Starving the Greeks out
Yanis Varoufakis seems to believe, as explained by our own Nick Andrews on Thursday, that Europe’s fear of a currency breakup gives Greece enough negotiating leverage to offset its lack of economic and political power.
But this calculation is based on a false premise. It assumes that a Greek default would force Europe to choose between two alternatives: kick Greece out of the euro or offer unconditional help. In reality there is a third option that other European Union governments would find much more attractive in the event of a default. Instead of forcing Greece out of the euro or even allowing it to exit, the EU authorities could simply starve the country of money and wait for political support for the Syriza government to collapse.
This siege strategy has been emerging in the past few weeks as the Plan B for dealing with Greek intransigence. Deadlines for a deal with Greece have come and gone without the EU showing any sign of blinking—in fact EU and International Monetary Fund officials have publicly stated that trying to impose deadlines on these negotiations has become counterproductive.
Instead of rushing towards a deal with Greece, other EU governments now seem content to sit back and wait while the Greek government resorts to increasingly desperate measures to scrape up the money it needs for wages and pension payments.
These monthly payment crises suggest that tax collection is deteriorating so fast that Greece now needs EU support not only to keep up foreign debt payments but also to maintain the normal functioning of government.
In other words, the primary surplus of 4% of GDP, whose reduction to around 1% had been the main objective of the Greek demands and whose forced diversion to domestic spending through default had always been the trump card in Varoufakis’ negotiating strategy, has probably vanished. (Nobody can be sure, since Greece has failed to provide detailed budget figures either to its creditors or to the markets since the new government’s election in January.) This means that the Syriza government, unless it gets more money from Europe, can have no hope of delivering on its election promises of higher wages, pensions and public spending, whether it defaults or not.
Now that the Greek primary surplus has more or less disappeared, Europe would not need to “punish” a default on foreign debt by forcing Greece out of the euro.
The default itself would impose sufficient punishment on the Greek people, as default did in Cyprus—by slashing their bank deposits, ruining their businesses and exposing foreign assets to lawsuits.
Under these circumstances, what would the EU do about Greek membership of the euro?
The near-universal assumption is that Greece would be expelled. But a more rational plan from the EU’s standpoint would be to do the opposite. Instead of forcing Grexit, the EU could insist that Greece must remain inside the euro. The EU treaties clearly state that joining the euro is irreversible—and that is the market message that peripheral governments and the ECB want to convey.
The EU could therefore insist that the euro was the only legal tender recognised by EU law, even if the Greek government decided to print domestic IOUs to pay wages and pensions.
Greece could be banned from replacing euro debts or domestic bank deposits with a newly issued currency. That legal provision, in turn, would mean an explosion of the government’s liabilities not only to foreign debtors but also to its own citizens since the government would be responsible for the insured deposits in banks that were rendered insolvent by the default.
Instead of being forced out of the euro, Greece could be treated simply like a municipal or local authority in bankruptcy. Without any access to borrowing, the government would have to keep spending strictly in line with tax revenues. With the primary surplus apparently vanishing, default would force Syriza to inflict even more austerity than the Troika, instead of the spending bonanza it had promised—and the government’s collapse would be just a matter of time.
In short, the main effect of a Greek default would probably be expulsion of Syriza from the Greek government, rather than expulsion of Greece from the euro.
That, of course, would Europe just fine.