The question of how to save Greece, debated for more than five years, is the European Union’s recurring nightmare. After the country’s citizens voted to reject the terms of a new bailout by international creditors, Greece risks having to leave the 19-nation Eurozone and abandoning the shared euro currency, a move that may reduce living standards in Greece, increase euro-skepticism across the region and contribute to a more vocal and radical opposition against Brussels and the IMF in Europe, says Research Director of International Business at the India, China & America Institute Dr. Dan Steinbock.
Steinbock believes that Greek-debt burden is particularly hard for small and fiscally conservative euro economies, such as Belgium (€7.5bn), Austria (€5.9bn) and Finland (€3.7bn), which are under increasing economic pressures and suffer from eroding sovereign credit ratings.
Following is the full text of Dr. Steinbock's interview to Mehr News Agency:
What is the message of overwhelming majority of people in Greece who voted "No" to austerity measures and other overhauls that European and International Monetary Fund officials had demanded in recent talks?
Prime Minister Alexis Tsipras resorted to the referendum not to end the negotiations, but hoping to ensure a better hand. Nor was the referendum the kind of a 'gamble' that it was portrayed internationally. Some 62% of Greeks voted against the creditors’ June 25 proposal, while only 38% voted for it. It was an unambiguous triumph.
On Monday, Greek party leaders also signed a joint statement, expressing common goals, including the securing of funding in exchange for reforms and seeking debt relief. Tsipras unified the Greek people right before the critical EU summits.
Nevertheless, the question remained: Was there any room left for some kind of compromise between Athens and its creditors? The subsequent events suggest that, with his high-stake strategic moves, Prime Minister was able to get creditors closer to compromise but unable to have Greek terms accepted in Brussels.
What are the consequences of "No" vote by more than 61% of Greeks in Sunday’s referendum?
After the vote, there were three possible scenarios:
In the “time for a humane compromise” scenario, Syriza will push its June 30 proposal, which may be modified in detail but not in substance. The creditors will argue in Brussels (and to their frustrated constituencies at home) that “a bad deal is better than no deal.” This scenario did not materialize because it is shunned by Germany, the pro-austerity euro economies and most of Eastern Europe.
In the “Tsipras gets tough” scenario, Syriza will use its new political muscle to argue that “Greek people demand immediate debt relief and a bailout." This scenario was the least likely. United Greece was not enough because the creditors remained united against Athens.
In the “creditors get tough” scenario, the troika – the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission – remained fixated to the substance of their June 25 proposal. If Athens would oppose it, Greece would default and financial stability would ensue. As the aftermath of the referendum suggests, the Eurozone opted for this scenario, which was first reflected by tougher actions and threats by the IMF and the ECB, respectively, and most importantly, by Brussels’ “final deadline” until the end of the week to present a proposal of reforms, ahead of a meeting of all 28 EU leaders in Brussels on Sunday (12 July).
The latter was accompanied by the European Commission head Claude Juncker’s warning that “we have a Grexit scenario prepared in detail” (although he added that it is something he is against). The signals underscored the importance of coming Sunday as a “make-or-break” day for Greece’s continued membership in the Eurozone. That’s why Prime Minister Tsipras, on Thursday, demanded a “fair compromise” with Greece’s creditors, but officially requested a three-year and €54 billion bailout from the Eurozone’s rescue fund and pledged to begin the implementation of the required economic-policy overhauls by next week.
Some three years ago, I argued that the third bailout package was inevitable for Greece to remain in the Eurozone. It would please no member country. But the costs of the Grexit are still seen as prohibitive not just in the Eurozone overall, but in Greece.
How do you evaluate the domestic impacts of quitting the Eurozone for Greece? Would it lead to improvements in economic conditions, people's lives and reducing the burden of Greek debt?
Any return to pure austerity is a dead-end: In 2008-2015, Greek per capita income, adjusted to inflation, plunged by almost a third. Still, Athens returned to markets only after two huge bailouts of €73 billion and €164 billion, respectively. Meanwhile, Greek public debt almost doubled to €323 billion, or 175% of the GDP. Yet, almost 90% of the bailout monies have been used to rescue European private banks, while just 11% has been directed to Greek people.
Nevertheless, a Grexit scenario would be extremely challenging as well. Would it lead to improvements in Greece’s economic conditions? Certainly not in the short-term, possibly in the medium- and long-term. However, much depends on how such Grexit would happen and how bad it would get.
On Saturday, Eurogroup finance ministers got together to assess Greece’s proposal, which may restart official negotiations. On Sunday, EU leaders have to accept or reject the proposal. That’s the “make-or-break” moment. If the Greek proposal is accepted, the coming days will mean hectic efforts by Greece and other Eurozone states so that the deal will be approved in respective parliaments. If, however, the EU leaders will reject the Greek proposal, the Grexit will not materialize immediately since, at least officially, the two sides have until July 20 to negotiate. That’s when Greece should pay off €3.5 billion in bonds to the ECB. In this scenario, nevertheless, the probability of compromise would be very low and Grexit the likely consequence.
If the past half a decade has caused Greek living standards to collapse by a third, a Grexit could result in more forced austerity, greater mass unemployment and a new collapse of living standards; within the next 6-24 months.
What are the impacts of Greek withdrawal from the Eurozone on other members of the zone, especially on the weaker members?
Today, Greek debt is owned by the key euro economies – Germany (27%), France (17%), Italy (15%), Spain (10%) and the Netherlands (5%) – as well as the International Monetary Fund and the European Central Bank (15%). Altogether, these countries and banks account for 90% of the Greek debt.
As a result, Germany is likely to maintain the toughest policy line, as we have already seen. In turn, France, Italy and Spain have a more conciliatory stance; not least because they have their own “Greek-like” debt challenges. As the dust settles, we are likely to hear that Paris played significant role in the past few days in the efforts to find a compromise that would satisfy none but would be acceptable to Athens and its creditors.
The Greek-debt burden is particularly hard for small and fiscally conservative euro economies, such as Belgium (€7.5bn), Austria (€5.9bn) and Finland (€3.7bn), which are under increasing economic pressures and suffer from eroding sovereign credit ratings. Finally, Eastern European economies have taken a very tough policy approach toward Greece.
In the short term, European equity markets have been down, with the depreciation of the euro and widening spreads in the Eurozone periphery. That, in turn, has unnerved markets and economic uncertainty in the US and Asia. As a result, calls have become more vocal in Washington, Beijing and Moscow for Athens and its creditors to seek a compromise on Greece’s debt crisis that will allow Greece to remain in the Eurozone. What Athens and Brussels need is a mutually acceptable compromise – not a fragmented Europe without hope for the future.
However, if that compromise ignores the dire consequences of half a decade of austerity policies in Greece and if it continues to steer bailout monies to the financial sector rather than the Greek people, it will continue to reduce living standards in Greece, increase euro-skepticism across the region and contribute to a more vocal and radical opposition against Brussels and the IMF in Europe.
Interview by Lachin Rezaiian
Dan Steinbock is Research Director of International Business at the India, China & America Institute (United States), and Fellow at Shanghai Institutes for International Studies (China), a leading think-tank, where he focuses on China, ASEAN, G20 and the new global political economy. Since 2005, he has focused on the global crisis impact on the G-7 and the BRICs economies, including the U.S.-Chinese relations. Dan Steinbock focuses on international business, international relations, investment and risk among the leading advanced and large emerging economies. Altogether he monitors some 40 major economies and a dozen strategic countries worldwide.