. The fallout is not clear yet, but it can be taken for granted that the core of the European integration project has been damaged, and it is tragic to see how narrow-minded national capitals are dealing with the challenges.