Sometimes I hate being right. Last week, I wrote that I wasn’t sure whether Greek Prime Minister Tsipras wanted a deal with his euro area partners. This week, we know that he doesn’t; the PM will campaign against the deal in a referendum that has been called for Sunday 5th July. And so now I am wondering; does Tsipras actually understand what he’s doing?
I don’t ask this question because he’s called a referendum. As last week’s column intimated, I have been worried for a while that Tsipras might put his own political future above his country’s membership of the single currency. From a short-term, selfish perspective (ie just his own), calling a referendum and campaigning against the deal preserves his political career for a while longer. Alternatively, if you feel like being generous, he might genuinely believe that Greece will be better off without a deal than with one. After all, there’s a long list of IMF-defaulting countries that have gone on to positions of international prominence, right?
He might even understand that the ECB is independent; for all of the phone calls between the Greeks and the ECB, ultimately the latter will feel constrained by political developments. Greece’s current bailout expires on Tuesday; and the best that the Greek government can hope for is that the ECB won’t curtail the emergency funding that Greek banks rely on prior to the referendum. If it extended ELA between Wednesday and next Sunday, the central bank’s credibility would be completely shot, so it won’t; ultimately that is more important that keeping Greece in the euro. That means deposit freezes at least in the short term; and there are already reports that the private sector has pre-empted the Greek government here, with the banks imposing their own withdrawal limits. But Tsipras may be prepared to accept this.
I don’t even ask the question because I think that the PM has taken a rash political gamble. In some sense, you could see the referendum as a last political role of the dice, something designed to put pressure on the rest of the euro area. It might prove rash, and it might be a gamble; but for desperate men, it would have a certain logic. For all that Finance Minister Varoufakis has been completely discredited internationally – he is a merely a sideshow now, rather than a serious player – Tspiras might still be paying attention to bad game theory.
No, I ask if Tspiras understands what he is doing for a different reason. I ask because, repeatedly over the course of today, Greek officials have insisted that the referendum is not about remaining part of the euro.
In a very narrow sense, this is true; the question will be about accepting the creditors’ terms or not. But the more worrying implication is this: I worry that the Greek government thinks it could win the referendum, reject the creditors’ terms – and remain within the euro.
What would this look like? It would mean further austerity, because the Greek government wouldn’t be able to get money from anyone at all. It would be forced to run a balanced budget, only spending what it can raise in taxes, because governments cannot create currency within the euro. In fact, tax revenues would plummet further, making things much worse. And the Greek government is already well behind on its bills, which has slowly been strangling the economy; that would only get worse too. Winning the referendum would imply more austerity, not less.
Winning would also mean the collapse of the Greek banking system: with the government in default, and defying the IMF and other European countries, the ECB could not save the banks. Sooner or later, with or without deposit freezes, they will collapse. And even if the Greek government wanted to manage this process, it couldn’t; because, as a member of the euro, responsibility for resolving major banks – ie all the ones that matter in Greece – lies not with the government but with the ‘Single Supervisory Mechanism’. This basically means the ECB, and other national European regulators too. Good luck getting much change out of them; the Greek government would just be on the sidelines at best.
Winning also means capital controls; because even if the Greek government issued short-term IOUs to pay bills, the populace would not want to swap ‘hard’ euros for them. Cue further burying of boxes of money, boat trips offshore, etc. Given the incompetence of the Greek authorities thus far, the idea they would handle this well is laughable.
So – ultimately – a failed Greece that sticks with the euro means financial and economic upheaval on a scale never seen before in a developed economy. (No, Russia doesn’t count.) Political and social upheaval would soon follow, with incredibly uncertain results. It wasn’t that long ago that Greece was a military junta.
And that is why I ask the question: does Tsipras understand what he’s doing? Defaulting and staying in the euro, and facing a collapsed banking and financial sector as a result, would be horrific. And while there have been plenty of ridiculous leaders before – and even more that have broken their election promises – I am not sure that we have seen one steer a democratic country so close to the cliff so quickly. Unfortunately, Tsipras does not seem to realise this. Tonight, my heart goes out to the Greek people; please, stay safe in the weeks ahead.