Abu Dhabi, UAESaturday 20 July 2019

In this Greek tragedy, there are only losers

Alan Philps combs through history to understand what is happening with Greece's debt crisis.
The ancient Acropolis hill, with the ruins of the fifth century BC Parthenon temple, is seen after sunset in central Athens. Petros Karadjias / AP Photo

In the 19th century, northern European nations invented a technique called “pacific blockade” to put pressure on poor countries to pay their debts. Without going to war, navies from the creditor countries would blockade a port and seize goods belonging to nationals of the debtor nation. This technique of “gunboat debt collection” fell into disuse after a 1907 treaty that limited the application of force to recover debts.

The era of the gunboat is long gone, but for many in Europe, the long-running Greek debt crisis falls into the same model: rich countries, in this case led by Germany, bullying a small country to repay its debts to European banks, who should have known better than to lend so lavishly to Athens.

After five months of fruitless negotiations, Greece is now on the brink of bankruptcy, with banks shut and people allowed to take out only €60 (Dh244) a day from cash machines. The economy is at a standstill and there is the slight prospect that tourism will collapse as holidaymakers cancel en masse this summer.

Aside from the suffering of the Greeks, there is a deeper issue for the future of the 28-nation European Union.

It used to pride itself on being a “Europe of solidarity” where the wealthier states aided the poorer. Now in countries such as Spain, political parties are railing against the “Europe of banks” where the interests of financial institutions trump those of people.

With a referendum on Sunday called by Alexis Tsipras, the Greek prime minister who heads the anti-austerity Syriza party, the crisis ought to be heading for a resolution. In fact, the referendum – if it goes ahead – may be another act in what has become a theatre of the absurd.

The Greek people are being asked to accept or reject the latest bailout proposal from the European Central Bank and the International Monetary Fund. But this is not like ordinary referendums. The wording of the question is written in technical terms impenetrable except to officials of those institutions. The proposal has already expired and been rejected by the Greek government.

In recent days, Mr Tsipras has confused the financial world with some staggeringly mixed messages. On Tuesday he sent a conciliatory letter to the creditors, offering to accept their bailout proposal, with some amendments. Within hours he was calling the creditors “blackmailers” and “sirens of destruction” and appealing for a resounding No vote on Sunday to reject the proposal that he had so recently appeared willing to accept.

The Greek government is portraying the vote as a way to strengthen its hand in negotiations with the German government. As for Berlin, it hopes to see Mr Tsipras lose the vote and have to resign.

Opinions differ on what motivates Mr Tsipras. Is he out of his depth and ignorant of how business is done in the EU? Or does he actually want to quit the euro zone, which would restore to Greece some of the financial sovereignty it lost when it joined the single currency?

Amid the confusion, three things are clear. First, the Greeks can never repay all their debts, not even in the rosiest economic scenarios. There will have to be more debt forgiveness, which Mr Tsipras is demanding but which is currently not on offer.

Second, any country that has gone through the level of economic contraction suffered by Greece over the past eight years would produce a revolution. So the Syriza phenomenon should not be a surprise, and indeed may be repeated in other European countries.

Third, unlike in the past, there is no sense of panic in financial markets. They seem to believe that the EU can survive a Greek default, or even Greece dropping out of the euro zone.

Neither side is blameless in this crisis. Syriza has been playing the politics of the student union, failing to understand that money from the European Central Bank does not grow on trees but is ultimately provided by the European taxpayers. Finance ministers, who must sell any deal to their voters, need to be schmoozed, not spat on.

But the greatest mistake, which led to the election of Syriza in January this year, is the fault of the EU. Last year the austerity medicine seemed to be working. The then prime minister, Antonis Samaras of the conservative New Democracy party, laid plans to exit the bailout phase. But the euro-zone countries rejected his 2015 budget, demanding an extra €2 billion of cuts. Humiliated, he called a snap general election, in which Syriza emerged as the biggest party.

It was noted in Germany at the time that Syriza made a fateful choice. It chose as its coalition partner not a centrist, pro-European party but the right-wing Independent Greeks. There was little common ground between the far left and the far right, except a preference for national sovereignty over the European project.

Suspicions have grown in Germany that Mr Tsipras is a Trojan horse inside the European project, one that has the power to crash the European edifice built on sound money. Hence Berlin’s willingness to entertain the idea of Greece dropping out of the euro zone, even at great political cost.

We cannot know how the drama will end, but it is clear that serious scars will be left on the European body politic. The EU cannot proceed with its common currency without further fiscal integration. At the moment, the recipe for integration means other euro-zone members heeding the wishes of Berlin, which is not an easy regime to live under.

Germany has been the greatest beneficiary of the euro, since the common currency has provided a vast market for its BMWs and Mercedes.

At the moment, mainstream German political debate does not acknowledge that the huge advantages it enjoys also entails some responsibilities to make sure that the peripheral countries are not forced to live in a financial straitjacket. A change of heart, or a new generation of political leaders in Germany, is required.

Alan Philps is a commentator on global affairs

On Twitter @aphilps

Updated: July 2, 2015 04:00 AM