Grexit is not of Greeks’ choosing

In my more than 30 years writing about politics and economics, I have never before witnessed such an episode of sustained, self-righteous, ruinous and dissembling incompetence – and I’m not talking about Greek Prime Minister Alexis Tsipras and the Syriza coalition.

As the damage mounts, the effort to rewrite the history of the European Union’s abject failure over Greece is already underway. Pending a fuller postmortem, a little clarity on the immediate issues is in order.

On Monday, European Commission president Jean-Claude Juncker said at a news conference that he had been betrayed by the Greek government. The creditor institutions had shown flexibility and sought compromise. Their most recent offer involved no wage cuts, and no pension cuts; it was a package that created “more social fairness”.

Tsipras had misled Greeks about what the creditors were asking. The talks were getting somewhere. Agreement on this package could have been reached “easily” if Tsipras hadn’t collapsed the process early on Saturday by calling a referendum.

What an outrageous passel of distortion. Since these talks began five months ago, both sides have budged, but Tsipras has given vastly more ground than the creditors.

In particular, he was ready to accede to more fiscal austerity – a huge climbdown on his part.

True, the last offer requires a slightly milder profile of primary budget surpluses than the creditors initially demanded; nonetheless, it still calls for severely (and irrationally) tight fiscal policy.

In contrast, the creditors have refused to climb down on the question of including debt relief in the current talks, absurdly insisting that this is an issue for later.

On Tuesday, Tsipras made his most desperate attempt yet to bring the issue forward.

Far from expressing any desire to compromise, dominant voices among the creditors – notably German Finance Minister Wolfgang Schäuble, who often seemed to be calling the shots – have maintained throughout that there is nothing to discuss. The programme already in place had to be completed, and that was that.


Yes, the programme had failed. No, it wouldn’t achieve debt sustainability. Absolutely, it was pointlessly grinding down Greek living standards even further. What did that have to do with it?

Juncker says the last offer made no demand for wage cuts. Really?

The offer says the “wage grid” should be modernised, including “decompressing the [public sector] wage distribution”. On the face of it, decompressing involves cuts.

If the creditors were calling for public-sector wages to be decompressed upwards perhaps they should have made this clear. Regardless, the increases in value-added taxes demanded by the creditors would mean lower real wages, public and private alike. 

As for no pension cuts, the creditors called for phasing out new early retirement penalties and the so-called social solidarity payment for the poorest pensioners. Those are cuts.

The creditors called for a lot else, too. Remember that the Greek economy is on its knees. Living standards have collapsed and the unemployment rate is 25%. Now read the offer document, and see if you think the advance in “social fairness” that Juncker stressed at his news conference shines through.

But I haven’t mentioned the biggest distortion of all. Noticing for the first time that Greece has EU citizens within its borders, Juncker addressed them directly on the subject of the July 5 referendum. Greeks will be asked whether they accept the offer presented by the creditors – an offer, by the way, that the creditors say no longer stands.

“No [to the offer that no longer exists] would mean that Greece is saying no to Europe,” Juncker said.

President François Hollande of France clarified it: the vote would determine “whether the Greeks want to stay in the eurozone”.

Nonsense. There’s no doubt that Greeks want to stay in the euro system, though I find it increasingly difficult to see why. If Greece leaves the system, it won’t be because Greeks decide to leave; it will be because Europe decides to kick them out.

This isn’t just semantics. There’s no reason, in law or logic, why a Greek default necessitates an exit from the euro.

The European Central Bank (ECB) pulls this trigger by choosing – choosing, please note – to withhold its services as lender of last resort to the Greek banking system. That is what it did this week. That is what shut the banks and, in short order, will force the Greek authorities to start issuing a parallel currency in the form of IOUs.

A truly independent ECB, willing to do whatever it takes to defend the euro system, could have announced that it would keep supplying Greek banks with liquidity.

If the Greek banks are deemed in due course to be insolvent, which hasn’t happened yet, that doesn’t have to trigger an exit either. Europe has the wherewithal and a bank-rescue mechanism that would allow the banks to be taken over and recapitalised. These options are foreclosed because the supposedly apolitical ECB has let Europe’s finance ministers use it as a hammer to extract fiscal concessions from Greece.

Nobody ever imagined that a government default in Europe would dictate ejection from the euro zone. The very possibility would have been correctly recognised as a fatal defect in the design of the system.

If the Greeks vote no, a Greek exit is a possible and even likely consequence. But if it happens, the reason won’t be that Greece chose to go. The reason will be that the EU and its politicised central bank chose to inflict exit as punishment. – © Bloomberg

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